Tuesday, October 19, 2010

drastically reducing govt with economic growth in post-WWII America

A set of three small articles in Reason on three historical success stories of cutting government significantly.

I'm going to re-print excerpts from one of those-- Arnold Kling on post-war America. (The others are more contemporary examples in Canada and New Zealand.) This one's especially important because of the kick in the pants it delivered to Keynesianism, which remains popular today among politicians, statists, and those ignorant of basic economics.

When World War II ended in 1945, President Harry Truman faced a problem. Public opinion called for a rapid demobilization that would bring the boys home as soon as possible. But the Keynesians who were gaining prominence in the economics profession warned that a rapid decline in government spending and the size of the public work force would produce, in the late economist Paul Samuelson’s words, “the greatest period of unemployment and dislocation which any economy has ever faced.”

Thankfully, Truman ignored the Keynesians...In addition to the demobilized servicemen, the federal government let go of more than a third of its civilian employees—over 1 million workers...Government spending plummeted by nearly two-thirds between 1945 and 1947, from $93 billion to $36.3 billion in nominal terms. If we used the “multiplier” of 1.5 for government spending that is favored by Obama administration economists, that $63.7 billion plunge should have caused GDP to fall by $95 billion, a 40 percent economic decline. In reality, GDP increased almost 10 percent during that period, from $223 billion in 1945 to $244.1 billion in 1947. This is a rare precedent of a large drop in government spending, so its economic consequences are important to understand....


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