McConnell: Spending Can’t Work Except When It Can
Mitch McConnell studies history and reaches the conclusion that we should hope for a German campaign of world conquest:
“But one of the good things about reading history is you learn a good deal. And, we know for sure that the big spending programs of the New Deal did not work. In 1940, unemployment was still 15%. And, it’s widely agreed among economists, that what got us out of the doldrums that we were in during the Depression was the beginning of World War II.”
To be precise, the historical record shows that throughout FDR’s first term, the country was on a path to recovery—albeit from a very low point. Then there was a recession-within-a-depression associated with efforts to return to McConnell-style policies of fiscal restraint. By 1940, things were much better than they had been in 1932. But still, as he says, not very good. Thus far we don’t have a very solid case against stimulus spending. And now things get worse. The conclusion McConnell wants is that “big spending programs” couldn’t help fight the Depression. But World War II was, among other things, a huge spending program. At the moment, however, we’re fortunate not to be in a position where there’s a powerful wehrmacht that needs fighting. So we can try to direct our recovery-oriented spending at useful civilian projects that will improve the country’s infrastructure or health or education rather than on tanks and bombs.
55 Responses to “McConnell: Spending Can’t Work Except When It Can”
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February 7th, 2009 at 10:10 am
That’s exactly right, Matthew.
Conservatives speak as if GDP growth between 1932 and 1940 was a fairly stable, low-growth trend, because the existence of the recovery between 1932 and 1937, the recession of 1937, and the recovery thereafter blows their arguments out of the water.
February 7th, 2009 at 10:18 am
Are you trying to build a case for stimulus spending? And how does the historical record–a very weak recovery followed by a recession followed by a weak recover followed by a recovery due to WWII–help with that case? Yes, things were better in 1940 than in 1932, but that doesn’t mean that the New Deal stimulus worked. To the extent that you want to rely on the WWII example, shouldn’t you try to demonstrate that the current stimulus is of a similar size and scope? Do you think it is? All of your confusion on this comes from the mistaken impression you have that stimulus is a natural or given response which opponents must build a case against. It isn’t.
February 7th, 2009 at 10:19 am
I’m stunned at the patience of people who can continue to argue with Republicans, month after month, year after year.
There’s a minimal level of candor you’ve got to have in an interlocutor before it’s even worth engaging with them, and the Republican party seems to have vowed — for reasons of immutable principle — never to rise to that level.
February 7th, 2009 at 10:23 am
E.g., to the extent that Thomas has just made a case for anything, he’s made a case for a bigger stimulus.
But not if you bend over backwards and twist your head around so you’re looking through the crook of one knee. If you do *that* then he’s cleverly refuting something or other, in some tangential way.
Grover Norquist is already calling this the Obama recession. I despair of teaching these people.
February 7th, 2009 at 10:25 am
WW2 did not pull the US out of the Depression. The New Deal did.
In 1940 the US had not yet entered WW2, and defense spending was just 1.7% of GDP – lower than in 1936. The GDP growth rate in 1940 was 8.8%.
In 1941 the US ramped up defense spending to 5.6% of GDP. But the GDP growth rate was a staggering 17.1% — vastly higher than can be explained by higher defense spending.
Oh, but maybe growth was due to rising exports because the rest of the world was at war, right? Wrong. Exports rose from $3.2 billion in 1939 to $5.2 billion in 1941 — a rise of just over 2% of GDP, while total GDP grew almost 30%.
The New Deal worked. It kept Americans employed while the economy rode out the Depression. By 1940, the US was out of the Depression and ready to enter a period of rip-roaring new growth, fueled by new technologies and new business models (Pan Am, NBC).
Then WW2 intervened and took credit for the recovery the New Deal had created.
February 7th, 2009 at 10:27 am
Ted, the key is to understand that “Republicans” aren’t a monolithic Borg. Yes Grover Norquist on the Corner called it the Reid/Obama/Pelosi recession. But Ramesh Ponnuru, minutes later basically called him full of shit for doing so. There are delusional Republican, slightly less delusional Republicans and those that pretend to be delusional so as to save face while they vote with Democrats.
