Sharon Angle and the Depression

August 18, 2010 · Posted in The Capitol 

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I haven’t written much about the Sharon Angle Follies, but this exchange is quite interesting:

Q. Did Keynesian economics, the stimulus spending, work in the Depression of the ’30s?

A. No. And I think history has really proven that to be true. Most economists agree that the thing that really worked, which is a sad commentary, is the war.

And she’s right. Stimulus spending during the 1930s had little positive impact on the economy since there was in fact very little stimulus spending during the 1930s. Expansionary monetary policy moves made a great deal of difference in FDR’s first term, but then contractionary fiscal and monetary measures undertaken in 1937 prompted a new recession. Shortly thereafter, World War II revived the economy. But as Steve Benen says “The war was a shot in the economy’s arm because of all the spending.” The war is a textbook example of how deficit spending by the government can boost the economy by mobilizing real resources for some public purpose.

Now obviously it would be morally wrong to revive the economy over the next two years via a deficit-financed effort to destroy Germany and Japan. But the point is that if we use deficit spending to target and mobilize idle resources, the economy will grow. What’s more, if we target those resources and mobilize them to do something useful we’ll reap substantial benefits.

Matthew Yglesias


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