Stimulus, FDR, Myths

Every time stimulus spending is advocated or the name of Maynard Keynes is mentioned, free market ideologues roll out what has become a firmly-rooted myth. It is that Franklin Delano Roosevelt’s stimulus spending had had no effect—and that real recovery required World War II—or some say the post-war period. Here is such a statement, plucked at Google-random from the American Thinker (link):

Exhibit A: The massive deficit spending of Franklin Roosevelt in the 1930s didn’t stop the Great Depression. In fact, despite FDR spending more money in his first five years in office than all 31 prior presidents combined, his Secretary of the Treasury Henry Morgenthau stated in 1939 that “[w]e are spending more than we have ever spent before and it does not work. ... I say after eight [sic] years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!”

Let’s take a look at this statement, so oft repeated. First of all, technically, anyway, the Great Depression had actually ended in the very month when FDR took office. The dates of that depression are August 1929 through March 1933. Let’s next deal with Morgenthau’s statement quoted by our source. When FDR took office, unemployment stood at 25.2 percent of the civilian workforce. In 1939, when Morgenthau spoke, unemployment stood at 17.2 percent. Ouch, you might say. But it was 8 points lower. Morgenthau’s frustration is understandable, but his statement isn’t accurate.

Herewith a graphic showing both GDP in constant dollars and the civilian unemployment rate in percent for the 1929 through 1950 period, with FDR’s time in office shaded in.

If our free market priesthood would bother to put up charts like these, clearly showing that stimulus did work—both in dollars and in lowering unemployment—their readers would start making faces. The numbers don’t support the statements. The priesthood doesn’t show such graphs for a really good reason. They can’t get away with what they’re saying.

Will a repeat of that past performance produce the same commendable results—sure as the sun shall rise? That may not necessarily follow. But that there is precedent for the anguished demands of Paul Krugman and company, that is certainly true. What lingers in the back of my mind is that fundamentals may have changed since FDR’s time. One of those is globalization. Another is the point I made a while earlier on this blog. Namely that a perpetual motion, as in an economy that forever grows at a greater rate than population, may not be possible forever to maintain. But the stimulus hawks are backed by history. It may turn out that God does exist but that the Hidden Hand does not.

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My GDP data come from this BEA table. The earliest unemployment data come from this BLS source, the later numbers from this one.