The Relationship Between Federal Spending and Recessions

I recently received a Wall Street Journal article (“Big Government, Big Recession,” August 21, 2009) in the mail from Big Daddy that makes the claim that recessions are made worse by Big Government spending (which it claims started in the 1930s with Roosevelt’s administration). This is an interesting claim for several reasons. The most obvious reason is that the Great Depression began before Roosevelt took office (indeed, the greatest leader we’ve had this century probably would not have been voted in without a drastic time of national suffering). We have not had a recession anywhere near as catastrophic as the Depression since it ended in 1941. Big Government spending on infrastructure and making sure people’s basic needs were met brought us out of that Depression. Some people argue with that by saying that the War ended the Depression, as it did in several other countries, but the U.S. was out of the woods before it entered the fighting.

Another reason this claim is debatable: recessions have always been intricately tied to government spending and regulation actions, but not in the way most conservatives claim. Here are some reasons that recessions have begun and ended since 1900:

~The recession of 1913-1914, during the Woodrow Wilson administration, began as real incomes declined in a very unregulated market and ended around the time of the institution of the Federal Reserve System.

~The recession of 1921 set off the greatest deflationary period in the country’s history at just over 36%. This is largely recognized as a result of the conservative fiscal policies of the Harding administration.

~The recession of 1926-27, interestingly, is thought to have occurred because Henry Ford shut down is factories to transition from production of the Model T, the machine that began the period of government road, and thus infrastructure spending, expansion.

~The Great Depression began as a result of lax fiscal policies of the expansion period of the Roaring 20’s and widespread environmental destruction of farm lands (the Dust Bowl), both reflections of the federal policies of the Hoover years. It is important to note that economists don’t think the U.S. was actually in any kind of recession between the years of 1933 and 1937, a reflection of Roosevelt’s policies.

~The recession of 1937 was caused by crumbling infrastructure and a large population who were falling through the cracks in the system. The New Deal was instituted, putting vast quantity of people to work, rebuilding a large chunk of the country, and providing basic services for millions of people who needed them. The economy continued to grow following this period of vastly increased government spending until Roosevelt died and many parts of the New Deal were repealed.

~The recession of 1945 was caused by a great decline in federal spending after the War.

~The recession of 1953 is thought to have been caused by a change in Federal Reserve policy.

~The recession of 1960-61 ended when President Kennedy increased federal spending to improve GNP and unemployment.

~The 1973-74 recession coincided with the Oil Embargo. If U.S. policies did not entangle the country and make it completely dependent on oil to run almost every sector of the economy, this recession and many more to come would never have occurred to the extent that they did. The same issue caused a recession in the early 1980s after the Iranian Revolution.

~And, of course, our current recession has been attributed to lax fiscal policies and financial sector regulation, in which many abuses took place, as well as a vastly underfunded infrastructure.

If there’s any lesson we can learn from this, it is that Small Government led to many of these recessions, including the Depression and our current recession, and Big Government spending has gotten us out of them. The article makes a good point that we cannot say with much confidence that government spending has gotten us out of the current recession because not much of the increase has actually been spent yet, but it is clear that we got into the mess during a time of less government spending and regulation, and continuing that trend to get us out of it would not be reasonable.

The chart in the following link shows Federal spending from 1920 to 1941.

http://www.usgovernmentspending.com/downchart_gs.php?year=1920_1941&view=1&expand=&units=b&fy=fy10&chart=F0-total&bar=1&stack=1&size=m&title=Total%20Spending&state=US&color=c&local=Total%20Spending

This graph shows clearly what I have been trying to explain: once the spending increased at the end of the 30s and beginning of the 40s, the Depression ended, just as Keynes, the economist discredited by the article, said it would. It’s easy to see that the recessions described above were ended with more spending, not less.

The argument against this way of thinking is that we are “mortgaging our future” by spending so much. I understand this and would tend to agree in general, except for the fact that our economic, land use, transportation, and foreign policies of the past 60 years have already mortgaged enough of our future that we need to spend wildly just to keep up with the system we have set up. The vast majority of the almost $800 billion stimulus is to be spent on infrastructure, the backbone of our economy, and yet the investment will come up about $2 trillion short. Why? Because we have built our economy on the backs of roads, oil, and automobiles, and we have not cared to pay the full costs of such an inefficient system. As of now, our roads and bridges are in desperate need of repair and updating, but we have defrayed the costs for so long that our infrastructure deficit, now estimated at between $2 and $3 trillion, is more than we’re willing to pay. This tells me that we need to change our entire system if we are worried about bankrupting ourselves over a mere $800 billion when we really need to spend 3 or 4 times that amount. If there is anything that I fault the stimulus plan for, it is that it puts the vast majority of its money toward improving the road and bridge infrastructure that will just cause of bigger problem down the road when the infrastructure deficit will be even larger.

The final interesting portion of this article claims that increased government spending over the past year has decreased our GDP over the past 12 months. But the article cannot accurately claim that the new administration’s spending policies are to blame for our yearly decrease in GDP for two reasons: The largest decreases in GDP over the past year occurred before President Obama took office and the stimulus was passed, and, as the article claims elsewhere, only about 1/8th of the stimulus has actually been spent to this point. According to the Bureau of Economic Analysis, the economy shrunk 1 percent between both the 1st and second quarters and the second and third quarters of this year, while it shrunk 6.4% between the 4th quarter of last year and the 1st quarter of this year. What we have spent so far has drastically slowed the growth in unemployment, and thus slowed the decreases in GDP.

I have no problem with conservatives taking issue with increased spending (except that there is never any complaint among them when it comes to excess war spending and oil and automobile subsidy increases). What I do take issue with is when these opinion articles are presented with misleading numbers and information to support their position. I’m not the biggest fan of government spending excesses because I think the money often goes to the wrong areas, but if you are a fan of the way our economy is currently structured, as I’m sure most conservatives are (though I am not especially), then history shows that these periods of drastic government spending increases are necessary for supporting such a flawed system.