Wednesday, September 8, 2010

How Can the Private Sector Grow? Let the Government Shrink

Copyright, The New York Times Company

Stimulus advocates have offered the United States engagement in World War II as evidence that government spending can end a depression and expand an anemic private sector. They are incorrect about World War II and give dangerous advice for today.

The Great Depression began in 1929 and lasted too long. Stimulus advocates tell us that the government spending surge that occurred as a result of our joining the war is the primary reason the Great Depression eventually ended.

The chart below shows the civilian unemployment rate from 1929 through 1941. With the exception of the last 24 days of 1941, the United States was not at war during those years, and its real government purchases were less than a third of what they would be during the war. Yet the unemployment rate had already come down sharply by the end of this period.

It’s true that World War II had an effect on top of the recovery the United States had experienced before Pearl Harbor, but that effect is easily exaggerated. The expanded wartime capacity did not primarily come from putting the Depression unemployed back to work but by drawing into the marketplace women, teenagers and others who were not part of the Depression labor force.

Nor did wartime military spending expand the private sector. Many parts of the private sector shrank during the war precisely because the government was spending so much.

We are at war in Iraq and Afghanistan today, and who knows what might be next? It is incorrect, and deeply unfortunate, for stimulus advocates to suggest that today’s war spending of almost $200 billion a year is doing its part to prop up our nation’s private economy.

If the Iraq or Afghanistan wars ended and, say, 500,000 troops were discharged from duty, our private sector would not contract, as stimulus advocates contend. Rather, the private sector would expand to absorb the new veterans, in much the same way that the private sector expands every summer — even in a recession — to absorb more than a million teenagers who are “discharged” from school at the end of the academic year.

A shrinking government, not a growing one, helps the private sector expand.


TGGP said...

We started mobilizing for the war before F.D.R managed to actually wrangle the country into it.

muzammal khan said...

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