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Winning the Economic Argument: Show Opponents This Graph, and Ask Them to Explain
Anyone who had the misfortune to hear the Sunday talk shows knows that the Republicans have decided to use their claims that spending is not consumption, that that it does not create or preserve jobs, and to point -- as the Minority Leader McConnell did -- to the New Deal as being a failure.
Way back in October, when the so-called "pundits" were suggesting there may be a need for another ~$150 billion stimulus, the case was made on these pages for massive public investment as the only source of consumption in a contracting economy, and cited the New Deal. ("Wanted: A Good Keynesian. Massive Public Investment Will Fix the Economy" October 13, 2008). This became the basis for the stimulus plan, until it was partially emasculated by Republicans.
Instead of wasting words on those who will not hear, switch senses to sight, show them this graph, and ask them to explain it:
(The Y-Axis is GDP expressed as a percentage increase over the lowest GDP in 1933. Note that in 1929, the GDP is nearly 40% ABOVE the 1933 low, and this was surpassed in 1936)
As pointed out in the above-referenced article, the key observation in this graph is the downturn in 1936-37. This is as close to a "scientific experiment" as there can be in macroeconomics: from '33 to '36 Roosevelt unleashed the New Deal and what passed at the time as massive spending. The GDP grew every year by double-digits.
Then, in a reversion to his true roots as a fiscal conservative, FDR decided that it was time to slash spending to balance the budget. The economy contracted. Then in '38, realizing the error of his ways, Roosevelt started spending again, and GDP grew every year thereafter.
Note the sequence: spending, tightening, spending. Growth-contraction-growth. These conditions mirror the requirements in medicine to prove disease causation that are known as Koch's Postulates: discover the causative agent and remove it; demonstrate the disease is effectively treated; then introduce the causative agent again and show it causes the disease. Without that last step, the first correlation may be coincidence and not cause. [For those interested in a medical example of Koch's Postulates, see below ]*.
With the Great Depression, there was the '29 Crash and contracting government spending, with the "disease" of severe economic contraction; then, in 1933 the ballooning of government spending and economic growth; then in 1936 the reduction of government spending and economic contraction; and then, in 1938 increased government spending and a return to economic growth.
It is interesting to note that Republicans, who have delighted for 50 years in attributing the end of the Great Depression to World War II, conveniently omit that in World War II there were wage-price control boards, rationing, higher taxes and massive government spending. Other than massive government spending, and "employment" in the armed forces, there is nothing economically "magic" about war. One might even suggest that, from a pure economics perspective, much of the spending in war is wasteful, building machines that will be destroyed before their useful life is completed.
But, these are all words. Just show opponents the graph, and ask them to explain how it was that the GDP in 1936 exceeded that in 1929 and never, even with the 1937 contraction, fell below that level again. And why, if government spending were irrelevant or even counterproductive, GDP fell when government spending was reduced and then grew again when it was again increased?
Because of the unplanned "experiment" of 1937, there is more compelling data showing the causative link between massive government spending and economic growth in the setting of a major economic contraction than there is for taxcuts: remember, George HW Bush and Bill Clinton raised taxes, and the 1990s were a period of sustained economic growth. And, the Bush tax cuts--the weakest recovery in history.
In 3-4 years the New Deal returned GDP to pre-Depression levels. It never sank below that again.
Some failure!
* E.g., for those interested how Koch's Postulates work, to prove a person has gluten "allergy" causing malabsorption, a biopsy is taken of the duodenum demonstrating abnormalities; then gluten is withdrawn from the diet, the malabsorption improves, and a repeat biopsy shows a normal duodenum; then, gluten is added back, the symptoms return and a biopsy looks like the first one. This patient has "celiac disease" caused by gluten, and his treatment is a gluten-free diet].
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One overlooked element of the Roosevelt recovery plan overlooked today was the end of prohibition. Less than three weeks after taking office, FDR signed the Cullen-Harrison Act legalizing 3.2 beer and wine. By the end of 1933, the nineteenth amendment had ended prohibition. The resumption of the manufacture, sale, transportation, importation and exportation of intoxicating liquors had a huge economic impact.
The repeal of marijuana prohibition could have the same positive effect today.
Amen to legalizing pot - especially here in California. Overnight Humboldt County would become
the largest producer of revenue for the State. The 41 billion state deficit would all but
disappear. It needs to be put on the ballot containing language that controls and regulates its
legal sale and taxes the hell out of it. I'm sick of paying black market prices for the
hyperponic sweet green stuff.
