There were certainly multiple factors that contributed to and caused the continuation of the Great Depresion. But lack of consumer demand, resulting largely from working people not earning enough to consume the products of industry, was at the heart of the problem. Capitalist economies tend toward overproduction/underconsumption, which leads to and strongly contributes to the downturn in the business cycle. Government spending worked to pull the country out of depression because the government, in effect, acted a giant consumer.

I would argue that in the short run, it really did not matter particularly for economic recovery what the government spent money on so long as the government spending created jobs. By spending money on weapons and ships and planes and tanks, many of which were destroyed in the war, the government acted as a consumer whose demand created jobs. The creation of jobs put money in the pockets of working people, which enabled them to consume more. In the short run, the mere act of spending and putting money into people's pockets, whether on public works projects or on weapons of war, stimulated the economy and brought recovery.

In the long run, it is certainly true that some economic activity is more useful to the society and promotes economic development more than other economic activity. I agree with you that for long run improvement, the government should be careful about how it spends, because stimulating the economy immediately is not the only goal of a spending program.

It's true that the United States emerged as the world's leading economic and military power after World War II largely because of the destruction of much of Europe and parts of Asia. American industries did not face foreign competition at that point, and they found a world hungry for what American industry could produce. The U.S. sought to fund economic recovery abroad in order to build up its trading partners as well as to stop the spread of Communism. We certainly were in a uniquely advantageous position economically at the end of the war. But this is a separate question from whether the government spending during the war stimulated American economic recovery, which it clearly did. War spending quickly pulled the U.S. economy out of the depression.

After World War II, many folks feared that the Great Depression might resume. One reason it did not, besides the unique economic position of the U.S. in the world at that point, was because the United States kept up its military spending during the Cold War. The U.S. kept its economy pumped up.

Good post Daewoo, and don't forget that by increasing the income and luxury tax on the rich he will stifle spending by the demographic most capable of spending large sums of money. Before Reagan reversed Carters luxury tax, the pleasure boat and American Yacht industry had for all intents and purposes closed up shop. This represented 10s of thousands of jobs in the boating industry alone. Luxury cars and second home sales also collapsed which had a huge negative impact on Real Estate and Auto sale leading to further stagflation. And don't forget the loss of vacation home sales which also fell under the hammer of the luxury tax. This affected the economies of both ski and summer resorts leading to higher unemployment in those sectors.

What these socialists fail to understand is that like it or not the economy flows like a river. In other words, it trickles down from the rich to the middle to the poor. And only if the richest people are spending, is their a flow of cash to employ the rest of the population in order to produce products which employed people purchase.

But of what value is the government spending going to do when it must be paid back by our taxes? It's like paying back on a loan which we got no benefit of at all. The Governments spending the money after all, but they aren't spending it in profitable ways which will offer us a return on the investment WE AS THE TAXPAYERS MUST PAY BACK. It is an insane plan which will bankrupt this country in short order.

We would be better off if Uncle Sam just took this bailout money and gave each taxpayer a half million dollars each, and each business a check for 10% of what their business was valued at for hiring new employees and investing in new equipment. That would be a much better use of the 800 BILLION DOLLARS THEY'RE GOING TO BLOW and would actually stimulate the economy in a quick and real way.

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If god made human from dirt, how come there are still dirt around? ~ [obvious_child]

You know what, Archie is right. Evolution is a total scam. ~ [obvious_child]

If the universe were not as it is, it would be different. ~ [Penfold]

A great civilization is not conquered from without, until it destroys itself from within. ~ Durant

No, we wont. Nor did the yacht industry or resort industries suffer because of increased taxes on the wealthy. They closed up because despite decreases in taxes on the middle class, real incomes have been falling for 30 years in the US. For all intents and purposes, the "upper middle class" is dead. Reagan killed it with his spending programs.

Again...WRONG. Trickle down economics is junk. It always has been, it always will be. Frankly the very idea is retarded, but Reagan managed to sell it because most Americans are XXXXXX and he had a folksey quality that they liked.

Which in large part is my point. If we want to use government spending to stimulate the economy we have to abandon any idiotic ideas about trickle down economics. We have to kick the reaganites in the nuts and buy them all calculators so they will stop spouting his idiocy, and we have to actually engage in value added government spending. This means no Reagan era corporate welfare, no trying to apply free market BS to government stimulus spending. WE have to find projects that will have positive economic impact, the government has to pay for them, and either the government has to then own them, or set up a non profit to own them, so full and actual economic value of those projects is passed to the general public.

