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Smith
Faculty Opinion Article
The 30
Seconds Outlook
February 15, 2009
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“We have tried spending money. We are spending more than we have ever spent and
it does not work. . . . After eight years of this Administration we have just as
much unemployment as when we started. . . . And an enormous debt to boot.”
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---Henry Morgenthau,
Secretary of the Treasury to
President Roosevelt
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Keynesian economics was the theory of choice in the Great Depression and again
today in efforts to cure the financial crisis. The reasons underlying the Great
Depression included efforts to balance federal budgets as the economy fell, incentive
reducing income tax rates, Smoot-Hawley tariffs in 1930, and restrictive rather
than expansive Federal Reserve monetary policy. New Deal spending and “alphabet
soup” programs did not end the Depression. In fact, economic growth returned following
1933 (except for 1938).
Then, World War II began and the absolute necessity to produce huge amounts of
armaments and related products. Keynesians believe this expansion in spending provided
the stimulus that finally ended the Depression. However, Professor Barro found that
dollars of annual war expenditures during WWII actually produced less in dollars
of annual GDP growth—a “multiplier effect” less than one--as wartime spending took
resources from private investment. But, the draft did reduce unemployment.
Barro’s findings were anticipated in 1946 by economist Henry Hazlitt. He stated
that Keynesian New Deal programs actually prevented the type of job creation that
provides the “multiplier effect” (greater than one) of additional job creation.
Government cannot create wealth by taxing and borrowing to pay for public jobs.
Spending on public jobs does not provide innovation that creates private sector
jobs that, in turn, create additional jobs.
John A. Haslem
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