• Putting Government on a Diet: 1945-1950

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    The recent
    mid-term elections were a citizen referendum for reductions in the
    size and scope of the federal government. But can federal spending
    and the budget deficit actually be reduced substantially without
    sending gross domestic product (GDP) into a tailspin and increasing
    unemployment to extraordinary levels?

    Liberals and
    economists with Keynesian sympathies have always argued that substantial
    reductions in federal spending when economic activity is weak (like
    now) would be disastrous. Really? Let’s see what actually happened
    the last time the Congress actually reduced government spending
    in any meaningful way.

    The period
    1945-1950 is (almost) a scientific test of the Keynesian hypothesis.
    Despite repeated warnings by most mainstream economists that cutting
    government spending at the conclusion of WW 2 would bring back the
    Great Depression, the Congress dramatically lowered government spending
    between 1945 and 1950. Federal government expenditures fell from
    $106.9 billion in 1945 to $44.8 billion in 1950. Defense spending
    took the biggest hit falling from $93.7 billion in 1945 to just
    24.2 billion in 1950. In just 5 years, government spending (as a
    % of GDP) fell from 45% in 1945 to just 15% in 1950 and the annual
    federal budget deficit fell from $53.7 billion in 1945 to only $1.3
    billion in 1950.

    But what happened
    to overall economic output and unemployment? Despite the massive
    economic transitions from wartime to domestic production, GDP actually
    increased (confounding all of the Keynesians) from $223 billion
    in 1945 to $244.2 billion in 1947 and then to $293.8 billion by
    1950. And despite millions of returning servicemen and women, the
    unemployment rate averaged a very low 4.5% between 1945 and 1950.
    Economic disaster? Hardly.

    History, of
    course, never repeats itself exactly and 2010 is not 1945. But one
    thing is clear: Cutting back federal government spending and annual
    deficits in the immediate post-World War 2 period did not hamper
    the economy; far from it. Indeed, as government spending and wartime
    price controls receded, the private market economy expanded strongly
    and unemployment stayed reasonably low. The Keynesians, dead wrong
    in theory, were also dead wrong in practice as well.

    4, 2010

    Armentano [send him mail]
    is Professor Emeritus at the University of Hartford (CT) and the
    author of Antitrust
    and Monopoly

    (Independent Institute, 1998) and Antitrust:
    The Case for Repeal

    (Mises Institute, 1999). He has published articles, op/eds and reviews
    in The New
    York Times, Wall Street Journal, London Financial Times, Financial
    Post, Hartford Courant, National Review, Antitrust Bulletin
    and many other journals.

    Best of Dom Armentano

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