Wow. This is maybe the WORST idea I have seen. That would lead to overnight hyperinflation. The US would be a third world country in roughly 120 days. By the end of the year we would all be millionaires, but that would be just enough to buy you a loaf of bread and a box of condoms.

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If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen. —Samuel Adams

Don't presume to tell me what I lived through Daewoo. I'm speaking from first hand knowledge regarding the spending attitudes of peers who refused to purchase boats and second homes specifically because of the luxury tax at the time under "Carter". You do realize I'm speaking about Jimmy Carter's policies don't you? And many refused to sell homes due to the capital gains tax which was huge. And the inheritance tax was the motivation for the creation of tax shelters which were created during his regime. All of these policies mostly affected the wealthy, and brought spending by them to a halt.

Reagan reversed those taxes and the economy bounced back before his first term was up which was evidenced by his victory which was the largest in history I believe. Only in Massachusetts did Mondale win. Reagan won all other states.


I never commented on the right or wrong, or good or bad of trickle down economics. What I said is it's the way capitalism works whether you like it or not. When the wealthiest among us stop spending and investing their money, the economy stops moving. PERIOD. That is the impact Carters policies had on the economy whether you can see it or not.

Regarding the bolded, this is a pipe dream. Name one government program that has ever made a profit. Here's an example, PostalReporter.com Blog USPS Reports $5.4 Billion Deficit for FY 2007 USPS Reports $5.4 Billion Deficit for FY 2007 Projects net loss of $600 million in 2008 Now, do you believe that Daewoo? That they lost 5.4 billion in 07, but would only lose 600 million in 08? If so, I have a bridge to nowhere to sell you.

The Government must get out of the way of business, not take control over it.

I agree completely. I said it to show how absolutely ridiculous and wasteful Obamas plan is and that this plan is no worse in the long run than his will be. The destruction to the economy will be similarly fatal. And considering the condition our economy is in, and that untold millions of people would bank and invest their money rather than just spend it. It would revitalize liquidity in the banking system, promote investment and free up spending which would promote hiring and put a stop to these massive closures and layoffs. My reason for even suggesting it was to say that rather than give the banking institutions control of 850 billion of our money and make us pay the bill for it, better they give it to us and at least allow americans to have a bankbook to show for the taxes they'll pay anyway. Get my point?

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If god made human from dirt, how come there are still dirt around? ~ [obvious_child]

You know what, Archie is right. Evolution is a total scam. ~ [obvious_child]

If the universe were not as it is, it would be different. ~ [Penfold]

A great civilization is not conquered from without, until it destroys itself from within. ~ Durant

I dont know what you lived though, But I do know that the decline in luxury goods industries did NOT correspond with any tax policy of the government, it corresponded exactly with reduced spending power in the middle class. I also know that your claim that his policies brought spending by the upper class to a halt is pure stupidity. There has never, ever, in the history of the united states, been even one single year where spending by the top 20% of earners (the class that his tax policies hit) has declined. Not one. Thst is just a fact...regardless of what you THINK you saw.

As far as people choosing not to sell their houses because they did not want to pay the capital gains tax....that is pretty much an economically neutral decision. It does not matter.


It has been proven absolutely that Reagans tax policies did not have a positive effect on the economy...his deficit spending did. He flooded the nation with cash, which stimulated the economy. Unfortunately he also shot our debt through the roof, the bill for which is coming due.


No, that is not how capitalism works. Capitalism works through the creation of wealth via the production of tangible goods.

The government is not supposed to turn a profit with the services it provides...it is supposed to provide services that create economic value to the economy as a whole. Examples of government projects:

Interstate highways
Electrical Grid
Telephone system
Hoover Dam

The postal service does generally turn a profit. Yes, I believe they will only have a $600 million deficit for 2008 despite the much larger deficit in 2007 because if you had bothered to read the article you would have noticed that the deficit in 2007 included several billion $s in one time costs. Considering the fact that the post office, in theory, has reserves of roughly half a trillion dollars (money that have transferred to the federal government over the last 15 years...their profits) neither of the deficits in question is particularly alarming.

So, when government is "getting out of businesses way" should they take the roads, grid, and telephone system with them?? All 3 were directly funded by the federal government.


Not really. First, we do not need to "free up" spending or revitalize liquidity. There is no liquidity problem. There never was. There is a solvency problem. The idea that this is a liquidity issue is a lie that our politicians have told us because they don't want us to think too hard about 2 simple facts:

1. Most of our banks are insolvent
2. Most Americans are not credit worthy

Generally the idea behind stimulus spending is that it essentially acts as a bridge loan until the economy can basically grow back into itself. That is why Reagans spending worked...it let the economy continue to move until the ag bubble started, which led to enough "wealth creation" to allow the economy to grow some without just stealing from our kids (not really, but we thought so at the time).

