On October 23, 2012, the Institute for New Economic Thinking (INET) hosted an economics discussion with Paul Krugman and Joseph Stiglitz. The moderator of the discussion asked the Nobel Memorial Prize in Economic Sciences winning economists what the solution to our current recession is. Paul Krugman quickly spoke up and said that much more government spending was needed to pull us out of the recession. Both Krugman and Stiglitz began to justify this position using the example of how government spending that supported World War II pulled us out of the Great Depression. Specifically they laid out the history as follows:
1) Two factors that lead to the Great Depression included a significant household debt bubble and a structural economic shift from a rural agricultural economy to an urban industrial economy.
2) The economy actually began to recover 2-years before U. S. involvement in WWII as the government started to spend money as part of the ramp-up to the war. The U.S. was building equipment and supplies.
3) The U. S. joined WWII and we now had two-income households that allowed debt to be paid down and savings to increase.
4) The war ended and the G.I. Bill allowed returning soldiers to enter trade schools, colleges, and universities to gain the skills they needed to complete the economy’s transition from agriculture to industry.
Stiglitz admits this recovery was not intentional, but happened ‘quite by accident’. However, both Krugman and Stiglitz believe we can intentionally repeat this type of recovery with the right macroeconomic policies. Their take-away from the Great Depression/WWII recovery example is that government spending was the triggering event and the reason for recovery. Hence, significant government spending is the answer to our current recession. I must admit I am more than disappointed by the inability of such ‘elite’ economists to see the differences between the spending that occurred prior to and during WWII and today’s government spending. Here’s why they are wrong:
Government Spending vs. Investment
The government spending leading up to WWII was being used to produce actual goods. These goods were not only being used by the U.S., but were being sold, for a profit, to our allies. This was an investment in real and potential income. The government was, in many ways, acting like a business. They also employed a tremendous amount of labor.
Today’s increased government spending is not being used to produce goods and services that can be sold for a profit. It is being used to support unemployment compensation, temporarily bail out companies like GM that eventually file for bankruptcy anyway, provide subsidies for renewable energy companies like Solyndra that have never produced anything generating a return, and to provide cash for banks who won’t lend it out for fear they won’t pass their ‘stress tests’ and/or because they are still trying to make up for revenues lost as a result of mortgage defaults.
Government spending is not generating the returns it did as we came out of the Great Depression. In fact, return on government spending has been negative since 2009. In the third quarter of 2009 each dollar of debt added produced NEGATIVE 15 cents of productivity, and at the end of 2009 each dollar of new debt SUBTRACTED 45 cents from GDP!
Plus, a significant portion of the money is ending up in the hands of CEOs and banks, the very elite and ‘wealthy’ people the current administration blames for our woes. The share of government spending reaching labor is very small so we will not see the labor driven recovery that occurred during the Great Depression and WWII from government spending. There is a difference between government spending for the sake of spending and government investment.
Pent-Up Demand
While the government’s investment in WWII created two-income households, allowed for the paying down of debt, wage rate inflation, and increased savings, it also created pent-up demand, as there was a shortage of consumer goods. When consumer production returned, households used their savings to create a boom in purchasing. The government did not need to spend because individuals were able to. This pent-up demand and high savings rate does not exist today, and is not being solved by government spending. The U.S. also came out of WWII as the only major industrialized country whose industrial infrastructure remained intact. As a result we became a major exporter as Europe and Japan rebuilt.
Today’s environment is very different. The developed world is no longer the primary source of goods production. We have transferred our production power to the developing world and have taken on the role of innovator and consumer. However, when manufacturing moves overseas, research and development often goes with it eroding our current competitive advantage in innovation. We are also transferring production knowledge to countries that have no regard for patents, trademarks, or other intellectual property rights and are willing to counterfeit goods. The current structure of our economy doesn’t look much like the post-Depression, post-WWII era.
Structural Differences
After WWII, the education returning veterans received helped the U.S. economy make the shift from rural agriculture to urban industry. We are now seeing a shift from industry to technology and service. This has resulted in two primary types of jobs in the U.S.: low paying service jobs (retail, food service, etc.) and high paid technology jobs that include technology service. This shift is considerably more difficult than the agriculture to industrial production shift for two reasons. First, there is a considerably higher level of education required to work in technology. While industrial workers could be successful with a certificate program and an apprenticeship, technology workers generally require a Bachelor’s degree or higher. The education process takes a lot more time than the previous WWII shift. The second problem is that a smaller percentage of the population has the aptitude for the required education than for industrial education. The academic rigor is much more intense and while it may be politically incorrect to say so, we cannot expect that everyone will be capable of making this educational shift.
No ‘Look-Alike’ Model
While there might be some legitimate reasons for the government to invest in the U.S. economy either directly through spending or indirectly through tax incentives, using the case of the Great Depression is not a valid argument. The situational and economic structure similarities just don’t exist. We are in an economic situation we have never seen before; there are no “look-alike’ models that justify our current model of ever increasing government spending.
Holly A. Bell is a business professor, author, analyst, manager, and blogger who lives in the Mat-Su Valley of Alaska. You can visit her website at www.professorhollybell.com or follow her on Twitter at @HollyBell8
Holly Bell's Blog (http://s.tt/1rXq2)
I think it's pretty spot on in regards to the failed Keynesian guided policies. More government spending isn't doing shit and certainly making the stimulus even bigger isn't going to do shit either.
