It took the giant public works project known as World War II — a project that finally silenced the penny pinchers — to bring the Depression to an end.
The lesson from FDR's limited success on the employment front, then, is that you have to be really bold in your job-creation plans. Basically, businesses and consumers are cutting way back on spending, leaving the economy with a huge shortfall in demand, which will lead to a huge fall in employment — unless you stop it. To stop it, however, you have to spend enough to fill the hole left by the private sector's retrenchment.
I’ve read a lot about World War II, but I don’t think I’ve ever heard it described as a “giant public works project" before.
Of course, with conscription it is easy to get full employment. And industry will certainly churn out shells if you keep firing them. But the idea that war boosts the economy is as boneheaded (to use a phrase Krugman likes to use about those with whom he disagrees) as suggesting that breaking windows stimulates economic growth because it provides work for glaziers.
War is a massive waste of resources. A vast amount of American productivity – and the productivity of other nations – was wasted producing things that serve no productive purpose. Worse, they actually destroy other productive items. The US and the UK lost over 400,000 productive citizens apiece. Meanwhile, the rest destroyed factories and infrastructure across Europe and the far east. I don’t want here to start a debate about whether the war was one of necessity or choice; for the purposes of this discussion, that is irrelevant. The important point is that suggesting that World War II was beneficial to the economy of the United States is not only disturbing but is also nonsense.
The current fiscal stimulus is not focussed on warmongering, to be fair. But there is still a lot of unproductive expenditure that the government would like to hasten in the belief that it will generate a fiscal stimulus. New aircraft carriers are still being built; the ID cards rollout is being sped up. These projects cost billions, yet are utterly unproductive. But even if the stimulus was “productive", focussing on infrastructure and capacity building, it would not necessarily be beneficial. There is no way that the government can decide how best to allocate those resources: whether a bridge is more important that a school; a power station more productive than a harbour; wireless internet for Birmingham more valuable than broadband for Yorkshire. So even if the “stimulus" is productive, it cannot be demonstrated that the resources so allocated would not have been more productive if the original (pre-taxation) owners of the resources had been allowed to allocate them instead.
In fact, the empirical evidence for fiscal stimuli is damning. Stimuli rarely achieve a “multiplier" greater than 1, which means that at most the boost in GDP is only equal to the boost in government spending. More often than not the multiplier is less than 1, so the economy grows by less than the government spends (e.g. a £200bn fiscal stimulus might lift GDP by just £150bn). This is clearly a disaster for the economy, as future growth will be sacrificed as we repay a debt that did not even pay for itself at the time. In the meantime, the extent that government controls our lives grows: government spending grows even as the economy shrinks, creating a pincer movement on our freedom.
Which seems to bring us nicely back to World War II.