In case you missed it – a good letter in today’s Wall Street Journal touting the post
WWII analysis of Robert Higgs and Vedder and Gallaway.
“A Boom Followed War Stimulus’s End
Your article “National Economies Hinge on Shaky Withdrawal From Stimulus” (The Outlook, Jan. 25) draws a parallel between the winding down of massive “stimulus” spending after World War II and today.
The article correctly notes that there were widespread fears about a return to high unemployment after the reconversion from the war, but it propagates what many economists believe is a long-standing myth about how “pent-up demand” from American consumers helped the economy avoid a post-stimulus depression. Keynesian economists at the time scrambled to find a way to reconcile their model with the reality that massive cuts in government employment and spending–from a value that was 48% of gross domestic product in 1944 to less than 18% in 1946–were accompanied by full employment rather than economic Armageddon, as the Keynesian multiplier theory would suggest.
While pent-up demand from consumers was their response, in separate studies Richard Vedder, Lowell Gallaway (1993) and Robert Higgs (1999) showed that increases in consumer spending weren’t nearly large enough to have meaningfully offset the declines in government spending. Instead, they attribute the post-stimulus economic miracle to the power of the free market to adjust after nearly 15 years of poor government policies by the Hoover and Roosevelt administrations done in the spirit of economic stimulus.
Jason E. Taylor
Professor of Economics
Central Michigan University
Mount Pleasant, Mich. ”