The Great Depression

The Great Depression is a frustrating topic.  So many economists and politicians explain the cause(s) of the Great Depression in accordance with their pre-determined narrative.  Some conservatives say that it was caused by government spending.  People who think that we should go back to the gold standard say that the Federal Reserve caused the Great Depression.  Some anti-immigration fanatics even argue that it was caused by immigration.  People on the other side of the political spectrum might argue that it was caused by unrestrained capitalism or inequality.  And they play the same game when explaining what ended the Great Depression.

Hack economist Stephen Moore writes a column in The Washington Times (“How did the Great Depression actually run its course?”) arguing that the rapid decrease in government spending after World War II caused the economy to surge thereby ending the Great Depression.  He is arguing that a decrease in government spending caused the end of the Great Depression and, therefore, in 2014 we should do likewise.

“The Keynesians,” he writes, “were sure that the massive reduction in government spending would catastrophically tank the economy.”  But, according to Moore, the economy “surge[d] after the war was over.”  Moore goes on to say how personal consumption and private investment spending grew after the war.

“In sum, it wasn't government spending, but the shrinkage of government that finally ended the Great Depression. That's what should be in every history book — but isn't,” writes Moore.

His problem is that the economy DIDN’T grow after WWII.  The economy actually declined considerably when the government drastically cut spending at the end of the war, and GDP didn’t fully recover until years later.  In 1945 GDP was measured as $2,217.8 billion.  The following year GDP crap-dived to $1,960.9 billion according to the Bureau of Economic Research, a loss of well over 10%.  It wasn’t until 1951, six years later, when the economy finally recovered its losses.

The lesson here is not that government spending is good for the economy.  It can be, but it can also be damaging to the economy.  The lesson here is, first of all, that Stephen Moore is an incompetent hack.  Second of all sudden, massive cuts in government spending can have an adverse effect on the economy, and it could take years to recover.