Brad DeLong, responding to my post on The uncertainty of stimulus, offers A Guide for the Perplexed Justin Fox on Fiscal Policy. His basic point is that World War II proved beyond a reasonable doubt that fiscal stimulus can work:
Demand expansion–deliberate attempts by governments to put the unemployed back to work by deficit spending and loose-money low interest rate policies–was successful in the 1930s and 1940s. It put the unemployed back to work. It did not contain within itself the seeds of a renewed Great Depression. It did not explode into hyperinflation. The coming of “stablization policy” enlarged the policy steps that could be undertaken without forcing a definitive break with the market-capitalist order, and without forcing a choice between Hitler’s way and Stalin’s.
I agree with all that. And I think the people who argue that FDR somehow prolonged the Great Depression are twisting history. Actually, they’re ignoring history. The depression ended in 1933, FDR’s first year in office. The subsequent recovery was maddeningly slow in many ways, there was a deep recession in 1938, and unemployment stayed high. I’m willing to buy that dirigiste New Deal policies played a role in slowing the recovery, but it’s awfully hard to make the case that deficit spending was to blame. What’s more, the U.S. economy did go from shrinking (which it had been doing since 1929) to growing again in 1933, and it kept growing for most of the rest of the decade before positively exploding during the war.
I guess what continues to perplex me at least a little is how lacking in the customary rigor of modern academic economics the arguments for stimulus are. It’s basically just, We ran gigantic budget deficits during World War II and the economy got better. That’s the kind of argument I would make, not the kind of argument I’d expect from the chair of the Political Economy of Industrial Societies major at the University of California Berkeley. It’s just all so seat-of-the-pants. But it’s better to be approximately right than precisely wrong, I guess.