Social Question

ETpro's avatar

Was the US effort in World War II government spending?

Asked by ETpro (34469points) April 1st, 2011

One thing that the Milton Friedman school of conservative, supply side economists and the Paul Krugman, Keynesian school of liberal economists both agree upon is that only the US entry into WWII brought the US back to full employment after the crash of 1929 and the Great Depression it percipitated. So why do conservatives insist that government spending is the worst thing to do when unemployment soars? I am pretty sure that God didn’t provide the money to finance WWII. GM and GE didn’t fund it. The Government did. In fact, the US Government spent at a level that had never been seen before. In inflation adjusted dollars, that level of spending has never been seen since either. Nothing even remotely close to it has ever been seen.

In point of fact, while FDR couldn’t muster congressional support for the spending needed to really jumpstart the economy till WWII broke out and we had no option but to spend like drunken sailors. the New Deal and WPA programs did get the GDP back where it should have been in mid 1942, well before Pearl Harbor was attacked on December 2, 1942. Even the recession within the depression, which occurred in 1936–37, happened when, in response to blistering Republican criticism of costs, FDR backed off on WPA spending.

So why must we still debate whether spending works to end a recession? Either WWII did or it did not end the Depression. It did. We all agree on that. And WWII was government spending on a scale never seen before or since. Granted the spending piles up debt. We were incredibly fortunate that WWII also created a unique set of conditions that allowed us to pay that debt down. The war devastated manufacturing capacity in nearly the entire developed world except for the USA We were able to retool our tremendous wartime manufacturing operation for civilian uses, and we became the supplier of the whole world. Even the boatloads of money we spent on the Marshal plan ended up coming back here with interest.

If we spend foolishly to get out of a recession, we might put people to work, but run up so much debt that we can’t possibly repay it. We are NOT there yet. The debt hit 120% of GDP in 1945. It’s hovering around 90% of GDP today.

Rather than make-work spending, we need to plan a spending program that invests in things that will drive a huge surge in GDP in the future. Energy would be a good target. The actual burdened cost of gasoline (petrol) in the USA today is around $14 a gallon. When we cart it to Afghanistan to support our nation-building there, it rises to $400 a gallon. Government subsidies keep it artificially low here so we can be happy driving our 3 ton SUVs as is our God Given Right. And almost all of that subsidy goes offshore to buy oil.

If we invested in natural gas like T. Boone Pickens is suggesting, and in a smart grid so we can phase in wind, tidal and eventually solar energy, we could wean ourselves from foreign oil, be energy independent, drastically cut our overall energy costs, generate a quarter of a million direct jobs and 5 to 10 million indirect jobs that won’t be offshored, and have a cleaner environment to boot. That sort of spending to get out of a recession makes sense. It not only puts people to work now, it develops something that pays dividends and keeps generating jobs for decades into the future. Those dividends let you retire the investment debt. And it is something we are going to have to do some day anyway, because every year the planet uses 1,000,000 years worth of fossil fuel.

We are seeing serious signs today that a house divided against itself cannot long stand. Why don’t we find a few things that are so obvious and logical that a strong majority of us can agree they are a good idea, and get together to work on something?

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29 Answers

marinelife's avatar

I agree with your assessment.

ETpro's avatar

@marinelife Thanks. Agreeing is always good for a GA!

@CaptainHarley There are three horrible things that can happen in economics. Inflation, stagflation or deflation. Name your poison. :-)

CaptainHarley's avatar

Deflation… printing money to avoid it… inflation.

ETpro's avatar

@CaptainHarley Best read up on deflation. Careful what you wish for. If the Tea Party gets its way, that is exactly what we are headed for.

zenvelo's avatar

The idea behind Keynesian theory is to increase the demand, which in turns expands the economy. It does not lead to inflation when the economy is in recession. In fact, the government spending stabilizes prices when credit dies up as it did in 2008–2010.

Prices = Money supply * Velocity of money. In recent years the velocity of money (how often it changes hands) has dropped significantly, and has only begun to uptick. As the economy expands, the Fed can reduce the injection of funds and keep prices level.

We are where we are today because in good times we did not save for bad times. GW Bush saw we were running a surplus, spent all the money in the piggy bank and ran up all the credit cards.

