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ECONOMIC STIMULUS FOR WHOM?

GOVERNMENT SPENDING TODAY IS DIFFERENT THAN IT WAS DURING

THE 1930s and 1940s.

By Christopher Carrico

Paul Krugman wrote in his New Years Day column in the NY Times that

Nobody understands debt. He complained about the wrong-headed, ill-

informed obsession with debt that characterizes the current Republican-

controlled Congress and is a key element in contemporary conservative

thought.

Krugman makes a number of arguments about why the debt is not as pressing

a problem as Republicans assert, all of which are valid. Among these

arguments are that interest rates have not increased with deficit spending

during the Obama administration as conservative experts predicted, and debt

is only likely to cause economic troubles when it grows more quickly than

revenue from taxes. Krugman does concede that taxes impose some cost on

the economy, though this cost is over-exaggerated by todays rapidly anti-

tax conservative movement.

At least for the U.S., the increase in sovereign debt is also not a particularly

pressing issue:

Its true that foreigners now hold large claims on the United

States, including a fair amount of government debt. But every

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dollars worth of foreign claims on America is matched by 89

cents worth of U.S. claims on foreigners. And because foreigners

tend to put their U.S. investments into safe, low-yield assets,

America actuallyearns morefrom its assets abroad than it pays to

foreign investors. If your image is of a nation thats already deepin hock to the Chinese, youve been misinformed. Nor are we

heading rapidly in that direction.

Contrary to the received wisdom that dominates todays discussions about

debt in both the U.S. and in Europe, Krugman gives us the example of Great

Britain, which has historically been able to carry much higher debt-to-GDP

ratios than in those countries that are today said to be in fiscal crisis because

of their debts:

Britain, in particular, has haddebt exceeding100 percent of G.D.P.for 81 of the last 170 years. When Keynes was writing about the

need to spend your way out of a depression, Britain was deeper in

debt than any advanced nation today, with the exception of Japan.

Krugmans argument in this column is meant to lend support to a fairly

standard liberal Democratic/Keynesian line about what needs to be done to

adequately address the current crisis. Stimulate the economy by increasing

effective demand through increased government spending on goods and

services. Additional debt incurred could be partially offset with tax increases,especially on the highest income earners; but more importantly, the economic

stimulus created by government spending will create economic growth that,

in the long run, will cause a sufficient rise in GDP to compensate for the

growth in the debt.

There are good historical reasons to think that Krugmans analysis makes

more sense than Republican counter-arguments. In his Socialist Register 2011

article The First Great Depression of the 21stCentury, Anwar Shaikh

describes the American experience of the Great Depression of the 1930s asfollows:

The Great Depression triggered by the stock market crash in 1929

led to a sharp fall in output and a sharp rise in unemployment

from 1929 32. But over the next four years output grew by

almost 50 per cent, the unemployment rate fell by a third and

http://krugman.blogs.nytimes.com/2011/12/31/us-net-investment-income/http://krugman.blogs.nytimes.com/2011/12/31/us-net-investment-income/http://krugman.blogs.nytimes.com/2011/12/31/us-net-investment-income/http://krugman.blogs.nytimes.com/2011/12/04/british-debt-history/http://krugman.blogs.nytimes.com/2011/12/04/british-debt-history/http://krugman.blogs.nytimes.com/2011/12/04/british-debt-history/http://krugman.blogs.nytimes.com/2011/12/04/british-debt-history/http://krugman.blogs.nytimes.com/2011/12/31/us-net-investment-income/

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government spending grew by almost 40 per cent. Indeed, by

1936 output was growing at a phenomenal 13 per cent. The rub

was that the federal budget went into deficits of almost 5 per cent

over the same four years. So in 1937 the Roosevelt administration

increased taxes and sharply cut back government spending. RealGDP promptly dropped, and unemployment rose once again.

Recognizing its mistake, the government quickly reversed itself

and substantially raised government spending and government

deficits in 1938. By 1939 output was growing at 8 per cent.

(pg. 55-56)

This cycle of phenomenal growth rates sparked by very high rates of

government spending continued to escalate considerably over the next

several years as the U.S. began its build-up for WWII in 1939, and entered the

war in December of 1941.

But here Shaikhs account of events begins to make some distinctions that are

not to be found in the traditional Keynesian analysis. Shaikh emphasizes that

during the New Deal and WWII:

the government spending involved did not just go towards the

purchase of goods and services. It also went toward direct

employment in the performance of public service. For instance,

the Works Progress Administration (WPA) alone employedmillions of people in public construction, in the arts, in teaching,

and in support of the poor.

Shaikh highlights the importance of distinguishing between government

spending on goods and services(thereby profiting business with the hope that

this stimulus will trickle down to employment), and spending directly on

employment(with workerswages then stimulating business by creating more

effective demand from consumers).

The first scenario, the one which Keynes advocated, will only help to reduce

unemployment and spur economic growth if businesses re-invest their profits

in productive investments that create new jobs. The second scenario,

however, is a direct and more certain way to reduce unemployment. And as

workers necessarily spend most of their income on living expenses, their

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wages are less likely to be hoarded (or invested in ways that do not create

jobs) than are business profits.

Lets now return to an examination of the present crisis, and think about the

situation not only from the point of view of government spending a laKeynesand Krugman, but also in light of the distinctions that Shaikh makes regarding

the character of government debt.

http://en.wikipedia.org/wiki/File:USDebt.png

As we can see from the charts above, the absolute size of the debt in inflation

adjusted dollars slightly declined from its peak in the 1940s until the 1970s.

After 1980 the Federal debt very dramatically increased from 1980 until the

present day.

http://en.wikipedia.org/wiki/File:USDebt.pnghttp://en.wikipedia.org/wiki/File:USDebt.pnghttp://en.wikipedia.org/wiki/File:USDebt.png

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If we look at debt as a % of GDP, however, what we find is that relative size of

debt dramatically decreased from the late 1940s until the 1970s, and has just

as dramatically increased since 1980. During the last few years of economic

crisis, the relative size of the debt is once again approaching the levels that it

had attained during the peak years of spending during and immediately afterWWII.

One thing that we must note is the astonishing fact that debt-to-GDP ratios

consistently declined during the years that are often described as having been

Keynesian, while those ratios increased during the years that we have been

calling neo-liberal.In other words, government debt dramatically increased

after the Reagan Revolution that claimedto be against Big Government.

http://en.wikipedia.org/wiki/File:US_Unemployment_measures.svg

http://en.wikipedia.org/wiki/File:US_Unemployment_measures.svghttp://en.wikipedia.org/wiki/File:US_Unemployment_measures.svghttp://en.wikipedia.org/wiki/File:US_Unemployment_measures.svg

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If we look at the above chart based on Bureau of Labor Statistics data, what

we will also see is that the new era of increased Federal debt has not, by any

means, ushered in a new era of full employment. Since 2007 unemployment

rates have been among the highest since the Great Depression. By way of

contrast, during the era of high levels of government debt immediately afterWWII, the U.S. had achieved near full employment.

One lesson that can be drawn from this is that it is not simply a matter of

increasing government spending in order to create effective demand, as in the

Keynesian model. Rather, government spending can have very different kinds

of effects on the economy depending on the nature of the spending. For

instance, as Shaikh indicates, there is a major difference between spending

that simply makes the government a consumer of goods and services, and

spending that directly creates employment.

In 1945 the Executive branch of the Federal Government directly employed

3.4 million civilians (employment by the Judicial and Legislative branches is

negligible by comparison). By the early 2000s, that number stood at 1.8

million. During this same time frame, the population of the United States more

than doubled. This is one of the key differences between government

spending then and now. High levels of government spending today may

indeed stimulate the economy, but a much higher ratio of this spending today

winds up as a stimulus to corporate profits, rather than as the wages and

salaries of the 99%.

At the end of the last Great Depression, it took a major World War in order for

the Federal Government to unambiguously commit to policies that would

generate economic growth that would benefit all classes in American society.

It would not take a World War in order to achieve similar effects, what it

would take is the re-orientation of government toward direct employment in

the performance of public service (Shaikh). Let us hope that it does not take

another World War to bring the First Great Depression of the 21stCentury to

an end.

The prospects for this kind of progressive change do not appear good given

the current state of affairs within the American political system. If anything,

the exact opposite trends seem to be in motion. President Obama announced

plans earlier this week for a leaner military, increasing the Federal

governments focus on creating ever more efficient killing machines that

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require an ever decreasing amount of human labor to unleash their

destructive potential.

It is high time for Americans to refuse to be a part of this upside-down system,

and begin building one that is based on that satisfaction of human needsrather than on the pursuit of corporate profits.