Budget Deficits and Stimulus

It’s an article of faith that running budget deficits during the New Deal helped end the Great Depression. This myth has been demolished countless times, but it hasn’t penetrated to the pundits and pop economists who host cable news-talk shows. In fact, FDR did not run extraordinarily large budget deficits, and J.M. Keynes actually criticized FDR for this. For details see this New York Times article by Price V. Fishback of the University of Arizona and the National Bureau of Economic Research. Fishback writes, “Once we take into account the taxation during the 1930’s, we can see that the budget deficits of the 1930’s and one balanced budget were tiny relative to the size of the problem [reversing the fall in GNP since 1929].

This point was also made by Jim Powell in FDR’s Folly: “Changes in federal budget deficits didn’t correspond with changes in gross domestic product, and in any case the federal budget deficit at its peak (1936) was only 4.4 percent of the gross domestic product, much too small for a likely cure.” (Emphasis added.)

P.S.: Of course, this does not mean that FDR should have run deficits to end the depression. It woudn’t have worked because government borrowing doesn’t add wealth to an economy; it just moves it around. (See Bastiat.) And inflation steals purchasing power and distorts the structure of production. Both measures put politicians rather than consumers in the driver’s seat.

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