19 May 2012

Here's A Secret: Austerity Does Work & Here's The Biggest Example Of It...Ever

Music to read by:

 

 

 Levon wears his war wound like a crown
He calls his child Jesus
'Cause he likes the name
And he sends him to the finest school in town

Levon, Levon likes his money

He makes a lot they say
Spend his days counting
In a garage by the motorway

He was born a pauper to a pawn on a Christmas day

When the New York Times said God is dead
And the war's begun
Alvin Tostig has a son today

 



By James Pethokoukis

Now, we all all know “austerity” from deep spending cuts (not the tax hikes, of course) is killing Europe’s economy and would do the same here in America, right?

Well, here’s a story about austerity that critics such as President Obama, Paul Krugman, and Ezra Klein never seem to mention: From 1944 to 1948, Uncle Sam cut spending by a whopping 75% as World War II came to end. Spending as a share of GDP plunged to 9% in 1948 from 44% in 1944.

Superstar economist and devout Keynesian Paul Samuelson—later to become the first American to win the Nobel Prize in economics—predicted such shock austerity would cause “the greatest period of unemployment and industrial dislocation which any economy has ever faced.” That dire, disastrous prediction was widely held by his fellow Keynesians, with one even predicting an “epidemic of violence.”

Except the doomsayers were wrong, even though Washington obviously ignored Samuelson’s call for gradual spending reductions. Despite cuts which dwarfed those seen in the EU today—not to mention those Republicans are calling for here at home—the U.S. economy thrived. There was no mass unemployment despite rapid demobilization of the armed forces. As George Mason University economist David Henderson explains is his 2010 paper, “The U.S. Postwar Miracle” (which this entire post draws upon):
As demobilization proceeded rapidly, employers in the private sector, full of the optimism … scooped up millions of the soldiers, sailors, and others who had been displaced from the armed forces and from military industries. … The number of unemployed people did increase, rising from 0.8 million to 2.3 million, but with a civilian labor force of 60.1 million, the 2.3 million unemployed people implied an unemployment rate of only 3.8 percent. As President Truman said, “This is probably close to the minimum unavoidable in a free economy of great mobility such as ours.
Of course, liberals are quick to point out the U.S. economy suffered its worst one-year downturn in history in 1946, a drop of 12%. To many Americans, it surely must have seemed like Samuelson was right, that the Great Depression had returned. But no one thought that back then, especially with jobs plentiful unlike during the 1930s. The drop in output was a statistical quirk caused by the removal of price controls. As Henderson explains:
For example, imagine that the free-market price of a pound of filet mignon during the war would have been $1.40 a pound. But imagine further that the government had set the price at $1.00 a pound. Then, when the price control was removed, the price would have shot to $1.40 a pound. Inflation statistics would have recorded some amount of inflation due to this large price increase. But those statistics would have overstated the real price increase because getting beef at $1.40 a pound is better for many of the people who couldn’t, because of the shortage, get it at $1.00 a pound.
Second, those sky-high output figures during the war measured government spending on goods and services, lots of it military hardware, at their cost. But what was all that stuff really worth, in purely economic terms, vs. post-war consumer purchases of homes and cars and nylon stockings? While total output fell by 12% in 1946, private-sector GDP rose by nearly 30%.

Or look at it this this way: Real U.S. output in 1947 was 17% higher than in 1941 despite the decline in government spending. Why was the economy prospering in way it never did during the Great Depression? Taxes were cut a little, and government interference—including price and production controls and rationing—was reduced a lot. But perhaps just as important, Truman dumped many of FDR’s most radical New Dealers. That change boosted business confidence, and companies started to invest again in America.

The typical Keynesian response mostly centers around dismissing the immediate post-war boom as a one-off event complicated by many unique factors. But it happened again, as Henderson notes! After the Cold War ended, overall federal spending fell to 18% of GDP in 2000 from 22% in 1991. But again the economy boomed. Real U.S. GDP grew by 40% with an average annual growth rate of 3.8%. Henderson speculates that perhaps the decline in defense spending freed up knowledge workers to help make technological miracles happen in the private economy.

The lesson here: Spending cuts might well produce prosperity instead of austerity, especially if accompanied by less government interference in the economy and less fear in the private sector of anti-market government policies.



Related Reading:

   



"Levon" - Elton John/Bernie Taupin

Levon wears his war wound like a crown
He calls his child Jesus
'Cause he likes the name
And he sends him to the finest school in town

Levon, Levon likes his money
He makes a lot they say
Spend his days counting
In a garage by the motorway

He was born a pauper to a pawn on a Christmas day
When the New York Times said God is dead
And the war's begun
Alvin Tostig has a son today

And he shall be Levon
And he shall be a good man
And he shall be Levon
In tradition with the family plan
And he shall be Levon
And he shall be a good man
He shall be Levon

Levon sells cartoon balloons in town
His family business thrives
Jesus blows up balloons all day
Sits on the porch swing watching them fly

And Jesus, he wants to go to Venus
Leaving Levon far behind
Take a balloon and go sailing
While Levon, Levon slowly dies 


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