Just curious, does anyone know the price difference in pre prohibition vs post prohibition alcohol?
I should have said "the twenty-first amendment ... ended prohibition". Sorry.
It's completely false to suggest that government takes money out of the economy, and only the private sector puts it in. For so many reasons, and on so many levels.
Government spending in America, on this economy, targeted spending on this economy, has a far higher multiplier effect than a private sector that sends its money overseas, hides it in offshore accounts, and outsources jobs to pay them pennies on the dollar. It's the sector taking money out of the economy.
What benefits the American economy more? A company that outsources and hides its profits in off shore banks? Or a government public works project here?
If you create public works projects, you guarantee spending and jobs (which means more spending) here. If you just hand out tax cuts to the wealthy, the money could go anywhere, and usually does.
We've neglected investment spending in America at least from Reagan on. That's why we've lost industry edges by the dozens. That's why we've lost millions of jobs and our debt has skyrocketed. Invest in this country and we all benefit. Give no strings attached tax cuts and the wealthy benefit, not the country.
Right Wing economic theory is why we're in this mess. Democrats have been too complicit with this from Reagan's time on. We need to completely reject all of it and build a progressive future by public investment on overdrive. The stimulus package is a first step. Too small. But a first step.
Unemployment benefits and food stamps have a high multiplier effect. An increase in such payments, however, is not a sign of a healthy economy. It doesn't increase our productivity capacity nor create wealth. It merely transfers wealth from the productive sector to the unproductive sector. Those multiplier numbers often don't mean much. As far as investment spending, it has increased dramatically since Reagan took office.
http://www.economagic.com/em-cgi/data.exe/fedstl/fpi+1
Much of the job losses in the manufacturing sector have been due to increases in productivity. This decade, however, a large number of manufacturing jobs have been lost to China, but mostly in labor intensive industries like textiles, apparel, and furniture which no longer are profitable in this country and have little to no economic value for that reason.
Thank you Paul...thank you, thank you, thank you. One picture is worth a thousand words.
FACT: You can't give tax breaks to someone that doesn't have a job!!!
Unfortunately, this is not true. Unemployment payments are fully taxable.
I forgot to mention so are most retirement benefits and Social Security payments, interest income, dividends, capital gains, rents, royalties and deferred compensation.
The major reason for the economic growth from mid-1936 to early-1937 was because of the "soldiers bonus payments". There were $2.237 billion of these bonds handed out to soldiers and almost all of it was spent by the beginning of 1937. That was 24% of total govt spending that year, just handed out in cash. That would be the equivalent of handing out over $750 billion in stimulus checks to low income folks this year in 2009. How that would not result in some economic growth is beyond me. But the point is that the US government can not do that every year. It's a pyramid scheme to maintain growth. It does not solve the underlying problems within the economy. It didn't in 1936-1937, as evidenced by the massive depression that began in mid-1937 after that money was spent, and it won't now. The temporary boost in growth is in no way evidence that it was good policy or took us out of the depression, which it didn't.
DuganS1 - you are absolutely correct. Spending prior to 1939 did increase the GDP - but did not create sustainable economic growth. It required constant government spending to keep it going. Spending starting in 1939 was different - it was spent on through basic industries in preparation for a world war - industries were built up and then were utilized to meet pent up consumer demands after the war.
In my opinion - we have too much indebtedness - both business and consumer. That must be solved first before any real growth can occur. Our industries must be made competitive on the world market for any sustained economic health.
There is also this:
http://www.measuringworth.org/datasets/usgdp/graph.php
And about the govt spending, the govt handed out $2.2 billion worth of soldiers bonus checks in mid-1936 (of a total of $9.2 billion in fed govt spending), most of which was spent by early 1937. The entire US budget is 1929 was $3.8 billion. Also, unemployment was 3.8% for 1929 and over 15% in 1936, despite a tripling in govt spending and millions being on the govt dole.