That pretty much only works during an inventory adjustment recession. That is OK, since pretty much all recessions are inventory adjustment events. What we are in right now is NOT an inventory adjustment. We had a big credit bubble, it has burst, and we are in a risk reassessment adjustment. That is an entirely different monster.

The keep talking about getting banks lending again, but the truth of the matter is that there is still plenty of money available for creditworthy borrowers. There just are not very many creditworthy borrowers. Not long ago Paulson released "suggested" lending standards for banks and basically said he was setting an ultimatum for them...lend to those standards or lose federal aid. Teh banks pretty much all came back with "If we TIGHTENED to those standards we would lose half our consumer lending business"

Most Americans spend over 75% of their paychecks on some kind of debt service (loan payments). That is insane and unsustainable. You would have to be an ##### to loan more money to somebody who spends that much of their paycheck on loan service.

Banks have been doing it for years, though. Last year fuel prices went through the roof, as did food prices, and a lot of those people who were spending 75% of their paychecks on debt service could no longer do it. People started defaulting, and it quickly accelerated into a self perpetuating downward spiral.

Now we are seeing lenders stepping back to more traditional risk patterns. Suddenly you have to be able to prove that at SOME POINT in your life you HAVE paid a bill on time or they are not willing to lend you $45,000 for a new pickup. They also are not willing to loan you $45,000 for a new pickup if you only make $50,000 per year because...well...that is stupid.

This downturn, what is currently a recession, is different from others in the past...the last time we had something like this it was 1929. A bridge loan is not going to cut it. Federal spending certainly has its place, but if we want it to actually help here we need to make sure it is something that adds value to the economy...something that will help revitalize it, not just help it limp through.

The problem that we get into there is that our economy is so far out of whack that coming up with ideas for that kind of spending is a challenge. For the most part our infrastructure is pretty complete. His ideas about upgrading the power grid are relatively good...if they attach some MAJOR strings to them. For instance, they should require that as part of the grid upgrade electrical companies should be required to install 3 phase power in homes if it is requested by the home owner...and at no extra charge. Expansion of 3 phase power availability would save us hundreds of billions of dollars per year as well as spawning new markets for 3 phase appliances, panels, and provide a lot of work for electrical contractors. IT could include net metering provisions that require the utilities to purchase power from homeowners at either the rate they charge for it or an average wholesale rate. Currently many states have net metering, but many do not, and a lot of them that do have it only require that the utility pay a "cost avoided" price for the electricity, which amazingly is always charged at 3 cents/kw hr, the price of producing the power from coal. Even power companies that have NO generating capacity and pay wholesale for ALL their power pay out that 3 cents/kw hr (which is typically about 1/3 wholesale).

The roads, public safety, and renewable energy parts are junk. Scrap them. The internet part is pretty good IF done properly.

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If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen. —Samuel Adams

Daewoo, I agree with much of what you write, and I disagree with some of what you write. Mostly I agree with you. I disagree about the federal projects you label "junk," simply because we need to repair the roads. In and of itself this is a good and necessary undertaking. It will help boost the economy in the short run, as we discussed earlier, and it will benefit everyone in the long run by giving us better roads. Environmental efforts will improve the environment beyond their impact on the economy. Whether these initiatives add long-term value to the economy or not, they are worth doing because they make needed improvements. It's better to have a clean environment than not, and this by itself is reason for the federal government to pursue this. I think it's imperative. Cleaning the environment has a social value beyond economic stimulus.

Here is an interesting piece by Paul Krugman in today's NYTimes about why we need a government stimulus package: http://www.nytimes.com/2009/01/26/op...n.html?_r=1&hp

It is evidence it does nothing to fix an economy though as that kind of increased spending is unsustainable. Your argument basically amounts to someone saying you can fix your money troubles by paying them off with a credit card or getting a money advance. A temporary solution is just not a solution..even more so when it risks even bigger consequences such as inflation.

The logic doesn't follow. You admit that once government spending went down the economy went down. Well later the economy went back up but it wasn't because an increase in government spending, it was an increase for demand of US products. What caused the increase in demand was basically the fact that no other production facilities were around. The government spending was irrelevant....assuming WWII could have been won without us spending a dime we would have had the same economic benefit.