February 7th, 2009 at 10:28 am
Might defense spending not have a multiplier, MS?
February 7th, 2009 at 10:28 am
It’s worse than that, I almost felt like making Thomas argument for him because he sucks. The *right* way to do this is to say that WWII solved unemployment by killing off the workforce. That definitely had an impact that I won’t deny.
February 7th, 2009 at 10:33 am
A graph is worth a thousand words.
http://swampland.blogs.time.com/2009/02/06/how-bad-is-it/
February 7th, 2009 at 10:37 am
Defense spending might have a multiplier, Zephyrus, but it does not have a multiplier of 3.
February 7th, 2009 at 10:37 am
You have a whole lot of confidence in that one story, when in reality it is but one of a dozen different stories in the economic literature about the recovery from the depression. A brief taste here:
http://www.marginalrevolution.com/marginalrevolution/2008/11/what-ended-the.html
I think you must know this, and moreover, you don’t have the expertise to determine which story is the most accurate one. Yet when you say “to be precise” you give the impression you are speaking the gospel truth. To me this says one of two things. The first, is that you are shamelessly selling your preferred narrative. The second, is that you are caught in the human tendency to take rumors which reinforce the things they already believe and incorporate them as truths.
I think a little more agnosticism in this whole debate from Matthew would be a sight more honest.
February 7th, 2009 at 10:38 am
Ted, that’s exactly the implication–if we’re going to do a stimulus based on the WWII model, it should be much, much larger. The evidence Matt points to suggests that smaller measures just don’t work. So, why should someone support that half measure? Make the case, don’t assume it’s been made.
February 7th, 2009 at 10:47 am
Thinker, you’d better hope desperately that those alternate versions of the post-Depression recovery are wrong. Cowen cites Christina Romer’s:
Today, with the prime rate at 0, there is no way to “lower real interest rates”. So if that’s the only way to get out of a Depression, we’re screwed. The only remaining monetary action we have would be to print money to induce deliberate inflation. As everyone acknowledges, that may well get us out of a deflationary spiral, but it will almost certainly leave us in economic chaos. Monetary policy is done. We’re left with fiscal.
February 7th, 2009 at 10:52 am
But World War II was, among other things, a huge spending program.
To the extent that World War II helped the economy, it was due to the incredible amount of savings garnered from rationing and bond-buying being ploughed into creating factories and other industrial infrastructure. The spending that was done on planes and bombs did not help the economy.
It is also a myth that prior to Roosevelt, Hoover was attempting to cure the Depression via laissez faire (which is what those who say that the New Deal got us out of the Depression always imply in order to show a contrast between failed laissez faire and successful central planning). Hoover tried mightily to prop up prices and to prop up wages, and to use infrastructure projects to stimulate the economy (which can only work if there is a savings plan to fund the projects).
World War II did not destroy our economy long-term primarily because almost all of the infrastructure was actually funded (by savings, in the form of rationing and the excess cash being saved in bonds) so that the resources were there to complete the projects, and because the industrial production could be converted in peacetime. In many ways, during WWII government policy pushed us in the directon that the market would have gone anyway had Hoover and Roosevelt kept their hands off.
February 7th, 2009 at 10:53 am
@Thomas, first of all the “evidence” doesn’t prove anything very fine-grained, because we don’t have a whole lot of controlled experiments. We don’t know — as you seem to assume — that there’s a “cut-off” point, below which all stimulus is useless.
We do know that government spending and investment can, at least *sometimes*, create a counter-cyclical effect that helps bring us out of a recession.
So there’s a very strong case for doing *something*. Exactly how big should the “something” be? I don’t know, but we’re projected to lose 1-2 trillion in demand, so it needs to be bigger than any proposal that has gotten *Republican* votes so far.
Your argument is strictly negative. You’re saying that Matt doesn’t have the evidence to *prove* that this stimulus is big enough. Fine, true. But what’s the implication of that? What’s the preferable proposal, and who’s making it, and what evidence do they have to prove that *it* will work? A constructive alternative sure as hell isn’t coming from the other side of the aisle, so . . . ?