The world war spending from 1939 to 1945 was government spending as well. (Even the weapons built for the British and Russians prior to the full mobilization in the US were financed by the Roosevelt administration through Lend-Lease.) Does anyone have a supply side explanation for why government spending for ships, tanks and planes abandoned at the end of the war had a positive effect on the economy while spending on highways, bridges and schools that continued in use for generations did not? The difference between 1936 and 1943 spending is not qualitative it is quantitative. In 1936 the Federal deficit was about $5 billion, 6% of GDP; in 1943 is was $64 billion, 32% of GDP. If the New Deal didn't work and the war did, the lesson is government spending must be truly massive to fuel a recovery.
Great article... very imformative and helpful indeed. I'd have to say, however, that just from what I've seen on HuffPo that not too many minds will be changed.
It seems to me that, at some point you realize that you're in the unenviable position of -- on the one hand -- "trying to teach a pig to sing," and (also) -- on the other hand -- "trying to wake a man who only pretends to be sleeping."
That is, some can't get it, and the others simply won't.
Had FDR been a Republican and all else remained the same, I dare say that they'd all be on the opposite side of this argument... for in their crowd, the messenger is all-important while the message itself, not so much.
Seventy-five years from now their grandchildren will be saying how neither FDR nor Obama fixed either of the Republican Great Depressions.
No one should be swayed by the graph because it's not calculated correclty. When something drops 40%, for example, it must go back up 67% just to get back to where it was. GDP in 1936 was still below GDP in 1929 in reality, even with more than a 300% increase in federal spending.
No, you read the graph incorrectly. The y-axis is not the annual growth in the GDP, it is the percent increase over the 1933 GDP. By 1936, the GDP exceeded the 1929 number. Try to get your facts straight.
The people who oppose the stimulus are Republicans. Republicans do not want the country to recover. They want everyone to suffer and blame Democrats. You cannot convert someone like that with charts and statictics. You cannot convert them period. You must go around them or through them to get where you need to be. The very fact that the MSM gives the same people who got us into this mess 50% more exposure than people trying to get us out of this mess only proves that the objectives of the Republican party and CNN, MSNBC, CBS, NBC, ABC and of course FOX are the same: impoverish the middle class in order to enslave them to the Corporate State. A good stragey that will probably work. All hail GE!!
Nice article and impressive graph. (Chuchulain's link below is also helpful.) I still chuckle (if a bit ruefully) at Mitch McConnell's clueless "interpretation" of history, saying that, because it was WWII that ended the Depression and not the New Deal, the New Deal stimulus effort "didn't work". What he should have realized is that, as large as it was, the New Deal only moderated the Depression, providing some improvement but not enough. This was because it was TOO SMALL to pull us completely out of a gigantic hole like the Depression, that it took a REALLY HUGE stimulus like mobilization for WWII to finally get the economy back on track. So, the calls by Republicans (even so-called "moderates" like Susan Collins) to reduce the size of the stimulus was exactly wrong. It may have to be a few trillion to really get us back to normal growth. I'm not recommending that, just pointing out what it would take, and so the current efforts may do no more than moderate the downturn
The economy failed to recover in the 1930s because of the lack of private investment, not because of the federal govt didn't spend enough. It's private enterprise that employs people and private enterprise decided not to expand employment in the 1930s, to a large degree because of FDRs anti-business policies. The reality is the federal govt could have brought the country back to full employment by spending much less had govt policy just been more favorable to business.
And your historical data to that effect is....?
Hot air is cheap. Mr. Abrams has shown you how to actually make a concrete point. Reciprocate.
You missed the point completely. The economy DID recover in the 1930s, in a manner completely related to gov't spending.
Does the government not employ people? Does the government not pay the people it employs? Do government employees not spend their paychecks just like everyone else? How is that not pouring money back into the economy? Or, since you are apparently following the logic of Michael Steele, since government does not create real jobs, maybe people who work in government are not really "employees," and therefore they do not really get "paid" and therefore they do not have any real "money" to put back into the real economy. Policies that are overly favorable to business have resulted in obscenely bad conditions for workers - prompting the labor reforms of the first part of the 20th century, things like child labor laws and workplace safety laws. Also consumer protections laws, like the one against contracts of adhesion. Getting more favorable to business than we are right now would result in the return of those conditions, on both the worker and consumer side. The answer to all of this is that as stimulus money starts to circulate, people will start buying more and businesses will have renewed opportunities to sell their products & services, thus creating a need for more workers, etc., etc. Giving business any more favorable policies than currently exist is exactly like giving yet more tax breaks to the wealthy - they will take it and use it to enrich themselves, not to put anything right for anybody else.
