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Source link: http://archive.mises.org/11570/the-crisis-that-wasnt/

The Crisis that Wasn’t

January 29, 2010 by

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. ”

{ 7 comments }

Mitch January 29, 2010 at 2:50 pm

Great letter.

It reminds me of my economics professors trying to explain why the stagflation of the ’70s happened or why the “stimuli” of the past two years haven’t righted our country’s imbalances.

For some reason, they will just never admit that Keynes might have been wrong. It’s refreshing to see such heresy published in the WSJ.

bob January 29, 2010 at 3:55 pm

Don’t forget Japan – stimulus and money pumping worked according to the Keynesians…just not enough and quickly enough to offset that pesky market which keeps insisting on spiraling into oblivion…

Maybe we just need more faith?

Stranger January 29, 2010 at 7:40 pm

This event poses a very interesting question. Why were the reductions in government spending creating a quick recovery instead of the of labor and capital chaos that followed the reductions in financial spending of the ’29 crash?

My theory is that the war gave the government the power to break the unions and commercial cartels that prevented competition. After the war there were no unions, hence businesses were free to absorb all the labor released by the army.

Josh January 30, 2010 at 8:50 am

The problem with trying to defeat the Keynesians is that they have constructued an unfalsifiable theory. If the stimulus dosen’t work, they Keynesians will claim that the stimulus was too small and we need more deficit financed spending.

If the economy begins its upturn (as it inevitably will, cyclical economic growth is certain), the Keynesians will claim success even when all the evidence shows that the so called multiplier is actually neglibible and sometimes negative.

Keynesian economics will unfortunately always be here.

The Crackshot Crackpot January 30, 2010 at 4:36 pm

No! No! Bob is right. What we need is a little more faith. C’mon you guys!

Dick Fox January 31, 2010 at 7:44 am

Never forget there were tax cuts in 1945 and 1948. The 1948 cuts even included a very serious cut that encouraged marriage and the raising of children in the home. This resulted in the lowest divorce rate in our nation’s recent history.

8 January 31, 2010 at 8:44 am

Truman wanted to continue Roosevelt’s policies after the war, but the brief post-war recession led to a Republican victory in the 1946 mid-terms. The New Deal was officially dead. Taft-Hartley, tax cuts, etc. were passed over his veto.

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