In other words you could have government spending continually increase and your economy would look better but at some point that bill is due and you can't tax people 100% and you can't borrow money indefinitely. The second that spending is gone the people are left with nothing because no growth really existed and no demand was created. This is evidenced with the New Deal and WWII....government spending went down and the economy tanked, demand for goods and services went up and our economy did well. Providing goods and services is much more sustainable than government spending.

Oh give me a break, the war isn't going to cut us nearly as much as these ridiculous stimulus plans and the war had little to do with the economy we are in now.

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I disagree that government spending will do anything even if spent on worth wild projects. It may be a smart move that could lead to long term benefits but it will not jump start anything. This is even more true if you use debt to pay for it.

In normal times government spending on infrastructure is probably a good idea which promotes growth and gives you a competitive advantage over, say, India where Dell has to build water treatment facilities to run their call center. I think the myth is that if you print billions and spend it on people building roads that all of a sudden you get this massive growth to turn things around. For one, you have created numerous government jobs of which many are going away the second you stop that spending which leads you right back in the same boat. The New Deal and WWII are great examples. In 1937 the unemployment rate was like 15% and after WWII there was no need for hundreds of thousands of soldiers. I keep hearing the lame excuse "we didn't spend enough in the New Deal"...well did we spend enough in WWII? If so then why did we fall into recession after it? It is never enough because you have to continue it and increase it indefinitely.

Basically my point is government spending doesn't stimulate an economy..it can only help promote one.

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You could also point out that setting up post offices is a power of congress...specifically listed in the constitution actually.

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Just want to correct some historical info for Archie. Mondale won in Minnesota (his home state) not Mass. I believe he also won in the District of Columbia.

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Remember that Keynes did not call for having government spending continually increase. He called for government to spend and run a deficit when the economy is headed into recession/depression, at a specific point in the business cycle. His idea was not to have government spending be "sustainable," to quote your last sentence. Keyne's argument was to use government spending to counter the business cycle, which is known as counter-cyclical spending. And yes, this government deficit spending is a short-term solution to the immediate problem of depression/recession, to the downturn in the business cycle.

The analogy of the jump start is apt. Just as you use jumper cables attached to another power source to give an immediate jump to your car battery, you use the federal government to give an immediate jump to the economy. You don't rely on government deficit spending to sustain economic growth over time, just as you don't run your car off the other power source over time. You use the jump to get the car engine started, and the engine runs the car. Similarly, you use the jump of deficit spending to get the economic engine started, and the private sector economy then runs the car.

Your point as I understand it is that in the long run, it wasn't government spending during World War II that caused the economy to prosper, but the demand for U.S. products. But it was government spending that created the demand, by creating jobs that enabled people to buy the products. This is true of products purchased by Americans and of products purchased by people overseas. The U.S. government spent money on the Marshall Plan to build up Europe, in part to rebuild our trading partners and to enable Europeans to buy American products. Government spending served to fix the economy by helping to create jobs both at home and abroad, which in turn paid people wages that allowed them to spend money on products, which led to the demand for U.S. goods. Government spending jump starts an economy by enabling the demand for products that then goes on to fuel economic growth.

The problem is that when you talk about, for instance, repairing the roads, the only question that really matters is "Will repairing the roads provide an immediate net positive gain to the economy of the US" and it will not. I absolutely agree that we should spend more on infrastructure, but borrowing a whole bunch of money to play catch up on your maintenance is just plain dumb. Filling potholes and doing overlays and fixkign bridges will not actually allow for an increase in the amount of goods transported across our roads in the short term because the demand is simply not there. So, there is no imperative to those projects and no short term gain. To do them now means we have to borrow the money. Currently there are NO PLANS whatsoever to repay ANY of the outstanding US debt....they just plan to continually roll it over. For all intents and purposes, that means that the cost of those repairs that we do NOW with BORROWED money is infinite. You are talking abotu spending an infinite amount of money to FILL POT HOLES. We cannot saddle ourselves with that kind of debt for something that does not provide an immediate benefit. There is no point when we can put it off until the recession is over and the cost will be like 20 billion percent less.

The alternative energy plan is even worse. First, we need to recognize that there IS NO SHORTAGE OF ELECTRICITY IN THE US. None at all. We have such a surplus that we literally have plants shut down and operating at half capacity. We do have an energy problem, but it is a liquid fuels problem and since we do not use liquid fuels to produce electricity, the 2 are entirely unrelated.

The bigger problem with renewables is that none of the technologies we have now are competitive. Coal plants produce electricity for 3 cents kw/hr. Wind costs roughly 6 times that. So does solar (and that is cheap solar). We have subsidized these technologies so we have built utility scale projects knowing from day one that they were not competitive. Then we force utilities to buy power from them at a higher price.

