1938 in 2010

http://economix.blogs.nytimes.com/2010/09/08/stimulus-and-private-sector-hiring/?emc=eta1

http://economix.blogs.nytimes.com/2010/09/08/stimulus-and-private-sector-hiring/?emc=eta1

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"There is a great deal of difference between knowing and understanding. You can know a lot about something and NOT understand it." (Charles F. Kettering)

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Paul Krugman's September 5 article on how similar our current situation in the U.S. is to 1938 (when the Great Depression was in its 9th year) resounds with anyone that is a student of economic history. What is it they say about history? Anyone who doesn't study it (especially politicians) is doomed to repeat it.

Krugman writes wonderful stuff and he has the added cachet of knowing what he's talking about: "President Obama's economists promised not to repeat the mistakes of 1937, when FDR pulled back fiscal stimulus too soon. But, by making his program too small and too short lived, Mr. Obama did just that: the stimulus raised growth while it lasted, but it made only a small dent in unemployment - and now it's fading out."

Krugman goes on: "And, just as some of us feared, the inadequacy of the administration's initial economic plan has landed it - and the nation - in a political trap. More stimulus is desperately needed, but in the public's eyes the failure of the initial program to deliver a convincing recovery has discredited government action to create jobs ... In short, welcome to 1938."

And, of course, the 1938 election was a disaster for the Democrats who lost 70 seats in the house and 7 in the Senate.

Then came WW II where, again to quote Krugman, "Over the course of the war the federal government borrowed an amount equal to roughly twice the value of GDP in 1940 - the equivalent of $30 trillion today."

So, the economic moral is clear: "... when the economy is deeply depressed, the usual rules don't apply. Austerity is self-defeating: when everyone tries to pay down debt at the same time, the result is depression and deflation, and debt problems grow even worse."

So, the lesson of 1938 is that massive deficit spending cured the problem by accident with the U.S. entry into WW II at the end of 1941.

Now, far be it for all economists to agree on what time it is let alone what cured the Great Depression. Casey B. Mulligan's post in "ECONOMIX" on September 8th, refutes Krugman's thinking. And, Mulligan has a chart!

(Before we go further, we want to add that Mulligan is a highly regarded University of Chicago economics professor who has been a leader in the behavioral economics movement - a movement which we think will be additive to the future sophistication of his profession.)

Mulligan's chart, "The Unemployment Rate Before Pearl Harbor," purports to show that WW II
spending did not end The Great Depression because the unemployment rate was on its way down before we got into the war. We won't spend a lot of time refuting his assertion but we would point out that smart people gear up for "wars" by building up materials in advance of potential hostilities just in case.

More importantly, Mulligan asserts that, if the current wars in Afghanistan and Iraq ended and 500,000 troops (or, whatever the number) were discharged from duty, our private sector would not contract, as stimulus advocates contend. It would, rather, EXPAND to absorb the new veterans. Seriously, what is he smoking? He needs to look more recently at what happened with our Viet Nam veterans: no jobs! Whether or not Mulligan's chart works, his reasoning on the economy's private sector expanding for returning troops makes no sense.

So, we'll vote with Krugman and we'll hope that all those Top 500 CEOs, who aren't spending any of the capital that they are holding back, will decide to start spending so that our GDP will have a chance to grow again. Right now U.S. GDP is growing at a steadily decelerating rate. That doesn't bode well for jobs.