The politicians in Washington and their enablers in the academy are wildly wrong about how to boost growth. They think more government spending is a key to prosperity, but this blog already has revealed that the Great Depression was made worse because of bigger government. Experts have pointed out that the best way to boost growth is to get government out of the way, as happened in the early 1920s when President Harding allowed the economy to adjust and thus deserves credit for quickly ending a serious downturn. Another great example of the benefits of a laissez-faire approach took place after World War II. The Keynesians all though the Great Depression would resume as government spending was reduced after the war. But as Jason Taylor and Richard Vedder explain for Cato Policy Report, less government spending was exactly the right approach:
….the “Depression of 1946″ may be one of the most widely predicted events that never happened in American history. As the war was winding down, leading Keynesian economists of the day argued, as Alvin Hansen did, that “the government cannot just disband the Army, close down munitions factories, stop building ships, and remove all economic controls.” After all, the belief was that the only thing that finally ended the Great Depression of the 1930s was the dramatic increase in government involvement in the economy. In fact, Hansen’s advice went unheeded. Government canceled war contracts, and its spending fell from $84 billion in 1945 to under $30 billion in 1946. By 1947, the government was paying back its massive wartime debts by running a budget surplus of close to 6 percent of GDP. The military released around 10 million Americans back into civilian life. Most economic controls were lifted, and all were gone less than a year after V-J Day. In short, the economy underwent what the historian Jack Stokes Ballard refers to as the “shock of peace.” From the economy’s perspective, it was the “shock of de-stimulus.” …What happened? Labor markets adjusted quickly and efficiently once they were finally unfettered — neither the Hoover nor the Roosevelt administration gave labor markets a chance to adjust to economic shocks during the 1930s when dramatic labor market interventions (e.g., the National Industrial Recovery Act, the National Labor Relations Act, the Fair Labor Standards Act, among others) were pursued. Most economists today acknowledge that these interventionist polices extended the length and depth of the Great Depression. After the Second World War, unemployment rates, artificially low because of wartime conscription, rose a bit, but remained under 4.5 percent in the first three postwar years — below the long-run average rate of unemployment during the 20th century. …many who lost government-supported jobs in the military or in munitions plants found employment as civilian industries expanded production — in fact civilian employment grew, on net, by over 4 million between 1945 and 1947 when so many pundits were predicting economic Armageddon. Household consumption, business investment, and net exports all boomed as government spending receded. The postwar era provides a classic illustration of how government spending “crowds out” private sector spending and how the economy can thrive when the government’s shadow is dramatically reduced.
[…] it would be helpful if there was more understanding of how supporters of Keynesian economics were completely wrong about what happened after World War […]
[…] it would be helpful if there was more understanding of how supporters of Keynesian economics were completely wrong about what happened after World War […]
[…] look at how the economy boomed after World War II even though the Keynesians predicted the economy would fall back into depression without a massive expansion of domestic […]
[…] because of big reductions in government spending and the demobilization of millions of troops. But as Richard Vedder and Jason Taylor explained for the Cato Institute, the economy quickly adjusted and rebounded precisely because politicians didn’t revive the New […]
[…] that’s exactly what happened after World War II (just as it happened under Harding, as Thomas Sowell […]
[…] By the way, something similar happened after World War […]
[…] look at how the economy boomed after World War II even though the Keynesians predicted the economy would fall back into depression without a massive expansion of domestic […]
[…] P.S. Rich also is a co-author of an article for the Cato Policy Report documenting how spending cuts helped restore growth after World War II. […]
[…] Post-WWII United States […]
[…] also reminds us that Keynesian predictions of post-World War II disaster were completely […]
[…] good case study. And if you want to go back further, the anti-Keynesian booms after World War I and World War II also teach important […]
[…] close, I want to share some great advice that was presented by the always soundProfessor Richard Vedder. I was at a conference a few years ago where he was also one of the […]
[…] close, I want to share some great advice that was presented by the always sound Professor Richard Vedder. I was at a conference a few years ago where he was also one of the […]
[…] it’s reasonable to think that WWII ended the depression. That’s why I think the key lesson is that private growth rebounded after World War II ended and government shrank, when all the Keynesians were predicting […]
[…] Truman, meanwhile, was a less consequential figure, but it’s worth noting that he wanted a restoration of the New Deal after WWII, which almost certainly would have hindered and perhaps even sabotaged the recovery. […]
[…] The column also looks at past Keynesian failures. […]
[…] because of big reductions in government spending and the demobilization of millions of troops. But as Richard Vedder and Jason Taylor explained for the Cato Institute, the economy quickly adjusted and rebounded precisely because politicians didn’t revive the New […]
[…] because of big reductions in government spending and the demobilization of millions of troops. But as Richard Vedder and Jason Taylor explained for the Cato Institute, the economy quickly adjusted and rebounded precisely because politicians didn’t revive the New […]
[…] I’ve already cited a Cato study on this topic, which shows that the Keynesians were wildly wrong in their predictions of post-war economic […]
[…] I’ve already cited a Cato study on this topic, which shows that the Keynesians were wildly wrong in their predictions of post-war economic […]
[…] I’ve already cited a Cato study on this topic, which shows that the Keynesians were wildly wrong in their predictions of post-war economic […]
[…] because of big reductions in government spending and the demobilization of millions of troops. But as Richard Vedder and Jason Taylor explained for the Cato Institute, the economy quickly adjusted and rebounded precisely because politicians didn’t revive the […]
[…] Reich claimed World War II was an example of successful Keynesian stimulus, but if he wants to make that argument, then he needs to explain why we didn’t fall back into the Great Depression after the war – which is what all the Keynesians warned would happen. […]
[…] P.S. Rich also is a co-author of an article for the Cato Policy Report documenting how spending cuts helped restore growth after World War II. […]
[…] Rich also is a co-author of an article for the Cato Policy Report documenting how spending cuts helped restore growth after World War II. Rate this: Share this:PrintEmailFacebookTwitterMoredeliciousDiggFarkLinkedInRedditStumbleUponLike […]
[…] As Ms. Fields explains in the video, President Harding, unlike Presidents Hoover and Roosevelt, slashed government spending. jQuery('#lazyload_post_0 img').lazyload({placeholder: […]
[…] Fields explains in the video that President Harding, unlike Presidents Hoover and Roosevelt, slashed government spending. Rate this: Share this:PrintEmailFacebookTwitterMoredeliciousDiggFarkLinkedInRedditStumbleUponLike […]
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