Catastrophe - Dick Morris [11]
And when the war finally came to America in December 1941, the federal government’s purchases and contracts pushed the economy to full employment in a hurry.
So why wouldn’t Obama’s stimulus package have the same effect as the World War II spending?
Two reasons: First, because government spending during World War II was incomparably higher than anything we could contemplate today. Even though Obama is running a budget deficit that may rise to 13 percent of GDP, that doesn’t compare with the 30 percent deficit we ran in 1942.
Second, because in the 1940s contractors and businessmen knew that the war would go on for a while and that the new government orders wouldn’t dry up. So they didn’t hesitate to spend money to expand their production capacity and hire new workers. Today, everyone knows that Obama’s stimulus package is a one-shot affair. Even if he passes a second package, everyone knows it won’t last as long as America’s four-year involvement in World War II.
But why didn’t Keynes’s theories work in the 1930s? If taxpayers got refunds and workers got paychecks, why didn’t they spend the money? Why didn’t they flock to the stores to buy new products and services? And why didn’t that surge in demand lead to big increases in employment as businessmen raced to take advantage of the swelling market?
Because people have brains. They’re not animals who respond automatically to stimulation; they know what’s going on. In the 1930s, they realized that the new jobs the government gave out could end at any moment. They knew the tax refund checks they got were one-shot gifts that wouldn’t come around again. Their anxiety over the future paralyzed their ability to respond to the economic stimulus of the moment the way the economists had hoped.
Likewise, business executives of the time knew that any sudden bump-up in sales was due not to an end of the recession but to the artificial, one-shot stimulus provided by the government. Once it was spent, it’d be back to the same old depression. And so, rather than taking the revenue generated by momentary sales upticks and investing it in new factories or hiring additional workers, they put the money into safe Treasury bills and waited for better times.
What about tax cuts? Were they a better way of implementing Keynes’s theories? Did refund checks in the mail create the demand Keynes craved?
The experience with one-shot tax reduction or stimulus checks has been even more dismal that that with spending increases.
Earlier in 2008, faced with a faltering economy, George W. Bush and the Republican Congress approved a stimulus check program for American taxpayers. More than $100 billion went out, an average of $950 per family.34 What happened? Nothing. The economy remained flat. Later, academics concluded that only 10 to 20 percent of the money had actually been spent on new goods and services.35 The rest was just used to pay down bills or reduce debt—neither of which created any jobs.
In the past two decades, Japan has faced a very similar challenge. Saddled with a protracted recession with no growth and stubborn unemployment, the Japanese government has been borrowing like crazy, spending money on public works projects year after year—with no real effect.
It was a sobering comedown for the once-thriving nation. In the 1980s, the Japanese economy soared. In the four years 1987 through 1991, the country’s GDP rose by 31 percent. Yet in the fourteen years that followed—from 1991 until 2005—it rose by only 10 percent!
The Japanese economy made slight gains in 2006 and 2007, but when the global economy caved in, the Japanese crash was worse. In the last quarter of 2008, according to CNN, the Japanese economy shrank at an annual rate of 12.7 percent.36
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GROSS DOMESTIC PRODUCT IN JAPAN
Source: IMF Financial Statistics Yearbook.
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It wasn’t that the Japanese government wasn’t trying to stimulate the economy all those years. It was following the same, futile Keynesian path that Obama is pursing—with no effect.
Here is the dismal history of Japanese