Plain Sense Economics

As David Leonhardt, of The New York Times, acknowledges, it is sometimes uncomfortable to draw comparisons with economic policies of the past. From his article on April 1.

Every so often, history serves up an analogy that’s uncomfortable, a little distracting and yet still very relevant.

In the summer of 1933, just as they will do on Thursday, heads of government and their finance ministers met in London to talk about a global economic crisis. They accomplished little and went home to battle the crisis in their own ways.

More than any other country, Germany — Nazi Germany — then set out on a serious stimulus program. The government built up the military, expanded the autobahn, put up stadiums for the 1936 Berlin Olympics and built monuments to the Nazi Party across Munich and Berlin. [...] Germany did escape the Great Depression faster than other countries. Corporate profits boomed, and unemployment sank (and not because of slave labor, which didn’t become widespread until later).

In addition to this analogy, which I recommend reading in more detail, there is an interesting graphic that helps understand the different approach the United States is taking to stimulate demand, versus its European partners.

Most industrialized countries have laws on the books that automatically increase government spending when the economy is slow. Spending on food stamps, unemployment insurance, and other benefits to poor people go up as more people qualify for assistance. And with a progressive tax rate system, a decline in income not only means lower income taxes, but a lower income tax rate. (The result taxes drop more rapidly than income.) We call these phenomena automatic stabilizers. The dark portions of the bars above show these automatic increases in government spending. The lighter colored portions show discretionary spending – which requires an act of the legislature. Great Britain and several European countries have stronger social safety nets, so their automatic spending is greater as a percentage of GDP. The United States is less. So, we are more likely to increase discretionary spending in hard economic times. The members of the European Union, as Leonhardt points out, have been willing to increase government spending, but not to the degree that we have in the U.S. There are more complicating factors – see Germany as an example – but this is an illuminating discussion.