Tyler Cowen Ignores the Elephant

Tyler Cowen’s Sunday NYT discussion of The New Deal is getting all sorts of play in the econoblogosphere–pro and con.

What’s not getting much discussion (except here) is the elephant that Tyler rather inexplicably fails to even mention: massive government (deficit) spending during the war. (It’s not the war, stupid, it’s the spending.)

The consensus opinion out there seems to agree that:

  • Government response to the crash and depression was in retrospect actually quite tepid pre-war.
  • Everyone–starting with Milton Friedman–agrees that monetary
    policy was way too tight. And once deflation began it was an
    ineffective tool in any case.
  • Fiscal policy, net, was also not terribly proactive. Spending
    increased, but so did taxes. This especially in ’36 and ’37 when FDR tried to balance the budget, leading to
    the resurgence of the still-lurking depression.

It wasn’t until the war that government made really big moves (necessarily, fiscal), with just-plain-mind-boggling deficit spending. U.S. government debt went from 50 to 120 percent of GDP.

(Yes, shortages continued/increased during the war, but for reasons unrelated to fiscal or monetary policy–notably the redirection of resources.)

The fiscal effect of war spending broke the Depression’s back and got the economy moving, setting us up for the sustainable post-war prosperity boom.

That boom allowed us to pay down the resultant debt-to-GDP ratio over the next thirty-five years, bringing it to 32%.

Then…1980. The elephant landed with all four feet: