The Mad Hatter’s tea parties

There’s been an awful lot of pious grandstanding about government spending lately. On April 15, protesters at “teabag parties” around the nation, including Honesdale, PA, decried government spending for ruining the country. In the Town of Callicoon, NY, three town councilmen defended their rejection of about $200,000 in state aid, which would have fully funded a solar project, by saying they didn’t think the state should be spending so much.

All of this contrasts strangely with what we were taught in school: that New Deal spending was the engine of recovery from the Great Depression. The tea-party propagandists get around that by touting a revisionist history according to which the New Deal actually made the Depression worse, and the slump didn’t end until World War II.

Pictures being worth a thousand words, we are printing three charts that prove this to be delusional claptrap.

Chart I shows the most common measure of broad economic activity, U.S. Gross Domestic Product (GDP), from 1929 to 1945. When GDP declines, it’s called “recession;” when it rises, it’s called “recovery.” Note that the line goes up every year starting in 1933, the year Franklin Delano Roosevelt took office as President, with the exception of 1938. Each of those years, peace or wartime, was marked by big spending—except 1938, the one year Roosevelt slashed spending to balance the budget. Oops.

To be sure, the chart does show growth accelerating during the war. But even factoring in the 1938 slump, GDP growth during the peacetime New Deal averaged 7.3 percent. If this does not count as recovery, what would you call the 4 percent averaged under Ronald Reagan?

Without GDP growth on their side, revisionists are quick to point out that unemployment did not drop back to normal until World War II. True. But as seen in Chart II, it started declining sharply in 1934, continuing down—with the exception of 1938—through 1942, the first full war year. The war merely sustained the trend started by the New Deal—to the tune of even more government spending.

Which brings us to the debt we are leaving to future generations.

For a household with annual income of $30,000, debt of $300,000 is crushing; for one that makes $10 million a year, it’s trivial. The same principle holds true for nations. It is, therefore, the ratio of Federal debt to GDP, not the dollar amount, that best measures debt burden. Chart III shows that burden rising to a peak of about 121 percent in 1946. What followed, after a short recession, was the most prosperous and powerful half century this nation has ever seen. New Deal and war spending built a capital base that fueled an economy robust enough, in turn, to push the debt burden back down.

Yes, there are bad uses for government money—like pouring it into moribund banks that hoard it rather than lend it. But history shows that big government spending, done right, has the power to turn recession into recovery. To pretend that the New Deal did not pull us out of the Depression, or that it is government spending that is killing our economy, or that turning down funding for a money-saving local project is fiscally responsible, is the kind of looking-glass twaddle that belongs at a tea-party all right—the one Alice attended with the Mad Hatter and the March Hare. It does not belong in responsible public discourse.

Also in this issue:

• A step backward

Dr. Punnybone

Work in Progress