During the few years where FDR actually adopted significant stimulus the economy recovered rapidly from the Great Depression. Government programs brought hope and jobs to millions of Americans, reduced malnutrition, and developed tens of thousands of public gems we continue to enjoy 80 years later.
After the war, President Truman created the Marshall Program that was critical to the economic and democratic revival of much of Europe. A Republican President, Eisenhower, led the U.S. to fund a stupendous infrastructure program, the interstate highway system, that transformed the Nation. The GI bill began the process of making university educations for their children the normal aspiration of middle class parents for the first time in our history. Scientists at U.S. universities, many of them immigrants, dominated the Nobel Prizes in science and medicine.
Instead of harming their grandkids, the huge budget deficits devised by their grandads and great-great-grandads during World War II were critical to their grandkids' lives and accomplishments.
- The grandkids were harmed when Hoover and FDR tried to run budget surpluses and instead made the Great Recession far more severe and led to unintentional deficits.
- The grandkids' lives were helped immeasurably when FDR deliberately ran budget deficits and provided social programs during the Great Depression.
- The grandkids' lives were helped immeasurably when the deficit spending during World War II rocketed the economy to full recovery from the Great Depression.
- The grandkids' lives (and the lives of hundreds of millions of people globally) were helped immeasurably because we spent vast amounts of money to defeat the Axis powers. Had the Axis forces won the results would have been horrific. Yes, it was the sacrifice of blood by the grandkids that made this possible, but they could not have gone to Europe and Asia to shed their blood without the U.S. government providing the financing.
- Hundreds of thousands of the grandkids' lives and limbs were saved during the war because the U.S. funded such vast amounts of men, material (much of it given to Allies), and intelligence. Without that vast funding of resources our service members would have gone into battle in situations where they would have lost or prevailed only through catastrophic levels of injury and death.
Peterson ignores the brilliant successes made possible by the large federal budget deficits during World War II because they would falsify his G3 myth by proving the opposite.
A Brief Historical Note on Federal Deficits in the 1930s-1950s
As Brad DeLong explained in his 1998 article on fiscal policy in the shadow of the Great Depression, the Hoover and Roosevelt administrations sought to run "balanced budgets" in response to the Great Depression, but a severe depression dramatically reduces tax revenues and produces involuntary budget deficits. FDR went through three stages on his approach to fiscal policy as I explain briefly below.
DeLong was writing during a period when he was hostile to government deficits, so his article is congenial to Peterson at a number of points. DeLong explains that President Hoover heaped scorn on his own economic team as a group of do-nothings who thought the Great Depression was a healing storm that would "liquidate" economic poisons such as unions. Hoover's economic advisors told him not to act. Hoover believed that it was vital for him to act to combat the Great Depression -- by trying to run a budget surplus! Hoover asked Congress to approve a raft of new taxes. Hoover's economic malpractice was a double failure -- it deepened the Great Depression and failed to even come close to balancing the budget. Hoover was enraged that the Federal Reserve refused to deliberately produce serious deflation. Had the Fed done so, it would have materially worsened the Great Depression.
FDR was, by instinct, a great believer in austerity. He campaigned against Hoover's "failure" to balance the budget. FDR's early efforts to balance the budget were doomed for the same reason that Hoover's efforts were doomed. Eventually, as DeLong put it, the Roosevelt administration decided to make a virtue out of necessity and stress the benefits of government spending to the recovery.
Once FDR embraced fiscal stimulus the recovery from the Great Depression became robust. Unfortunately, Treasury Secretary Morgenthau, who detested budget deficits, convinced FDR to reverse course and inflict austerity in 1937. Austerity did not balance the budget because it crushed the recovery and hurled the economy back into an acute phase of the Great Depression.
The economists' malpractice in the 1930s did not simply fail to protect the grandkids -- it brought economic terror to the parents, kids, and grandkids. G3 has always been cynical propaganda that produces disastrous austerity policies whose principal victims are our kids and grandkids.
Indeed, it was the malpractice of austerity that helped produce World War II by bankrupting Germany and discrediting its democratic leaders. John Maynard Keynes famously warned that such economic malpractice would lead to economic ruin and enrage the German people. The grandkids of those European leaders who inflicted ruin on Germany were the ones who died by the tens of millions in World War II. It is common for those who share Peterson's dogmas that purport to be protecting our grandchildren to be the ones savaging our grandchildren. Peterson is another in a long line of pretended protectors of our grandkids who actually advance economically illiterate policies that prey on our grandkids.
When Should We Run a Budget Surplus?
There are times when we should run a budget surplus, but they are unusual times for an economy like the U.S. with a sovereign currency that is very likely to continue to run substantial balance of trade deficits. We could achieve an economy running so "hot" that many millions of Americans who dropped out of the labor force reentered and employers were looking so aggressively for scarce workers or scarce resources such as rare minerals that prices for such workers and rare minerals rose sharply. Alternatively, demand could so outpace supply that the general price level rose sharply and produced harmful levels of inflation. Running a budget surplus could be an excellent idea shortly before either condition arose. None of those conditions is true in the U.S. today as we can see every day by observing the data for inflation, federal interest rates, and labor force participation rates.
The circumstances in which a Nation like the U.S. that has a sovereign currency, borrows solely in that currency, and allows the value of its currency to freely "float" needs to "balance" a budget or run a budget surplus are historically rare. As we have seen from the horrific errors of the 1930s under Presidents Hoover and Roosevelt, the grotesque pattern of economic malpractice in the eurozone of inflicting austerity in response to a Great Recession, and the slowing U.S. recovery once Obama and the Republicans began to inflict austerity, it is critical for everyone's welfare, particularly our kids and grandkids, not to inflict austerity except when it is really needed.
Even extremely conservative central bankers now admit that modest inflation is desirable. The U.S. and the eurozone have failed to provide sufficient demand to achieve even the Fed and ECB's modest inflation targets. Moderate inflation, in nations with functional governments, does not lead to hyper-inflation. Moderate inflation does not cause significant harm to an economy. We should have been so lucky to have experienced moderate inflation in the last ten years, it would have meant a superior economic environment. But the same is not true of disinflation (negative inflation rates). Even modest deflation poses a material, albeit far from inevitable, risk of pushing an economy into a long-term recession or locking it into a long period of weak growth.
Economists now broadly recognize that the problems of disinflation versus inflation are not symmetrical and it is essential to adopt macroeconomic approaches that put far greater weight on avoiding modest disinflation than modest inflation. This means we can and should err on the side of not inflicting austerity for the purpose of preventing inflation that has not even become modest.
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