This is an excellent graph to juxtapose with Mr. Abrams.
http://www.nytimes.com/imagepages/2009/01/23/business/20090124_CHARTS_GRAPHIC.html
Overall, it looks like the best economic performance from Eisenhower to the present was Johnson's. Bush rates at the bottom. He rates at the bottom from Hoover on, actually.
Those statistics depend infinitely more on how their Presidential terms align with the business cycle than on how effective their policies were.
Government is nearly 25% of GDP. Government has a HUGE impact on the economy. There is no way around that. It might pain "conservatives" to admit that. Though they never seem to get enough of the magical, voodoo medicine called "tax cuts".
But targeted, government spending is a proven stimulus to the economy. Tax cuts, in and of themselves, have no history of helping the economy. Except in so far as they generally force deficit spending. That means the economy gets hit with extra money from both sides. Extra money. Like steroids. Juice. A jolt of electricity. But the tax cuts themselves offer zero stimulus, if they are coupled with spending cuts. It's virtually a wash at that point. What the government hands back to tax payers, it removes from the economy by cutting spending. Again, a wash.
Targeted government spending, OTOH, has the added benefit of being in America, for Americans. Tax cuts without strings means money can go anywhere, including out of the country.
That tactic OBVIOUSLY failed under Dubya. Voodoo economics has been completely repudiated, when we look at Reagan, Bush Sr. and Dubya collectively.
Oh COME ON!!!! You REALLY need to go get another talking point!!! It's the Presidential policies which create the cycles, and the economy, NOT the other way around!!!!
If, when all else fails, it's all about the business cycle, then why oh why:
a) Support the Wall Street bailout, and then
b) Oppose the Main Street bailout?
It couldn't have simply been who happened to be the Preznit that day, eh?
The conclusion that the economy dropped because federal govt spending was reduced in 1938 is also very misleading. First, federal spending was only reduced from $8.8 billion in 1937 to $8.4 billion in 1938. In comparison, federal spending was cut from $6.8b in 1920 to $5.5b in 1921 to $3.8b in 1922 and then to $3.7b in 1923 and the economy boomed tremendously. Federal spending was also cut from $66.5b in 1946 to $41.4b in 1947 and to $35.6b in 1948 and the economy boomed tremendously. As well as from $80b in 1953 to $77.7b in 1954 and to $73.4b in 1955 and the economy boomed. The big difference between the 1938 period and the 1920s and late 1940s and 1950s was that there was a lack of private investment into the economy. Investors weren't investing in the 30s under Roosevelt. And that lack of investment was why unemployment remained between 15 and 22% throughout the entire decade, while it was at 3-5% in the 1920s and late 1940s and most the 1950s.
well, yeah if you let facts get in the way.
Or you could realize that the same thing just happened, when we saw what appeared to be a HUGE economic boom, but was really just a boom/bust cycle brought on by lack of regulation in the capitalist economy!
Hmm, I wonder if the huge amount of inflation and lowering of the interest rates by the Federal Reserve had anything to do with it.
Government is not omniscient. Government is a failure. We have no free market, but that's what we need, and that's what the economy of the '20s and '30s and on needed.
Right-wingers cry for a free market but they don't really believe in it. Left-wingers are actually honest and don't cry for a free market. Only the libertarians believe in a truly free market.
Per the official statistics, GDP was as follows in the given years:
1923 $85.4 b
1925 $90.6 b
1927 $95.5 b
1928 $97.4 b
1929 $103.6 b
1936 $83.8 b
1937 $91.9 b
1938 $86.1 b
whitehouse.gov gives different figures.
http://www.whitehouse.gov/omb/budget/fy2009/pdf/hist.pdf
I may have missed it, but can't find it prior to 1930.
There seems to be some variance in stats for our GDP, historically. Which is odd, when you think about it. We should have a consensus on the stats from that long ago.
http://www.usgovernmentspending.com/year1933_0.html
Also note that state and local govt spending actually increased more than federal government spending decreased in 1938 from 1937, so the idea that govt spending went down overall is false.
The graph is mis-leading to say the least. When something goes down 50%, for example, it must go back up 200% to get back to where it was. GDP in 1938, for example, was way below where it was in 1929. In fact, GDP in 1938 at $86.1 billion, was lower than it was in 1920 at $88.1 billion.
