There has been a lot of talk lately about a proposed massive stimulus package by the Obama Administration and comparisons to FDR's New Deal of the 1930s. The idea is that, like the New Deal, a massive increase in government deficit can make up for the lack of consumer demand and private investment and keep the economy from falling too deeply into recession. Then, when the economy eventually gets back to growth, the deficit can be cut, eventually leading to surpluses that will pay down the national debt.
Curiously, though, few economists believe the New Deal actually ended the Great Depression. Some do believe the Depression would have been worse without it, but very few believe that it brought the prosperity of the post-war period. Most economists, including liberal economists like Paul Krugman, credit World War II for bringing back the good times.
The debate then centers on not if the New Deal did or didn't end the Great Depression, but why it didn't. There seem to be two basic schools of thought:
- Conservative/Libertarian view: New Deal worsened the Depression by scaring away capitalists from investing and creating long-term job opportunities
- Liberal/Keynsian view: Roosevelt didn't spend enough soon enough, and he mistakenly tried to balance the budget in 1938, sending the country back into Depression.
Based on which theory you believe, the Obama Administration should either take a hands off approach and let the country go through a painful but necessary restructuring, with government aid being enough only to make sure no one goes homeless or starves, or he should run massive deficits, the likes which have not been seen, cutting taxes while increasing spending, in hopes that private investment will eventually kick in and create jobs.
In the current debate, the Conservative/Libertarian view has been basically shut out and discredited, with the real debate being around the size and scope of stimulus. This is understandable: after all, Ben Bernanke and Henry Paulson, two 'conservative' members of the Bush Administration, have put Roosevelt to shame with the size of their bailouts of wealthy banking institutions.
And I have to admit, I personally am hoping for a large stimulus package in the $700 billion range. At the same time, I don't think we should completely discount the warnings of the Libertarians. We should definitely keep the debate alive if for no other reason, to keep our minds open and active. As was writtenby Bob Murphy on Lew Rockwell's site today:
"These "countercyclical" measures try to prevent the recession from unfolding, by stamping down on unemployment and propping up insolvent businesses. Yet these actions simply prolong the agony, and ensure that even more resources are squandered while the economy tries to adjust to a sustainable configuration."
So what do you think? Will stimulus bring our economy back to prosperity, or just prolong the agony?