When Did Deficit Spending Ever Lead to Actual Growth?

Paul Krugman once again defends an instance of deficit spending with the same excuse: it could have been worse. That's the same excuse used for FDR's policies, which failed to curb unemployment during the Great Depression - this time, it's Japan: almost twenty years of deficit spending have yet to produce any tangible results. But, then, it could have been worse, writes Krugman.

There is a reason deficit spending (which is not the same as a deficit produced solely by cutting taxes), combined with government intervention, does not work. In its extreme, socialism, a price system, as a mechanism for communicating information, does not exist, as Ludwig von Mises famously stated. Underlying this statement is the empirical observation that men (or women) manifest their wishes, needs, and priorities, through voluntary exchange. Centralized bureaucracies cannot substitute this information, much less the individuals' own prioritization of their desires. Stimulus spending, which supposedly covers needs that a market will not recognize, is bogus. Taxation (or borrowing, which will inevitably lead to taxation in the long run) drains the market of its resources and redistributes them against the wishes of the citizenry. This means that any initial appearance of growth cannot last, since the government-mandated products or services prove undesirable, cost-ineffective, and, eventually, unsustainable - and the business that produces these products or provides these services will have to fold, leaving its employees unemployed, its providers unable to recover their money, etc. In the meanwhile, many entitlements may have been established, burdening government finances for years to come. How can, then, sustainable growth come out of a planned (more or less) economy?

A Case for More Stimulus Spending. Again. Wrong. Again.

Once again, Nobel laureate Paul Krugman, in a New York Times Op-ed, makes the case for more stimulus spending and tries to draw historic analogies with the FDR administration and World War II. His case, in a nutshell:

Premise: 5 years of deficit spending (1933-1938) did not produce growth. Conclusion: 5 years of deficit spending is not enough and can show only few results; the government must borrow and spend even more.

Premise: World War II necessitated a very large amount of borrowing and, following its conclusion, the U.S. economy boomed. Conclusion: deficit spending of an enormous scale leads to prosperity.

That he fails to point out any causal connection between what he wants us to understand as cause and effect should be an initial indication that, perhaps, something is amiss in Krugman's reasoning. If what he proposes is correct and can be generalized, then it would apply equally to other economies - so, why don't we see the course of the economy of another victorious power of the Second World War, which also had to resort to massive borrowing to sustain the war effort: Great Britain.

1939-1945: great deficit spending to fund the war effort

1945-1950: post-war consensus, nationalizations, National Health Service

1954: end of all food rationing

1950s-1960s: growth rate smaller than that of most Western European countries; large debts still looming

1967: devaluation of the pound sterling

1976: $4 billion loan from the International Monetary Fund

1978-1979: Winter of Discontent

This period ends with the election, in 1979, of the Conservatives under Margaret Thatcher, who completely reversed the policies followed up until then and turned the United Kingdom from the sick man of Europe to the strongest European economy. If Krugman's reasoning were correct, Great Britain would not have had to face such financial difficulties; all the more so, since the post-war consensus was very close the economic policies Krugman supports. Instead, it is the very debts Britain inherited from the war that proved to be a constant burden on its development. This means that either there was some other factor disqualifying deficit-spending Britain from growth (which I cannot imagine), or that it was not deficit spending (or, at least, not deficit spending per se) that led to the expansion of the U.S. economy following the war; and that Krugman's reasoning is flawed.

Let me finish by copying a quote by Ludwig von Mises from my friend, and excellent essayist, Tilemachos Chormovitis - according to von Mises, "War prosperity is like the prosperity that an earthquake or a plague brings. The earthquake means good business for construction workers, and cholera improves the business of physicians, pharmacists, and undertakers; but no one has for that reason yet sought to celebrate earthquakes and cholera as stimulators of the productive forces in the general interest."

To that, let me add that a disease does not mean good business for a physician, if it is he or she who has it; the destruction of one's home by earthquake does not mean that that person will thrive, even if he or she is in the construction business. This is a hint as to the explanation I will try to offer for America's post-World War II economic boom in a subsequent post.