EXCERPTS:
"History teaches that temporary surges in government spending give people money that, for the most part, they save or use to reduce debt, rather than setting in motion an upward spiral of income, expenditure, real output, and employment, as envisioned by John Maynard Keynes, the British economist whose theory spurred massive government interventions in the economy from the 1930s onward.
History also teaches that government “emergency” spending tends to fatten the coffers of the politically connected. Thus, much of the so-called stimulus spending has served only to increase the pay and benefits of government employees, transferring income from the private sector to the government sector, and reward groups, such as the United Auto Workers and low-income home buyers, for their support of the Obama administration.
One aspect of the current crisis that has come as anything but a surprise to students of history is that the politicians (in the words of President Obama’s chief of staff, Rahm Emanuel) have not allowed this crisis “to go to waste.” The past two years have witnessed one power-grab or institutional takeover after another, including AIG, Fannie Mae, Freddie Mac, General Motors, and Chrysler.
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"Since the early 20th century, periods of national emergency – real and imagined – have triggered sharp increases in government power, scope, and cost.
The first five episodes were World War I, the Great Depression, World War II, the upheavals associated with the civil-rights revolution and the Vietnam War, and the post-9/11 events associated with the war on terror and US engagements in Afghanistan and Iraq.
We are now in another such critical period, springing from the housing bust, financial debacle, and recession. In their embrace of Keynesianism, many economists have concluded that even though the New Deal’s hodgepodge of policies never brought about full recovery, World War II did, as the economy expanded to produce munitions and enlarge the armed forces. Huge, deficit-financed government spending, they argue, finally wiped out the lingering mass unemployment.
The truth, however, is really quite simple. In 1940, after eight years of New Deal pump priming, the unemployment rate remained about 10 percent even if, unlike the Bureau of Labor Statistics, we count people enrolled in federal emergency work-relief programs as employed. The gigantic buildup of the armed forces, primarily by conscription, then pulled the equivalent of 22 percent of the prewar labor force into the military. Voilà, unemployment disappeared, as it was bound to do regardless of any wartime Keynesian fiscal policies.
