Economist Paul Krugman, Nobel Laureate and New York Times columnist has suggested a solution to this Great Recession. It is a controversial suggestion and one that flies in the face of today's political wisdom. It just might work.
A common fallacy among Americans is that Franklin Delano Roosevelt's economic policies extricated the United States from the Great Depression of the 1930s. Others, with more knowledge of those times, recognize that it was the onset of World War II and the U.S. preparation to wage that war, which truly pulled us out of that economic mire. But stripping that truth down to its bare essentials leaves us with one fact.
To pull this country out of the Great Depression, government spending had to be raised to 43.6% of GDP in 1943, 43.6% in 1944 and 41.9% in 1945. Only in 1946 did spending drop back to 24.8%. In his new book, "End This Depression Now," Krugman argues that the answer to our present economic dilemma, which he terms "a second depression," is to spend our way out of recession as we did during WWII.
As today's leading proponent of legendary, supply-side economist John Maynard Keynes, Paul Krugman believes his mentor had it right when he advised government that "the boom, not the slump, is the time for austerity." He argues that Keynes's definition of a depression, "a chronic condition of subnormal activity for a considerable period without any marked tendency towards recovery or toward collapse," applies
Of course Krugman's ideas fly directly in the face of all the austerity rhetoric that is emanating from both political parties during the run-up to November's presidential elections. Both parties seem to believe that the only way forward is to either raise taxes on some; (or cut taxes on others) and cut spending.
In fact, raising taxes and cutting spending is exactly what Herbert Hoover did back in the early 1930s, just as the economy was struggling to recover from the crash of 1929. In my opinion, Hoover's austerity policies, like those that many conservatives are advocating today, are what drove this country from a prolonged recession into its first Great Depression.
In essence, Krugman is suggesting we increase government spending back to the levels of WWII, if necessary. Today, government in total spends around 36% of GDP, if you include all goods, services, cash and transfer payments. That represents over one third of all spending in this country. Clearly Krugman's answer to solving this country's woes would make government bigger while creating the most powerful economic entity we've seen since the 1940s.
In the end, we may very well do just what Krugman suggests. I don't believe the majority of Americans will consciously vote for austerity. Raising their own taxes and cutting spending that they need-especially on Medicare and Social Security--would not be in our individual interests, regardless of how well it may be for the future posterity of our children and children's children.
The two biggest concerns American voters will have as they vote this year is staying employed or getting re-employed. Worries over the debt ceiling, the deficit and America's future concern us theoretically but those issues do not impact our pocket book today. If Americans are faced with a program of prolonged austerity after the November elections, I am convinced that they will vote the responsible party out of office as soon as possible.
Under that scenario, if borrowing, spending more and ultimately inflating our national debt away is easier (and safer) than austerity, then guess what most politicians will do? If you doubt that, ask yourself who was the more popular President-Hoover or FDR? That's my point.
Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or e-mail him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill's insights.