I agree with your view, but the knee jerk reactions to the right way to solve the problem has poisoned the political well.

ETpro's avatar

@zenvelo Very true. And only a massive education program, or letting the lunatics run the asylum till the pain of their policies finally sinks in, will change it.

CaptainHarley's avatar

I don’t see it that way. All the Tea Party wants is smaller government, less spending, and more freedom.

ETpro's avatar

@CaptainHarley We still have a pretty depressed economy. The public sector isn’t spending at the level it did. If we slash government spending, that means the people supplying the government the goods or services that spending purchased will get laid off. That cuts their spending, which means more people get laid off. US Corporations are sitting on a massive amount of cash, but they are not going to invest it and ramp up inventory when the warehouse is stocked and nobody is buying. If that sort of deflationary cycle is left unchecked, it turns into a full-blown depression. Why would we deliberately provoke that?

I know what the Tea Party wants. They think only in terms of paying less taxes. Less taxes means more money in their pockets. But we are already at the lowest income tax rate of any developed nation on earth, and we spend more on our military than all the other nations of Earth combined. Exactly how is that going to work? It’s simple stupidity driven by human greed, and fed by corporatists who plan to be the oligarchs of the banana republic it will create.

Billionaires like the Koch Brothers, Rupert Murdock, the Walton family of Walmart® fame, dominionist Richard DeVoe of Amway, The Prince family (Blackwater founder and dominionist Erik Prince’s folks) fund right-wing think tanks to crank out the slogans and spin that motives the mostly middle class people of the Tea Party to wave their fists in the air in outrage and demonstrate for policies that are designed to transfer what little wealth they have to the very billionaires funding the movement.

Research the funding of the “Mackinac Center:“http://www.mackinac.org/ in Michigan. It is the corporatist think tank for a worldwide chain of conservative think tanks. It’s inner funding is secret, but the billionaires listed above all support the portion of it that is required to disclose its funding sources.

CaptainHarley's avatar

Allow me to reiterate… smaller government, lower spending, and greater freedom. It’s our mantra.

laureth's avatar

The top marginal tax rate during WWII was around 90%, too, which funded a lot of that governmental spending.

ETpro's avatar

@laureth The top marginal tax rate during WWII was 94% but applied to income varying between $250,000 and $400,000 which was a kings ransom in those days. Even that rate didn’t come close to funding the war spending, and the debt soared to 120% of Gross Domestic Product.

After the war, we maintained high rates to pay down that debt, and we did it. Rates bounced between the low 80% and 91% range. Rates remained in that range till Kennedy proposed and Johnson signed a cut to 70% in the 1960s. Reagan cut it to 28% and tripled the national debt debt in his 2 terms..

The Reagan cut did little to change rates for the poor and middle class, but was a massive windfall for the very rich. Wealth inequity hit an all time high twice in the past 100 years, in 1929 and again in 2008. Today, the wealthiest 400 American families hold more wealth than the power 50% of the US population taken together—155 million people. Both times that wealth disparity became so extreme, the economy crashed. But the Tea Party boys are determined to drive the economy over the clif yet again. And when they do they will find someone else to blame for the failure, and go right back to work to do it again. That is how ideologues function. Facts are irrelevant unless they agree with the ideology.

laureth's avatar

That’s what “top marginal tax rates” do, tax the top. ;) (In other words, I agree with you.)

CaptainHarley's avatar

@ETpro

The FED is what is “driving the economy over the cliff,” not the Tea Party. Constant printing of greenbacks to finance all of Obama’s boondoggles is driving an inflationary cycle that has already increased the price of most food products more than 20%. Stick around. It’s gonna get “interesting.”

zenvelo's avatar

@CaptainHarley Worldwide food prices have risen because of bad crops in East Europe, Asia and the Southern Hemisphere, not because of “Fed printing.”

Oil prices have gone up because of renewed demand from China and India. And which particular “Obama Boondoggle” are you referring to? The extension of the top tier Bush tax cuts which added a trillion to the debt? Health care reform that is calculated to save 700 Billion?

CaptainHarley's avatar

@zenvelo

I don’t know what fairty tales you’ve been reading, but nothing you have said is correct.

