Archive | September, 2012

Keynesian Economics Works

19 Sep

Courtesy of the Daily Kos:

“I believe that we are at the threshold of a fundamental change in our popular economic thought, that in the future we are going to think less about the producer and more about the consumer. Do what we may have to do to inject life into our ailing economic order, we cannot make it endure for long unless we can bring about a wiser, more equitable distribution of the national income.”

Franklin D. Roosevelt, Commencement Address at Oglethorpe University, May 22, 1932

I grew up in a family that wasn’t typical.  Sunday dinners were an occasion for loud political debates and a favorite topic was whether FDR ended the Depression.

My siblings and I would roll our eyes across the table from each other as the adults argued about matters that occurred before we were born.  Twenty-five years had passed since Roosevelt died.  The disagreements about him raged on.

My dad was an opinionated New York City blue-collar union Democrat.  Politics strayed into the conversation often.  If a distant relative or a family friend who came to dinner happened to suggest that Roosevelt never ended the Depression, the War did, that was my dad’s cue.  His voice got loud and emphatic.  For a few minutes, all the adults yelled at each other until there was a lull.  That’s when my grandmother would proclaim in her deepest and most serious voice, “If it wasn’t for FDR, we would have starved.”  My sisters and I heard it so many times; we’d finish the sentence for her.

Plus ça change, plus c’est la même chose.

Republicans still favor the privileged few over the many and they’re still wrong about everything.  They said Roosevelt was a communist or a socialist; his policies were a failure.  Now they say it about President Obama.  They said if it hadn’t been for the War, the Depression never would have ended.

Despite what Republicans say, it is clear that Keynesian economic policy works.  During the years from 1933 to 1936, Government spending brought recovery.  A lull in spending during 1937 and 1938 hindered progress.  When spending resumed again in 1939 and 1940, the recovery resumed.

When Roosevelt implemented Keynesian economic policy the tax code was also adjusted to make it more progressive.  From 1933 to 1940, the marginal tax rate on income over $1 million (in today’s dollars) was increased from 34% to 51%. During the same period, the marginal tax rate on income from $0 – $65,000 (in today’s dollars) remained steady at 4%.

What were the results?  GDP was declining steeply before Keynesian economics was implemented.  From 1930 to 1933 GDP was down 41%.  GDP increased steadily from 1933 to 1936 when Keynesian policy was implemented.  The recovery stalled in the two years after Keynesian policy was halted.  In 1939 and 1940, GDP increased again when Keynesian policy was reinstated.  Here’s a chart that shows GDP performance, government spending, and the size of the deficit from 1930 to 1940.

In the chart above, government spending (red line) was approaching $10 billion in 1940.  It reached $13.5 billion in 1941.  GDP was getting close to $100 billion in 1940.  It had gained back all that was lost and it was about equal to its 1930 level.   It increased to $114 billion in 1941.  The deficit increased from $3 billion in 1940 to $5 billion in 1941.  These numbers clearly show that Keynesian economic policy was  working.  The temporary reversal of Keynesian policy in 1937 and 1938 only delayed the recovery.

After 1941 the US converted to a wartime economy with massive government spending that was unprecedented at the time.  For example, government spending increased from $13.5 billion to $35 billion in 1942.  I don’t introduce wartime numbers into the discussion about Keynes for a couple of reasons.  The period before the War already illustrates perfectly the effect of Keynesian policy with the respite from it in 1937 and 1938 acting as a control on what could be considered an experiment.  The economy improved when Keynesian policy was implemented and it flat lined when the policy was withdrawn.

Today Republicans like to cite a 14.6% unemployment rate in 1940 as evidence of FDR’s failure with Keynesian policy.  The rate fell to 9.9% in 1941 which was still pre-war.  Don’t expect Republicans to cut any slack on that figure either because it sounds terrible compared to average rates before the 2008 economic meltdown.   An unemployment rate of 9.9% in 1941 was a significant improvement over the 24.9% rate in 1933.  During the two lost years when Keynesian policy was interrupted, unemployment rose from 14.3% to 19%, adding to my conclusion.  The War intervened in 1942 and unemployment fell to 4.7% that year.  We’ll never be able to say whether that would have been achieved without the War.  If Republicans want to chalk up full recovery from the Depression to the War, it still goes to show that a nation can indeed spend its way out of economic problems.  What was the war, after all, if not a huge government-sponsored economic stimulus project?

In the end, these are all just statistics and by themselves they’re probably not enough to convince anyone of anything.  People respond to emotions instead of facts and figures.  So here’s something to put a smile on your face. It’s FDR again, doing an impression of Mitt Romney or Paul Ryan (you decide which) way back in 1936.