A Teaching Opportunity on Government Spending

With the passage of the massive $787 billion "stimulus bill" and the proposed plan to spend an additional $75 billion to bail out homeowners who spent beyond their means, President Obama and the Democrats in Congress have made clear they believe spending extraordinary sums of money and putting the country further into debt will bring the country out of recession. People that believe that government spending is the most effective way to stimulate the economy are labeled Keynesians, after the British economist who articulated the theory. "Keynesian economics," as it is called, has many adherents, especially in the Democrat party, but its success as an economic policy has been rocky at best.

In the 1930s Franklin Delano Roosevelt embarked on a massive spending spree designed to wipe out unemployment in America. Reacting to the stock market crash in 1929, Roosevelt poured billions into the economy under his "New Deal." Federal spending had more than doubled by the time Roosevelt was re-elected in 1936, but economic growth was so small that the size of the economy in 1936 was smaller than the size of the economy in 1929. The New Deal spending programs were given lots of publicity but achieved few results. Five years into the New Deal, in the winter of 1937-1938, the unemployment rate in America was 20%. The stock market didn't get back to its 1929 level until the 1950s.

In the 1990s Japan implemented its own version of the New Deal. Beginning in 1991, Japan embarked on a massive nationwide spending program, focused on infrastruc­ture investment. Hundreds of billions of dollars were spend on airports, roads, and bridges. The infrastructure focus was similar to focus on infrastructure of the recent stimulus passed by the Democrat Congress and signed by President Obama. Yet the billions in spending by Japan did little. In fact, many Japanese consider the 1990s to be a lost decade. During that decade, the unemployment rate more than doubled and surpassed the U.S. rate. The Nikkei stayed down and the country's standard of living failed to keep pace with the rest of the world's. But even worse, today Japan has the highest debt burden of any industrialized economy.

In addition, today, the state of California is seeing the culmination of 15 years of massive government spending. The state is constantly in a fiscal crisis. The state, under both Democrat and Republican governors, has seen government spending skyrocket. Yet the state has little to show for all its spending. It has one of the highest unemployment rates in the country and has had to issue billions in new debt.

Last summer saw the failure of the "stimulus" passed by the Democrat Congress and signed by President Bush. Both that stimulus and the current stimulus tried to do what the Keynesians think a government should do during an economic downturn: attempt to jump-start the economy by increasing government spending and issuing more government debt. Obviously the stimulus last summer failed, just like the New Deal failed in the 1930s, the Japanese infrastructure spending failed, and the California spending spree of recent years failed. Such history indicates that recent $787 billion stimulus will fail as well. The lesson from all of this is simple. The government does a poor job of bringing a country out of a recession. Increasing debt in order to spend money does not create jobs in the long-term because the government, unlike the private sector, does not know how to create wealth. While the tax cuts and deregulation that allow the private sector to succeed are opposed on ideological grounds by most politicians, they are what is best for a capitalist country. Until the voters of America learn this lesson and elect those who will allow the private sector to flourish, American economic power will continue to wane.

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~ The Conservative Guy