February 7th, 2009 at 10:58 am
Well, if WWII was the only reason for the end of the Depression, how come the $trillion spent on the Iraq & Afghanistan “Wars” hasn’t propelled the economy into the stratosphere?
February 7th, 2009 at 11:13 am
Of course, some people had incomes to buy bonds with in 1942 who had no income, or no disposable income, at all ten, or seven, or even three years earlier….
February 7th, 2009 at 11:14 am
I think there are a couple of issues here regarding what McConnell said, and your analysis of it…
1. It is pretty clear that the government can stimulate economic activity, in some degree, over a given interval, but it is not clear at all that if interval [a,b] is part of the larger interval [a,c], that there can ever be any net stimulus over the longer interval. That is rather apparent from the data we have, and is reflected in the CBO report, which says, as a reasonable person would expect, GDP will be 3% above in ‘10, but by ‘19 it will be slightly below. Those two reflect the positives and negatives of the stimulus, ex any success or failure of the actual projects.
2. McConnell is right that the New Deal did not really work. Everybody, including the Roosevelt administration, new it at the time, but thanks to some court historians, we are provided with some dubious arguments that it did. The most compelling pieces of evidence are the continued negative net private investment, the inability to really lower the unemployment rate, and the fact that the ‘37 dip was good proof that, when stimulation stopped, there really was not much recovery there, which goes back to my point one, and is consistent with other data from public spending projects.
3. Both sides have to stop claiming WWII. Sure, it was stimulative, but that shows us almost nothing. A huge percentage of the public had been shipped off to war, and there were price controls and rationing. All it shows is that in a command economy, in war time, over a short period of time the government can create a lot of economic activity. Anybody who thought that it would not be able to in such a situation would be a fool, but the knowledge is only so useful in a situation which does not at all resemble WWII.
None of this is to say that these things are good or bad ideas. In the end, it all comes down to the long term trade offs people want to make in order to achieve some sort of short term comfort. That is, I think, the reasonable way to take a semi-”treasury view” position that DeLong so despises and this site seems to parrot. There is, in the end, no free lunch, in this way the conservatives are right. On the other hand, there is no reason you can’t pay Tuesday for a hamburger today, it just makes sense to debate the price of the burger. In other words, it is a bad argument to say that you cannot increase aggregate demand, but you can only do it over a short time, and will end up paying it back in the future in the form of lowered demand in the out years.
February 7th, 2009 at 11:18 am
CParis: the massive deficit spending of the Bush administration took place in an economy which didn’t have vast amounts of spare capacity, so it didn’t produce much extra real growth; it mostly just displaced productive private investment. Job growth under Bush was anemic, true, leaving the economy well below full employment (compared to late Clinton era stats), but it’s nothing like the equivalent of what we faced in 1933 with 25% unemployment, or what we’re facing now. Within 2 months, every job created during the Bush administration will be gone, and after that we’ll keep going down, unless the stimulus package passes.
Anyway, when conservatives say “government deficit spending only crowds out private investment,” the response should be “Yes, good description of the Bush administration, but of course the situation now is different because of the massive unemployment Bush’s policies have finally caused.”
February 7th, 2009 at 11:18 am
Unemployment:
1932 23.6
1934 21.7
1936 16.9
1938 19.0
1940 14.6
That looks better than a “very weak recovery” especially if the recession in 1937 had been avoided. It would be interesting to see what constitutes a strong recovery.
The Democrats have done a terrible job of pushing back against all the Republican bullshit. The Republicans want the economy to continue to tank to improve their electoral chances in 2010 and 2012. They are more than willing to sacrifice the lives and well-being of millions of Americans to achieve that goal. Why don’t the Democrats just say that?
February 7th, 2009 at 11:23 am
I’m happy to embrace the well-reasoned argument @18.
Combining that argument with the graph @9, I would conclude that it makes a great deal of sense to do something to blunt the slope of this downturn. Even if we’re only trading off equal areas under a demand curve, the human effects of a sudden plunge like the one we’re undergoing are likely to be worse than the human effects of slightly reduced demand in the future, because the speed of the displacement makes it hard for workers to adjust.
