Boulton: Massive spending neither original nor productive

Boulton: Massive spending neither original nor productive

June 3, 2009
June 3, 2009

The theory behind President Obama’s massive spending program is that by throwing a trillion dollars against the wall, somehow all that will lead to enough of an increase in the demand for goods and services out in the great beyond so that both a rise in unemployment and a decline in aggregate GDP can be avoided.

This is basic Keynesian economics and assumes that recessions are the result of insufficient consumer demand, thus the government needs to spend to whatever extent necessary to offset that deficiency.

Ergo, as true believers in the government’s omnipotence in solving all the country’s economic problems with a single bound, it was the Democrats imperative duty to authorize government spending at levels exceeding two times or more what it collects in tax revenue. A corollary assumption was that the United States is on the verge of collapsing into another great depression ala the 1930s and since Roosevelt was able to save the situation through massive federal spending, so should the Obama Administration. In the process several million jobs would be ‘saved’, assuming it’s remotely possible to calculate that leap of faith.

The problem with all this mythology is that it simply isn’t true. First, if these millions of jobs are preserved only by massive federal spending on God knows what, then what happens when the spending spigot is turned off. According to the frequently cited rule of thumb that every dollar of new spending leads to somewhere between five and six dollars of incremental spending as the expanded largess rolls through the economy – then the effect wears off and the economy is right back where it started unless the private sector has recovered enough to take up the slack. If the private sector hasn’t risen to the occasion, then banana republic spending must continue forever to sustain economic activity.

Another fly in the ointment is that the only time massive government spending of this proportion, outside of war expenditure, was tried it didn’t work – despite the great FDR myth and the premise that President Hoover’s recalcitrant miserly conservatism accentuated the economic misery to start with. In fact it can be creditably argued that FDR’s New Deal was a continuum of Hoover’s economic policy that clearly hadn’t worked prior to FDR’s 1933 inauguration.

Leaving aside the compendium of ‘alphabet agencies’ each created to address the economic problems of the 1930s and a host of economically counterproductive policies each pursued, the truth is that Hoover was as proliferate with the federal fisc as Obama is proving to be. This is clearly illustrated by the following figures lifted from Dr. Robert Murphy’s book, The Politically Incorrect Guide to the Great Depression and the New Deal (2008, Regnery):

Receipts Outlays Net Deficit % GDP
FY 1929-30 $4.1 $3.3 +$0.7 0.80%
FY 1930-31 $3.1 $3.6 -$0.5 -0.60%
FY 1931-32 $1.9 $4.7 -$2.7 -4.00%
FY 1932-33 $2.0 $4.6 -$2.6 -4.50%
FY 1933-34 $3.0 $6.5 -$3.6 -5.90


The reason that FY 1933-34 is included as part of the Hoover record is that the budget for that year was greatly set under his watch by the Congress whose term didn’t expire until March 1933. Since the federal fiscal year started on July 1 of every year back then, Roosevelt had only a couple of months to juice federal spending on his own.

The one saving grace to this record is that the deficit remained under 6% of total American GDP, pretty much in line with post WWII experience but still less that the proportionate extent of the Bush deficits, while Obama plans to ram the federal deficit to over 10% of total GDP – doing Germany’s Weimar Republic one better when its budget deficit hit 10% of GDP just prior to the hyper-inflationary takeoff in 1923.

Some forecasts even call for the federal deficit under Obama to approach 20% of GDP before everything is said and done.

The pertinent question is how much did all this excessive spending do to get unemployed Americans back to work in the 1930s and the answer is that it didn’t. Again using Dr. Murphy’s figures, unemployment rates averaged roughly 3.3% of the labor force from 1923 – 1929. In 1930 unemployment spiked to 8.9%, just like it did over the latter half of 2008 and 2009 to date. By 1931, when the budget dropped into a deficit, unemployment had jumped to 15.9%, to be followed by further increases in 1932 (23.6%), 1933 (24.9%), and 1934 (21.7%). So for the three years under Hoover, when the federal deficit was greater than the total amount of revenue collected by the US Treasury, the unemployment rate almost tripled. So much for spending lots of money that the government didn’t have to get people back to work – then FDR took over.

Since 1933 was the nadir of the Great Depression as far as unemployment went, mid-1932 saw the deflationary collapse in commodity prices and the stock market turn the corner which fits since the latter are leading indicators while unemployment rates are amongst the last to reverse course, unemployment under FDR did improve. In 1934 it had dropped to 21.7%, nothing to write home about, and then 20.3% in ’35 before troughing at 14.3% in 1937. Then in 1938 the average unemployment rate jumped back to 19% with thousands of Americans working for the WPA and Civilian Conservation Corps.

Never in American economic history, or that of Western Europe for that matter, was the unemployment situation this bad for almost a decade, and bringing it back down to fewer than 3% only by drafting millions into the army is not a resume highlight. During all other economic downturns, when the government essentially did nothing in the way of increased spending to juice up economic conditions, the employment picture did not get remotely as extreme. If emulation of the Hoover/ Roosevelt regime of federal spending is Obama’s vision, based on historic evidence, we're in for some difficult economic times.

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