Wednesday, August 25, 2010

Not so Stimulating

I sent the following to the Raleigh News & Observer:
E. Wayne Stewart says that “enormous fiscal stimulus ... to finance World War II led the U.S. out of the Depression.” While it is true that aggregate economic indicators (e.g., unemployment and GDP) improved during the war, it was not a time of economic prosperity.

During World War II the U.S. produced a lot of war material, not consumer goods. It was a time when citizens went without many goods and raw materials due to war-time rationing. It was also a time when wages and prices were set by government planning boards. In short, it was a time of economic privation for the general public. It wasn't until after the war, when spending was drastically reduced, that the economy returned to a sense of normalcy.

The lesson we should learn is that, yes, it is possible for government to spend enough money to improve aggregate economic indicators. That same spending, however, can distort the fundamentals of the economic structure in ways that are not wealth-producing as determined by consumer preferences.
This argument, that government spending during WWII got us out of the Depression, is used by many to justify economic stimulus. The argument I use above comes from Robert Higgs and his analysis of the economy during the Depression and WWII.

For me, though, the biggest problem with the "just spend" argument is that it ignores the nuances and subtly of a market-based, consumer-driven economy. It is like saying that to get a 1000 word essay to a 2000 word essay all you need to do is add 1000 words. There is no thought into the idea that those extra words need to fit into the overall essay in a coherent manner. A productive economy needs spending to occur in the proper places at the proper times, and it is the market process that does this most efficiently (not completely efficiently, but better than the alternatives).

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