February 7th, 2009 at 11:24 am
Today, with the prime rate at 0, there is no way to “lower real interest rates”. So if that’s the only way to get out of a Depression, we’re screwed. The only remaining monetary action we have would be to print money to induce deliberate inflation.
I think fiscal expansion is warranted, but the above is not exactly right. The Fed has brought the shortest-term interest rate to its lower bound through direct manipulation. But there is plenty of room left on the longer-term interest rates, which can be manipulated indirectly by purchasing Treasury bonds.
February 7th, 2009 at 11:26 am
And I should add: this is a good thing because the data suggests that expansionary fiscal policy has a greater multiplier when coupled with expansionary monetary policy.
February 7th, 2009 at 11:44 am
For a stimulus that worked, go here.
February 7th, 2009 at 11:48 am
@Matt Steinglass – I was being a bit facetious, but thanks for the additional insight.
I think we also can’t overlook the $billions in Iraq/Afghanistan “War” spending that has been stolen or gone to foreign bribes, thus producing little positive impact on the US economy. And that HalliburtonKBR outsourced many of the US taxpayer-funded reconstruction projects to essentially unpaid press-gangs from 3rd world countries, even depriving Iraqis of jobs.
February 7th, 2009 at 11:51 am
the human effects of a sudden plunge like the one we’re undergoing are likely to be worse than the human effects of slightly reduced demand in the future…
There is a parliamentary party in this country perfectly content to observe the ‘human effects of a sudden plunge’, as it would conform with their theology in a most satisfactory way.
February 7th, 2009 at 12:29 pm
Where, Bruce?!?
On the argument about “a hamburger today,” let’s keep something in mind: during periods of economic expansion, when the economy is running very hot, the Fed deliberately steps in and used monetary policy to cool it off, in order to avoid inflation and bubble-like investment which only sets us up for a harder fall when the eventual downturn comes.
If the cost of that hamburger today comes in the form a fiscal policy – keeping taxes higher when the economy is running great guns and using the surplus to pay down debt – then that will, indeed, lower GDP growth. But wouldn’t that amount to simply doing through fiscal policy what we would be doing through monetary policy anyway?
Another way to look at it: if stimulus spending lowers unemployment by 3% in a recession, and the “cost” that has to be paid during the subsequent upturn in the business cycle amounts to the labor market being just plain ol’ strong instead of so tight that companies can’t find the labor they need, I’ll take that deal every time.
February 7th, 2009 at 12:50 pm
Joe,
I think you make a couple of dubious assumptions in your argument…
1. The Fed does not seem to be very good at cooling down bubbles. Pretty evident from recent history.
2. The Fed does not “fight” inflation. It simply attempts to regulate it. Without the Fed there would be no inflation, which is born out by the history of the price level in the US pre and post Fed, so to say it fights inflation is to say it is simply fighting itself.
3. The decrease in demand comes as much from taxation as from the realization that taxes will need to be paid in the future, and therefore money will be saved. In other words, Ricardian Equivalence tends to hold in the medium and long term, even though it does not necessarily in the short term.
4. Your argument is that you will trade a bit of long term unemployment, investment and growth for additional short term employment. That is fine, even sensible, but the question becomes one of choosing between two different outcomes, each with positives and negatives, and not one of perfect versus disaster, which is the way each side is framing this debate.
February 7th, 2009 at 1:11 pm
Matt,
1. OK, you got me! The Fed isn’t very good at it. Monetarism isn’t the answer. That leaves us with fiscal policy. I take your point, kind sir.
2. Without the Fed there would be no inflation Ho boy. Gold bug. Let’s just agree to disagree about this, ok? “Assume” a federal reserve bank. You know. Just so we can learn some lessons about what to do on the off chance the Fed isn’t abolished.
