When Deficit Spending Worked Wonders

This post was written by Dr. Art Pitz on February 16, 2009
Posted Under: Economic History

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One of the issues that has been debated regarding the pending Stimulus Plan has been concern over how much the proposed spending would add to an already enlarged federal deficit. This is a legitimate concern especially considering that President Bush and his advisors took what was a surplus federal budget and turned it into a serious deficit federal budget in relatively short time. Folks worry that we have already mortgaged our future and that large expenditures in a Stimulus Plan would only add to an intolerable burden.

This led me to think about a time when the U.S. chose a path of massive deficits. When was that?

Fuel Oil Ration Coupon by Seattle Municipal Archives under Creative Commons License

WWII.

Virtually everyone who has studied the Great Depression has noted that the New Deal did not bring the U.S. out of the depression. WWII did. It is ironic that the Federal Government was far more willing to spend on a huge scale to fight the war rather than spend like that to bring us out of the Great Depression.

But, it did work.

The Gross National Product rose quickly from 200 billion in 1940 (in 1954 dollars) to 320 billion in 1944—a 60% gain. This allowed the nation to meet the large war expenses while providing civilians with more money to spend than there were consumer goods to buy. There were few civilian goods since the U.S. chose to engage in wartime rationing and to convert America’s manufacturing base into defense industries.

The latter was done with astonishing speed. The last passenger cars rolled off the assembly line in February of 1942 to be replaced by jeeps, supply trucks, planes and tanks. Production of these goods rose so much that by the end of 1943 production even exceeded demand which had the salutary effect of prompting many corporations to begin planning for reconversion to peacetime needs.

Government purchases of goods and services increased from about 18% in 1940 to 56% in 1944. The U.S. has never before or since had such a gigantic role for government in the economy.

It is well to keep that in mind during the current discussions. The latest Newsweek’s front cover alleges that we are all socialists now due to the increasing role of the federal government in the economy. That appears to be over-hyped given our track record in WWII.

Deficit spending met the needs of the U.S. in wartime in WWII. Perhaps, if it is well managed now, it will meet the needs of the current crisis. And, if it does, then the role of government will diminish just as it did once WWII came to an end. Further, it is highly doubtful that the U.S. government’s purchases of goods and services will come anywhere close to the 56% of the GNP that it achieved in 1944.

That’s my opinion, but what do you think?

Thanks for reading,
Dr. Art Pitz
The Professor’s House

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Reader Comments

I believe that the most important part of rescuing the economy is not only the governments purchases of goods and services, but the fact that people were able to live on rationing and lack of consumer goods. Americans were literaly forced to save money, so when the war ended people had loads of money and lots of consumer needs to be met. Today many americans would not be willing to endure that type of rationing because it would be very impractical. I am instead hopeful that investing in new Green technology will do the job that rationing would do.

#1 
Written By Shawn Simmons on February 17th, 2009 @ 9:45 pm

I think that the press and the opposition has blown this deficit part of the recovery bill out of proportion. They would like to find and highlight what is wrong with doing this; but still they have no better ideas or suggestions, really. Something drastic needed to be done; because so little had been done or done right for soooo many years now. Also the deficit thing wasn’t talked about or cared about when it was being run up - for WAR. The recovery and other things that Obama does will work, and when they start to take hold…the turn around - will work to bring the deficit down, too. In your earlier writings you mention the railroad project by Lincoln…and in that regard, Obama has clean energy projects galore to work on, and part of that would be an American electrical grid…connecting our power sources…and distributing that power to the places it is needed. Also, another similiar project will be to bring broadband coverage to the whole of US.

#2 
Written By Karene Nagel on February 17th, 2009 @ 10:00 pm

The talk - confused by too many as knowledge - has in significant part caused the lack of consumer confidence and spending while the hedge funds, speculators and manipulators are responsible for the erratic bahaviour in the market.
As a large W-European industrialist told me several years ago, if they keep talking about it, they’ll talk themselves into a recession.

#3 
Written By Patrick on February 17th, 2009 @ 10:31 pm

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