Fiscal policy poll

What are the times in history — whether in the U.S. or elsewhere — when a large-scale application of expansionary fiscal policy has been effective in raising a country out of a recession or depression?

I’ve already discussed World War II and the United States, so whether or not you agree with me there is no need to mention that episode again.  I’m not (yet) looking for a debate rather I am conducting an opinion poll.  Over the next few weeks or months I hope to investigate some of the cases you mention and see what is the verdict of history.


Lend-lease payments from the US to Britain and Russia come to mind..... oh, you meant a country spending _itself_ out of a recession or depression?

That's as silly as a family having financial problems and deciding to spend more money on frivolous items in order to make everything better. In other words, it doesn't make any sense at all mathematically.

Its not that silly at all and that analogy doesn't hold water. Consumption is falling off a cliff and something needs to replace it. Government spending may be able to work as a bridge to whatever that more sustainable thing is. Mathematically, it can make sense. What wouldn't make sense is for the government to suck even more air out of the tires of the economy by massively reigning in spending and/or raising taxes.

Not saying its a full proof plan and Tyler is right to be curious about historical examples. There may be lessons to learn.

Recovery from the recession of 1958 was in the U.S. accompanied by an expansionary fiscal policy. Correlation does not imply causation, but still...

I'm not sure that you are going about this in quite the right way. It seems to me that you are investigating whether increasing government spending is generally good for the economy. To get at this you are looking at crises and evaluating the response to them. But that may not always be the way to look at expansionary fiscal policy, particularly because you could argue that the automatic fiscal policy built into the system has headed off several recessions that didn't ever become recessions, due to Keynesian fine-tuning.

Rather, the way to evaluate expansionary fiscal policy is to look at spikes in government spending as a %age of GDP. I think that the cases you want are WWI, WWII, 1951-ish, 1967-ish, 1979-ish, and 1989-ish. Obviously, the wars are the biggest spikes, but there were substantial spikes in the other four years, three of which were in recessionary times.

It's probably contradictory to the thesis "expansionary fiscal policy has been effective in raising a country out of a recession or depression?", but Ireland's experiences in the 1970s and 1980s might be worth looking at.

You have to answer the question of why consumption is "falling off a cliff" before specifying a remedy.

My answer to that question is that debt loads have outstripped productive capacity to finance them.

It wasn't exactly a depression, but this example might still work: The USSR's rapid economic development during the '50s and early '60s after huge amounts of government orders for industrial goods and infrastructure spending

I really don't see the difference between Wall-Street making lots of risky and misguided investments versus Congress making lots of risky and misguided investments. Where is the difference? If indeed Congress has a better shot at reestablishing confidence then it would be better if it just "pretended" to spend, spend, spend....

What about the Civil War.
Here is the data on real
percapita gdp growth

1860 -1.3
1861 -0.4
1862 10.1
1863 5.4
1864 -1.1
1865 0.5
1866 -6.9
1867 -0.8
1868 1.4
1869 0.1

The other common example is Hitler's military spending in
Germany in the 1930s. Isn't Hitler commonly refereed to
as the first successful Keynesian? You also need to include
his nonmilitary spending like on the autobahn.

People seem to forget that it was "stimulus" that got us in this mess. And now its the solution also?

Restore an honest dollar, w/ its value tied to something concrete. That will require printing money to stop the deflation but as long as we don't re-inflate, this action will begin to stabilize things.

People seem to forget that it was "stimulus" that got us in this mess.

Are you sure? It seems to me we have lots of candidates. China probably had a big part in getting us into this mess.

"...any fiscal stimulus will result in the U.S. borrowing money from the Chinese to employ illegal aliens who will them remit money to their homelands where it will be used to purchase consumer goods manufactured in China."

Plus middle-class and lower-class US citizens who get the money spend it in Walmart or Target and send it to china.

I'm not saying this is completely true, but to the extent that it's true we'd do better to get demand to collapse. We can have a real recovery when the illegal aliens all go home looking for better opportunities and masses of americans are happy to take low-paying jobs producing for export.

Did you know that a $10 sweater can save you more than $100 in heating bills in one year? Buy the sweater. If you don't have it now you might find yourself saving up for it later. And that sweater is a lot more important when you don't actually have heat.