3. The decrease in demand comes as much from taxation as from the realization that taxes will need to be paid in the future, and therefore money will be saved. This is highly dubious on a number of levels. It assumes that the “expectation of taxation” will be considered alone, without taking into account every other expectation. But more importantly, at the beginning of a depression, something like a concern about future deficits, and whatever concern one might have that it will have tax implications years down the road, is a gnat’s fart in a hurricane. People are running like hell out of the economy because of the economy. You might have noticed something a little more important than a debate about taxation happening in this country over the past year or so.
4. It’s always good to keep one’s head, and to appreciate the complexity of complicated issues.
February 7th, 2009 at 1:26 pm
Joe-
I wasn’t making any argument about whether the Fed should, or should not exist, just pointing out that their speeches about being the last guardians against runaway inflation are a bit ironic given the structure of the monetary system. FWIW, I am not a gold bug, though not a fan of the direction the Fed has taken either.
As to your point three, it is well taken. Things are inordinately complex, and no theory by itself can explain the way each interrelated variable affects the entire system. That said, there is a significant correlation between short term stimulus and a decrease in long term demand. From where does it come? I don’t know, and I am not sure we will ever get a definite answer. Tax expectation certainly is one part of the answer, though there are many others as well.
February 7th, 2009 at 2:42 pm
World War II did wonders for the unemployment numbers. It’s pretty amazing what shipping a large chunk of your workforce overseas will do. The labor surplus quickly turned into a labor shortage. The shortage was so bad that German prisoners of war were not only hired to guard themselves, they got jobs working in local stores and restaurants. Then again, the Children’s Crusade did the same thing. It’s not necessarily the best approach.
February 7th, 2009 at 4:28 pm
then republicans must be arguing for rationing, a draft, and the creation of the Offices of Production Management and Price Administration
February 7th, 2009 at 4:33 pm
There has to be a better way for McConnell to make this argument that the New Deal did not work (with which I concur). The way he’s doing it right now borders on the pathetic.
February 7th, 2009 at 5:41 pm
Correcting #24 supra, for an example of a stimulus that works, go here.
February 7th, 2009 at 5:44 pm
So here’s an interesting question: Could we have won World War II without the New Deal? I’m starting to think not. I grew up in a steel town. We did fine during the Depression. While private demand for steel dropped, public demand made up the difference. The expansion of public works projects caused a lot of demand for steel and kept the steel industry afloat. But what if the steel industry had been allowed to fail? The massive military build-up for WWII would have been delayed for years because we would have had to rebuild the steel industry first. You just can’t make a tank without steel. That delay may have been enough for Hitler to win. Had we followed McConnell’s advise back then, we might be speaking German now.
February 7th, 2009 at 7:50 pm
If McConnell and other red state Republicans are so against government spending than why is that these red state are always on the federal dole when it comes to appropiations.
February 7th, 2009 at 8:56 pm
It seems to me that arguing that WW II saved our economy is essentially arguing for socialism.
February 7th, 2009 at 9:06 pm
McConell is using Lebergott’s series for unemployment which counted people employed by the WPA as unemployed (but counted people employed by state and local government and some other Federal agencies as employed (I don’t know about the CCC and PWA). In the methodological note explaining why he made this decision, Lebergott compared the WPA to Buchenwald and the Gulag. It is not reasonable to ignore this extreme ideological prejudice and pretend that Lebergott’s analysis was fair and balanced.
Here is the methodological quote in which Lebergott explains how he concluded that unemployment in 1940 was 15%
I think it is useful to quote the relevant methodological note in full whenever anyone uses Lebergott’s numbers.
Indeed the number McConnell quoted from Lebergott is no longer found in the official series on unemployment Historical Statistics of the United States
That is the editors who decide the official number (for what the officialness is worth which is little) have decided that Lebergott’s number is not the best estimate available. It is still quoted by critics of Roosevelt, because it is convenient to them even if the don’t quite hate the New Deal as much as Lebergott did.
February 7th, 2009 at 9:16 pm
I’m glad you bring this point up, Matt, but I think it needs to be made loudly, clearly, and repeatedly to correct the record.