My electricity bill has more than doubled in the last year and it is because our provider has literally been forced to shut down a turbine at their coal plant and buy wind power at 6 times the cost. That kin dof thing is a MAJOR economic negative for the economy.

Think it leads to a cleaner environment? Think again. A 100mw wind plant uses roughly 70x the amount of copper that a coal plant requires for the same output...that copper is mostly cyanide leached out of open pit copper mines. Those projects are INCREDIBLY resource intensive. It is questionable, especially with clean coal technologies coming online, whether there is ANY environmental benefit to "renewable" energy as we practice it today AT ALL. You have to look at the whole supply stream, not just the fuel requirements.

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If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen. —Samuel Adams

You are missing an important dynamic here, Steeeve.

They are going to spend the money. It does not MATTER whether it makes sense or not under these particular circumstances. It is GOING to get spent.

Once we let that little bit of reality in, the argument changes. NOT spending the money is NOT on the table. Even if we had irrefutable proof that spending the money would not help...even if we had a signed letter from god himself saying that spending the money will not help, WE ARE GOING TO SPEND THE MONEY because politicians have to look like they are doing something to help in order to avoid having people actually think about it for too long and realizing that it is largely the politicians that made this mess to begin with.

So, we are stuck arguing about WHERE to spend the money that it might have a positive long term impact. Even this is largely hypothtical because frankly there IS no America in the long term...at least not anything recognizable to us today.

Once all those qualifiers are on the table, you CAN use government spending to spur the economy (provided you have one...which we dont) and you CAN use deficit spending or even rank monetarization to do it and still avoid inflationary problems IF, and ONLY IF, it is used on projects that impart long term value on the economy that is on par or greater than the amount spent.

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If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen. —Samuel Adams

The transition to a peace economy after World War II had some bumps, notably strikes, but the economy did not sink back into depression, as some had feared it would. One reason is because the government spending during the war, coupled with a lack of consumer goods during the war, created pent-up demand. People had money to spend, and they spent it. This is a direct result of the government spending that jump-started the economy during the war and put money in people's pockets by giving them jobs. The fact that government-funded jobs are temporary really doesn't matter so long as there is enough demand to create other jobs after the government spending declines.

The key is for the government spending to enable consumption that then triggers private sector growth.

Right, but the only way to make it work is to continue the increase in spending, that was my point. As we have seen and you agree with, the moment the funding stops the economy goes right back into recession. It is also debatable whether we were even out of a recession when the spending is on going. The New Deal was happening and the recession wasn't over. The recession in the 80s had no relationship to government spending (in terms of trying to solve it).

Keynes theory is about as accurate as trickle down economics. It sounds good in theory but doesn't work and never will.

I understand the purpose, you have a bad habit of describing how something works instead of arguing whether or not it does work. I'm not stupid.

I am arguing that it doesn't jump start the car. If you want to use the analogy it would be like jumping a completely dead car battery. You might get the engine started for a second but you will have to replace the battery before the car will go anywhere. Even getting the car started for a second is debatable.

It was the government spending that led to the demand...but by flattening the rest of the industrialized nations. The demand had nothing to do with employing people because after WWII people weren't employed by the federal government (war is over) and it wasn't like they got a big check when they came home and spent it. Remember we were in a mini recession after WWII for 2-3 years. People got jobs when manufacturing was needed after the war. The government was buying this stuff...at least not the US. It was US citizens and foreign nations. All of this was unrelated to the war and to government spending.

In your defense, we did build some great infrastructure during that time that allowed for extreme business growth...so in that sense the government spending helped but this was mostly paid for without debt and would be worthless without the main cause of economic recovery. In other words, you can't go out and build interstates anytime you want and think the economy will go nuts.

Nothing I've seen supports this. While having no other countries functioning helped us, we didn't have a huge trade surplus which is what you are arguing the government created.

You talk about the Marshall Plan, well that wasn't during a period of US economic recession...at least most of it wasn't. This is largely irrelevant.


One trap you can fall into is assuming a truth and finding a way to get that answer. For example we can do bailouts over and over and over until the economy gets better and then everyone will say it was the bailouts and it took "# of bailouts x $" to get the economy going again when you really don't have any correlation. We have already done a few stimulus packages and those failed. Japan tried them in the 90s and that failed. The New Deal failed. We have had recessions recover is 1-2 years with no stimulus packages.

There is just no relation to government spending and economic recovery. Keynes is wrong.

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