You know, I really wish you were correct. I could relax and not worry about whether all of my children and grandchildren are going to be able to eat. But constantly printing money not backed by anything definitely ends in runaway inflation. Just ask Germany what happened to them between the world wars.

Watch this if you dare. It’s only one of hundreds now:
http://www.youtube.com/watch?v=7rNsQBPUbJI

ETpro's avatar

@CaptainHarley It is you who is lost in a fairy tale if you believe the Fed can manipulate the price of specific commodities by printing dollars. Perhaps if there were such a thing as wheat dollars and barley dollars, this would work. But dollars are quite fungible. As @zenvelo mentioned, crop failures are part of that spike and speculation on the futures market is the other part.

Printing too many dollars causes the inflation rate for everything to rise. Not printing enough to keep up with the growth of goods and services would cause deflation. The inflation rate in February was 2.11%, up from 1.63% in January. The rise is due mainly to oil speculation on the futures market—driven by fears of Arab unrest disrupting supplies. Supplies are not actually down, but speculators are reacting to the higher risk.

BTW, under Republican Bush in 2008, the inflation rate was constantly between 4.5 and 5% or more right up to the point where the economy fell off a cliff. So much for the wild money printing binge of Mr. Obama. But again, that is just if facts have anything to do with your beliefs. Facts generally have no effect do on ideological purity. Propaganda videos that fit the confirmation bias may be much more compelling, if not more factual.

ETpro's avatar

@CaptainHarley Re the video, see this.

I’m on enough mailing lists of right wing outfits selling all sorts of “secret” investment opportunities to tell you, watch out.

CaptainHarley's avatar

@ETpro

Sigh. I didn’t say anything about the Fed being able to manipulate specific commodities. : (

I’m no longer interested in anyone trying to blame everything on GWB, and the Fed is currently doing something called “Quantitative Easing,” which is financial speak for “printing money to offset the trillions of dollars in debt.” But, believe what you choose to believe. If time proves me wrong, I’ll say so.

ETpro's avatar

@CaptainHarley The ecopnomy did crash under Mr. Bush. All the failed investements the video speaks of failed under Mr. Bush, but several such as GM have now been rescued. I just wanted to warn that that tape have the feel of an investment scam and has been identified as such. There is deep endemic risk of deflation and depression still in the economy. If government lays off enough people and cuts spending deeply enough, we will start into a deflationary spiral.If the Fed issues too much money and the economy falters even with the cash infusion, we’ll see runaway inflation. Yes, the risk is very real. The investment solution is NOT very clear.

CaptainHarley's avatar

Since I don’t invest in stocks and bonds, the issue is moot. I didn’t post that video as an incentive to buy stocks and bonds, but as an example of the types of warnings now rife throughout the Nation.

CaptainHarley's avatar

Take a look at these charts on the dollar’s purchasing power and the fluctuations in the purchasing power of gold:

http://minefund.com/wordpress/2011/03/28/purchasing-power-of-the-dollar-vs-gold/

laureth's avatar

@CaptainHarley Re: “smaller government, lower spending, and greater freedom” – except when it’s not about that.

ETpro's avatar

@laureth The Smaller, leave-me-alone Government Republicans have claimed to support is one easy to support. But the new Republican majority appears to have no such intentions. They yearn for massive, control-my-thought authoritarian government. They want government sized to fit in every bedroom and in every woman’s womb. Government big enough to decide who can and can’t marry whom. Government big enough to evaluate every person’s inner thoughts and decide who is pure enough to die for their country and who thinks so differently from big brother that he or she should be shunned and possibly imprisoned or destroyed.

@CaptainHarley The supply of gold doesn’t fluctuate very much, but the total supply of goods and services does. That is why a fiat currency is superior to gold. The spikes and valleys you see in your chart are produced by booms and recessions that cause huge swings in the total goods and services produced. With a fiat currency, the money supply can be adjusted to better match that actual GDP.

