Everyone who ever went to college and took Econ 101 became acquainted with Paul Samuelson (1915-2009). His basic economics textbook, Economics: An Introductory Analysis, was first published in 1948 and is currently in its 19th edition. It must the most widely used college level textbook ever written.
In 1943 while World War II was raging, Paul Samuelson made the following prediction:
“The final conclusion to be drawn from our experience at the end of the last war is inescapable—were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties—then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.”
Samuelson’s prediction was the conventional wisdom of the time, which held that the war had ended the Great Depression and that as soon as the war was over the Great Depression would return and millions of returning soldiers would be unable to find work.
The conventional wisdom was wrong, spectacularly wrong. The years after the war were marked by an economic boom that lasted longer and created more wealth for Americans than any previous period of economic expansion.
By January, 1947 President Harry S Truman was able to say the following:
“[A]t the end of 1946, less than a year and a half after V-J day, more than 10 million demobilized veterans and other millions of wartime workers have found employment in the swiftest and most gigantic change-over that any nation has ever made from war to peace.”
Keynesian economic theory holds that cutting government spending will reduce aggregate demand and bring on a recession, if not a depression. Keynesian theory, at least as practiced by its followers, does not seem to understand that the government cannot spend money without first removing that money from the private sector by either taxation or borrowing . When government stops taking so much from the private sector, more money is available for business investment and expansion leading to the creation of jobs for workers of all kinds. The newly created jobs give people money to spend, save and invest and the economy grows. It’s a straight application of supply-side economics in action.
Obama has been spending money like it was World War II again. If a new President Romney can make the sort of reductions in government spending that approach the proportionate magnitude of post-World War II spending cuts, Americans may soon be singing “Happy days are here again.”
The Obama years will look like a long nightmare followed by awakening into a bright new day.
A new essay from The Hoover Institution, A Lesson in Fiscal History by David R. Henderson, explains. Highly recommended reading for anyone interested in how government spending, and how government spending less, affects the economy.