Commentary Magazine

Shock Therapy

To the Editor:

James K. Glassman argues that the stimulative effect of fiscal policy during the Great Depression was “non-existent,” and that there is a consensus among economists that fiscal stimulus is useless at best in combating a recession [“Stimulus: A History of Folly,” March]. Both notions are contradicted by the facts.

Mr. Glassman writes that the unemployment rate reached 25 percent in 1933 despite FDR’s “aggressive spending.” In fact, FDR inherited this rate when he first took office. But his expansionary fiscal policy went on to produce an average rate of 9.5 percent annual growth in GDP between 1933 and 1937, by far the largest four-year rate in modern U.S. history outside of World War II. This is even more impressive when one considers that the fiscal stimulus was actually quite modest; the Depression-era deficit peaked at 4 percent of GDP in 1936. While unemployment in 1937 was still considerably high at 14 percent, this simply shows the depth of the economic hole that the U.S. was in.

Equally instructive is the effect of the Roosevelt administration’s return to fiscal orthodoxy in 1937, when the government ran only a small deficit. The economy predictably fell into a deep recession, providing a clear view of what economic life in the ’30s would have been like in the absence of any significant stimulus.

As for any consensus among economists, it is in fact the opposite of what Mr. Glassman states. A 2003 survey of leading economists by Dan Fuller and Doris Geide-Stevenson found that 84 percent agreed or partially agreed with the statement that “fiscal policy has a significant stimulative impact on a less than fully employed economy.”

Paul J. Pieper

University of Illinois

Chicago, Illinois


To the Editor:

Although he accepts that government has an important role as the lender of last resort during a widespread credit freeze, James K. Glassman resists following most contemporary economists in recognizing that the federal government can and must also be the investor of last resort. To arrive at his position, Mr. Glassman points out that government spending increased from 3 to 10 percent of GDP between 1929 and 1939 but did little to resuscitate the economy or prevent unemployment from reaching 25 percent in 1933. But one could just as well argue that when little was done between 1929 and 1932 to save the banking system and preserve jobs, public confidence was destroyed and the Great Depression was cemented.

The reason the Bush and Obama administrations have undertaken stimulus programs is that they can be a significant means of reducing the depth of a downward spiral. “The key,” as Keynes said, “is speed,” especially in a complex economy like ours. When Mr. Glassman’s article appeared, unemployment was at 7 percent; it is now over 8 percent. We can all agree that political rhetoric about “jumpstarting” the economy is overblown, but the purpose of the stimulus and the actions (which Mr. Glassman supports) to shore up the banking and insurance sectors is more modest—to allow the regenerative process to begin sooner and from a higher economic base than would otherwise be the case.

Mr. Glassman abjures speed and exhorts us to undertake a deliberative process in determining which projects the public should invest in. But his conclusion appears to jump on the stimulus bandwagon in suggesting that because interest rates are low, building highways would be a good thing to do. Interest rates were low last year and the year before as well. Did he support deficit spending to build roads then? Does he think that the Obama stimulus package means to throw money into an abyss? Or is it rather intended to create the public works and employment that Mr. Glassman himself would like to see?

Martin T. Goldblum
Beverly Hills, California



To the Editor:

The problem with government stimulus is what happens when it comes to an end. I suspect that the main reason the U.S. enjoyed such remarkable growth in the postwar decades was less the stimulative effect of the New Deal or World War II than the fact that much of the world’s industrial base had been destroyed by the war, leaving the U.S. as the last man standing. Capital flowed to our shores from around the world for the purchase of our manufactured goods.

Today, this role has been assumed by export-based countries like China. We, on the other hand, have chosen a precarious path to expansion out of downturns. The 1970’s recession was ended when we found an easier way than production to bring in capital—creating IOUs in the form of securitized debt. Although this course has arguably been responsible for our present troubles, the Obama administration seems to want to put it in hyperdrive with its enormous borrow-and-spend agenda.

Pat Riley
Mound, Maine


James K. Glassman writes:

Very well: I should not hold FDR responsibile for the unemployment rate in 1933, his first year in office. So from what year exactly may the reckoning on his policies begin? Can we agree on 1935, when the unemployment rate was 20 percent? Or 1938, when it was 19 percent? The figures cited by Paul J. Pieper for GDP growth in the 1930s sound large, but that is because they came off a terribly low base. The essential fact is that it was not until 1940 that nominal GDP in the U.S. returned to its 1929 level.

Contrary to Mr. Pieper’s assertion, nowhere did I claim that fiscal policy did not have any power to stimulate. What I wrote was this: “The consensus until recently among economists was that attempts at stimulus through emergency fiscal policies—as opposed to monetary policies and the automatic effects of increases in unemployment assistance and decreases in tax payments—were useless at best.”

I would gladly join the economists in Mr. Pieper’s poll in affirming that “fiscal policy has a stimulative impact on a less than fully employed economy.” There is little doubt that “automatic stabilizers”—unemployment insurance and lower taxes—have a beneficial effect. The issue is whether discretionary or deliberate stimulus—say, the federal government buying a new icebreaker for the Coast Guard, paying for a Little League parking lot in Puerto Rico, or giving out a one-time tax rebate—constitutes sound practice. Here, the view of the accounting profession has clearly been skeptical (as the citations in my article suggest), and I am not persuaded that the empirical data justify recent attempts to argue the contrary.

Martin T. Goldblum sees an apparent contradiction in my argument. Maybe I did not make myself clear. I believe that government has a role to play in American life. Building roads and providing for the common defense are examples of its legitimate functions. At a time when interest rates are low, government, like any prudent manager, may reasonably decide to borrow to pay for worthwhile projects. What I question is the idea at the root of discretionary stimulus—that spending and rebating and all the consequences thereof are in and of themselves worthwhile.

Pat Riley argues that the chief problem with the U.S. economy is that we do not export enough. It would certainly help to do more, but as of the most recent report, the U.S. ranked third gloablly in exports, just behind Germany and China and at nearly twice the level of fourth-place Japan.

Still, it is certainly accurate to say that Americans have been borrowing and spending too much and investing too little. The grandiose schemes in President Obama’s budget for government spending on health care, energy, and education will not mitigate this problem. To the contrary.

What we really need are policies that encourage Americans to invest—ending, for example, the corporate and capital-gains taxes. Government can indeed help the economy in the long run, by unleashing the forces of American ingenuity.

About the Author

Pin It on Pinterest

Welcome to Commentary Magazine.
We hope you enjoy your visit.
As a visitor to our site, you are allowed 8 free articles this month.
This is your first of 8 free articles.

If you are already a digital subscriber, log in here »

Print subscriber? For free access to the website and iPad, register here »

To subscribe, click here to see our subscription offers »

Please note this is an advertisement skip this ad
Clearly, you have a passion for ideas.
Subscribe today for unlimited digital access to the publication that shapes the minds of the people who shape our world.
Get for just
Welcome to Commentary Magazine.
We hope you enjoy your visit.
As a visitor, you are allowed 8 free articles.
This is your first article.
You have read of 8 free articles this month.
for full access to
Digital subscriber?
Print subscriber? Get free access »
Call to subscribe: 1-800-829-6270
You can also subscribe
on your computer at
Don't have a log in?
Enter you email address and password below. A confirmation email will be sent to the email address that you provide.