I have heard every wingnut from Hannity to McConnell make this argument, that it was WWII, not dastardly ‘government spending’ that got us out of the depression. Even granting this argument, one has to ask next, ‘what about WWII helped us economically’? It seems to me that only reasonable answer is that it massively increased government spending. The government employed large numbers of people as soldiers, and bought massive amounts of tanks, bombs, etc. from domestic industry. So what McConnell’s argument essentially reduces to ‘the level of government spending of the new deal did not get us out of the recession. The greater level of spending associated with WWII did’.
So we’re not spending enough? Very well, then. Let’s spend some more money.
February 7th, 2009 at 10:18 pm
There was government rationing and price-fixing in WW II, too. Plus, U.S. industry wasn’t bombed and U.S. agriculture was unfettered. A huge market opened up for products and food that countries would ordinarily have provided for themselves.
February 13th, 2009 at 1:43 pm
Aren’t these the same Republicans who just a few short years ago were stating that deficit spending to finance the wars in Iraq and Afghanistan were quite all right because the deficit was small compared to the GDP.
Most of the huge federal deficit has little to do with social programs but is rather, the result of huge regular increase in defense spending, while preventing any efforts to curb the massive amount of waste that goes on in the various departments and programs that are involved in defense. Even outside of the Defense Deparment, departments like the Department of Energy, which spends 67 percent of its budget on making fissile materials for nuclear weapons, are spending huge amounts of money for defense related purposes.
World War II as an economic stimulus is a special case. Before World War II, the United States did not have a large, dedicated, defense industry. Rather, non defense, consumer indutries were retooled to make defense materials for the war.
It was the huge amount of government spending that turned these industries from consumer production to defense production and so this is one of the few times that government defense spending had a net positive effect on the economy. But it was still government spending, as high as 45 percent of GDP that stimulated the economy.
Now, there is no such stimulus on the economy created by defense spending, which is generally thought to have a net negative effect on the economy . That is it takes more out of the total economy than it puts back in. A great deal. The defense industry maked up about 6 percent of our total economy, but it sucks 30 percent of resources out of it.
This is very much what caused the collapse of the Soviet Union. The military expenditures pulled too much away from any possible consumer industries.
Most reason based economists state that the New Deal simply did not do enough govenrment spending to bring the economy back to pre depression levels but made a big dent in the depression. Virtually in every area by which economic health is measured, the New Deal inproved the economic conditions in the country.
Republicans are great at rewriting history and creating myth.
The depression is almost no longer a living memory. So they can safely make their absurd statements without having a large enough public to call them on it.
Roosevelt started as a fiscal conservative. He entered office with a single goal in mind, and that was to balance the budget. He was a reluctant convert to Keynsianism. In 1932 he started government spending, but insisted that it be within the constraints of a balanced budget, and the economy barely improved. It was the example of Sweden which wholeheartedly threw itself into Keynesian economics that gave him pause. By 1934, less than two full years after the new liberal labor government of Sweden resorted to Keynes ideas, the depression was over and their economy reached pre 1929 crash levels. By 1935, their economy had grown 7 percent over those levels.
On the other hand, when in 1936, FDR saw the GDP jump by more than 14 percent, Roosevelt, worried about balancing the budget, and cut back on government spending and the New Deal. A rather nasty recession occured, where the annual growth slowed from that 14 percent, to 5 percent. and unemployment jumped back up from 14.1 percent to 19 percent. He returned to New Deal Economics and the recession retreated again.
There is more than enough empirical data that prooves that the New Deal Keynsian programs worked and worked well.
Republicans assert that the New Deal either extended the depression or was not responsible for the results that did occur.
The same Republicans will go to any lengths to insist that is is not their economic policies that caused the two recessions that occured during the Reagan years, one during George H.W. Bush’s tenure as president, and the two that George W. Bush’s presidency had. If you remove the 8 Clinton years, the evidence is that the Republican economic ideas of the last three Republican presidents, which make up 20 of the last 29 years, the neo-conservative economic ideology of the Republican party seems to be a history of many recessions, with a few good years in between them.
They are so ideologically rigid and non pragmatic that it might be better to rename Reaganomics “Faith Based Economics”
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