Stimulus and Deficit Reduction PDF Print E-mail
Economics
Written by Dada Vedaprajinananda   

You can’t have your cake and eat it too

Though the governments world over are trying to tide over the economic crisis, the effect is yet to be seen. Right now, we need to take lessons from the Great Depression of the 1930s.


The US economy is currently in the worst crisis since the depression of the 1930s.  Both politicians and economists have called for government intervention to stave off total disaster. But, the prescription of the economists: government spending to raise total consumption and Gross National Product does not sit well with the constant call of politicians for “fiscal restraint.”

By the time the Great Depression had engulfed the world in the 1930s, economists such as John Maynard Keynes were aware that a deflated economy could be improved by an injection of government spending to supplement the existing weak consumer spending. This was the economic logic behind Franklin Roosevelt’s New Deal. 

Although the New Deal raised a lot of hopes, a good look at the actual economic statistics of the era reveal that the Depression persisted until World War II and it was only the massive spending on the war effort that finally took the US out of the depression and set the stage for the post-war boom.

Are there any lessons to be learned from this? I think so.  Roosevelt’s programme failed because the stimulus of government spending was not sufficient. At one point during the 1930s, he even tried to balance the budget. If you are going to stimulate the economy by spending, you can’t undercut this effort by raising taxes and weakening demand. 

Roosevelt had to heed the calls for “fiscal restraint” because he was a politician, and Obama, who is also a political person, seems to be following the same route. If Obama succumbs to these same pressures and tries to balance his budget or reduce deficits then there will be no real stimulus and the economy will remain stagnant. 

Obama is promising to raise the money to reduce deficits by taxing the very wealthy. That, however, is easier said than done.  The super-wealthy are super-efficient at avoiding taxes.

As much as I hate to say it, one leader who seemed to get it right during the 1930s was Adolf Hitler.  His dictatorial control of an economy that was channelled into a massive public works programme and rearmament effort seemed to get Germany back on its feet, although historians and economists still debate whether the economic revival was real, just a propaganda show or a resurgence built on slave labour.

We certainly don’t need another Hitler to fix the economy, but the chaos of a system where political leaders try to score points with old slogans rather than with logic will not help us fix the Humpty Dumpty that modern capitalism has become. Hopefully, the current crisis will force everyone to think in a deeper way and will help to spur a movement towards an economic system that is truly just and democratic.