Gold sold for $18.03 an ounce in 1850. If you’d bought an ounce then, it would now be worth $1428.28, Gold sounds like it gives a pretty good return, but the amount of goods or services an ounce of it would buy would be a far lower return than the dollar appreciation would suggest. That 1850 ounce of gold would buy you a really fine tailor made men’s suit. If you want top-notch work, not just a custom-fitted pattern, and if you want it made in America the ounce of gold will still buy you a suit for around $1,000. You might have change left over now for a nice tailor made shirt and tie as well.

Globalization is what’s changes that makes the situation seem so much worse than it is. You can buy a tailor-made suit here now that was made somewhere in China and get it for $99. It’s really not tailor made. It’s made to a pattern that fits a man of your measurements, and a few final tweaks are added by a seamstress here.

If you look at the Dow Jones Industrial Average from 1986 when it was founded till today, it’s done as well as gold. Spin masters can take little fluctuations in this or that index and grab the right snippet, then graph it on the right scale and make just about any sort of propaganda case they wish. One has to look at more than propaganda films to understand the true impact of political policy decisions.

dabbler's avatar

We don’t need to spend our way out of the recession we need to spend for things we need because we need them and to get them we need to spend. And despite what hyper-free-market types would convince you there are some resources that really aren’t well supplied by anything but a government entity, a collective resource. We used to call that a community but some dopes like to map it into socialism or communism.
The recession is largely caused by cash hoarding by… guess who! the people who have it. US Corporations are sitting on close to 2Trillion dollars of liquid cash because they say the climate is not right for investment. And it’s hard to tell how much is in private wealth but it’s at least as influential.
What creates that logjam of cash is tax policy that encourages that hoarding stagnation, plain and simple. Just as a thought exercise imagine we set rates back what they were before Reagan’s voodoo economics (that term courtesy of President Bush Senior) started the long slide to the state we’re in now with huge debt and less capacity to crank up GNP steam than we had then (thanks partly to the collaborating effects of globalization stripping some prime manufacturing capability out of our national economy). Reagan abandoned the “tax-and-spend” policies of the Democrats for the the ”...!-and-spend” policies of the new economics. google for “two santa claus theory”
Literally the bottom line is that we need to collect enough money to spend enough money to get the job done that needs to be done at each governmental level.

ETpro's avatar

Great answer, @dabbler and welcome to Fluther.

Regarding imagining where we’d be if we’d not decided to transfer wealth to the already wealthy under Reagan, here is a graph that charts just that. $9.2 trillion of our current debt is thanks to that tax policy shift.

CaptainHarley's avatar

I don’t know what economics texts you guys studied, but it certainly wasn’t the same ones I used. Government produces nothing. It is land, labor, capital, and entreprenuer which create value and jobs. This reliance on government is a trap.

ETpro's avatar

@CaptainHarley Governments don’t produce cars, or trucks, or refrigerators and such. But they certainly buy them. And that buying is an order and puts people to work just exactly like private sector buying does. When we hit a spell of cash hording like the 2008 collapse of Wall Street produced, and people get laid of in millions, consumers can’t order cars, or trucks, or refrigerators at anything near the rate they had been doing. Inventories spike, and manufacturers lay off workers because they don’t need to make more cars, or trucks, or refrigerators/ Retailers and wholesalers lay off workers because they can’t sell as many cars, or trucks, or refrigerators. In that sort or deflationary spiral, government is the ONLY sector that CAN spend. And that is pretty basic stuff in economics text books.

The non partisan Congressional Budget Office has run the numbers on House Republican plans to cut $61 billion in spending. They say it will lead to 400,000 jobs lost this year and 700,000 jobs lost by the end of 2012.

dabbler's avatar

@CaptainHarley please point us to an economics text that says government produces nothing.
Can you explain where from suddenly popped into existence your water system, your roads, your airports. What entity provides legal structure and enforcement for civil society? If none of those play a part in your life or all of those in your life were provided by something other than government then I welcome your correspondence from Southern Sudan which is one of the very few places on the planet where in fact government produces nothing.
Or maybe I misunderstand your sense of the word “produce” because it’s quite correct to say that government doesn’t produce anything. Corporations don’t either. Schools and churches don’t either. It’s the people whose collective action is recognized as government who produce a wide range of services it is obviously easy to take for granted.
As societal animals we rely on our collective actions for some things we all need, we call that government.

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