Basing economic recovery on GDP numbers alone is misleading. According to GDP numbers the US economy was on full speed ahead up until 2006 and as of yet it hasn't fallen too much (well layoffs haven't really hit high numbers yet comparitively to the Great Depression).
If GDP is all we look at, growing dept is a major stimulus to an economy and as long as we borrow more and buy stuff we'll always prosper. Right now, consumption is 70% of GDP.
Now that I've camplained about GDP as being a measure of success, I'm getting pretty tired of the FDR love fest as if he was the greatest president. Sure he was president throught the great depression but history isn't that nice to him if you look at his other doings.
He made it illegal to own gold.
http://www.the-privateer.com/1933-gold-confiscation.html
He imprisoned people for being of Japanese ancestryhttp://en.wikipedia.org/wiki/Japanese_American_internment
And some people will argue that his policy's were what would otherwise have been a severe recessions maybe a depression into the great depression. Note this article was written in not so politically economic climate.
http://www.universityofcalifornia.edu/news/article/6550
Ofcourse, dems will defend any action taken by their great president, but fail to realize, he wasn't perfect nor will any man ever be. History will always be debatable because we will always have biased people writing posts and unfortunately there aren't many "unbiased" people.
First of all, who ever said FDR was perfect? The author of the article certainly didn't. Nor have I seen that among the comments.
Second, it is impossible to support the contention that FDR turned a recession into the Great Depression. He inherited the Great Depression and GDP climbed dramatically from the onset of his programs on. With one minor blip. When he CUT spending.
Those are the facts. You can't spin that. His policies worked. If anything, they indicate that more spending would have worked faster and better. As mentioned in the article and elsewhere, WWII didn't get us out of the Depression. Government spending did. Targeted, mobilized, government spending. When you spend on things that last and improve the overall society and environment, you get a double win. The spending itself stimulates the economy, and if you improve infrastructure, transportation, information and electrical grids, education, health care, etc. etc. you provide an even better environment for even more commerce. The best kind of multiplier effect.
It's basic common sense. Something the Unites States has forgotten from Reagan's time until the present. I hope Obama returns us to common sense.
Yes, and Bush increased our national debt levels greatly too and for the most part GDP grew. May be a "fact" but doesn't mean that he had nothing to do with the great depression getting worse. We have seen multible recessions thoughout history and only one of them turned into a Depression under FDR. A fact many forget is that Hoover whom FDR inherited a recession from started his own public works programs.
I bet you that in 3 years we will still be going down, especially with a reactionary Congress, who is unwilling to face the unpopular facts that they cannot spend their way out of this. If they do they will destroy many peoples retirement through inflation (I don't htink about next 1 year, inflation will hit and hit hard if we continue to let congress spend) and hopefully the dogma of "keynes" will finally be put to rest.
And the FDR being perfect comes from the "theory" that of all of what he did, the New Deal was his diamond in the rough, when that diamond isn't even regarded so greatly until recently.
It is widely thought that FDR prolonged the depression because unemployment remained so high. In 1936, 1937, and 1938 there were still many millions of people on the govt dole. This occurred because private investment remained low the entire decade. And it remained low to a large degree because corporate owners and managers and regular investors didn't invest. They didn't invest because of the mountain of anti-business legislation FDR put through, or because of poor policies like the NRA which created monopolies and forced large numbers of small concerns out of business.
You complained about using GDP as a measure of economic health, but you have not proposed a better measure. Then you complained about stuff that is irrelevant to the discussion. Typical Republican.
Repugs and George Bush talk about this spending bill... which 35% is tax cuts... and how this is massive compared to What Repugs did for 2001 recession....
George BUsh's tax cuts stimuli ... was 3 trillion in Tax cuts and 5 trillion in additional debt and a war and was the first jobless recovery. The only sector that grew /created the recovery was housing which will now all know was mostly just hot air.
And of curse this is a far,far worse situation and with a massive banking problem.
Regards
Yawn Viper,
George Bush talks about this spending bill?
"George BUsh's tax cuts stimuli ... was 3 trillion in Tax cuts and 5 trillion in additional debt and a war " Check your facts. Bush added 4 trillion to the debt over eight years in office, Including the 750 billion bank bailout.... yeah the truth isn't important.
The repugs term is getting old too. Why not comment on the graph that is at the center of the post? Oh, you didn't read the article... its actually quite good.
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