I would argue that cold-turkey is the only cure. The financial crises of the dollar have been gaining in frequency and amplitude ever since the last connection to stable money and interest rates was broken. Monetary inflation always ends eventually in the collapse of it's financial order, but today, that potential collapse is global. Stop now, or be stopped later by economic realities. I would choose to meet this challenge now rather than to pass it on a later people (but I don't think later is far off anyway).

Maybe there is some evidence in the average depth/length of recessions between countries that have high fraction of gdp per capita expenditures and/or transfer payment and those where the government spends only a small fraction of the GDP. That is, does the private sector recover faster and suffer less from recessions when the Government is a large or small part of the economic activity in the country.

Mark Thoma commented in his blog that we are (potentially) seeing a real live refutation of Friedman's monetarist thesis. It seems that the governments of the world are set to put a real test to Keynesian economics as well.

What shall we do, if they both are refuted? Where do you look for a theory framework to explain and to discuss how things should be done, if such thing did happen?


[" What are the times in history... when a large-scale application of expansionary fiscal policy has been effective in raising a country out of a recession or depression? "]

....Ahh, a Unicorn hunt for Thanksgiving weekend. What fun.

Prevailing Keynesian groupthink assumes government spending 'creates' additional aggregate consumption 'demand' ... thus (?), increasing national 'production' from labor, capital & other resources that otherwise were remaining idle and useless by ignorant/foolish private owners of those resources.
The economy not only gets lots of additional production, but even more output via a mystical "multiplier effect."

True Keynesians claim that even government spending to hire people to dig holes in the ground
and fill them up again -- has beneficial effects... though the diggers create nothing of consumption value, they trigger that multiplier-effect, spending their newly acquired digger-filler income for consumption goods newly produced by others. Fantasy.

Consumption cannot precede production. And the time lags in a complex national economy are very significant. Congressmen & their hired bureaucrats ain't any smarter nor motivated than the owners of the private resources that Congress redirects thru taxes, inflation, and borrowing.

I would argue that cold-turkey is the only cure.

There's a lot to be said for finding the people who stole the money and taking it away from them.

That might not do much to help the economy, but we'd feel a lot better in the day time and sleep a lot better at night.

The period 1819 to 1840 is a good period to study. The budget of the US was small and economic well being was determined by monetary policy. The panic of 1819 caused economic collapse due to an excessive amount of paper money issued in relation to specie held by state chartered banks. Andrew Jackson fought for policies strengthening the requirement for hard money for all consumer transactions and small commerce and requiring banks to hold specie to support the issuance of paper notes.

The recovery took years. When people accumulate worthless assets, they have to write off those assets against capital and savings.

The review of this period holds valuable lessons for current problems. The idea that printing money will solve our problems is ludicrous. People must de-lever and accumulate savings again.

Also, government spending does not necessarily solve anything. Building a road to nowhere produces nothing. Building a road to a factory or a service producing company provides real growth. Otherwise we could just have people dig holes and fill them up. Buying fighter plans now can mean you won't have to buy them later, saving money in the future. But do we really need them?

Putting more money into government education that produces a mediocre product and lines the pockets of bureaucrats is just like building a nonproductive road and impoverishes the taxpayer. Is there no payoff in the end?

These are questions policy makers must ask.

Of course, people in Washington must appear to be doing something. But they are the same people who caused the problems. We need a new Congress.

I'm having an easier time thinking of periods of considerable government spending than of fiscal stimulus, but I might look at:

(1) Song China under Wang An Shi's economic and government reforms (he created a government granary and banking system that competed with the private sector). Under his tenure as first minister, the government became very wealthy, but this might also be driven by deregulation of land use and ownership that spurred the settlement and cultivation of southern China after the Tang.

(2) Meiji Japan due to the rapid expansion of Japan's railroads and industrial capacity. There's conflation between the effect of heavy capital investments with high marginal products and any sort of short-term stimulus, but it might be worth looking in to.

(3) Art patronage in Medici Florence, Rome, or Renaissance Venice. This is a large investment in a good that isn't used to manufacture anything else (except maybe human capital?).

(4) Cathedral construction anywhere in Europe? Perhaps the time-frame for this is too long?

Sweden's recovery from the great depression. And it may be even more applicable as they were also a debtor nation at the time.

And I'm not sure conflating a collapsing financial sector and the real economy into one problem with one solution is healthy or informative.

Very grateful to a bunch of much better skills. I look forward to reading more of the future of the subject. Keep the good work.thanks.

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