Sunday, December 2, 2012

The 1930's Fiscal Cliff

If I recall, the recession in 1937 was caused by Congress addressing their version of the fiscal cliff and trying to reign in government spending. Keynesians like Krugman point to that as evidence that we can't reign in spending right now. What he doesn't go on to say is that the US financial problems were not solved until WW2 purged the world of excess people and productive capacity. The world apparently has never figured out another way to solve this kind of problem.
I certainly agree that the Second World War gave cause for sustained large government spending (while demolishing economies to rebuild), but I must say this is the first time I have heard about the 1930s fiscal cliff. So let's take a look at the data.  Let's start with depression era government spending and deficit.
Federal outlays (blue) and deficit (red).  A large contraction in government spending and the deficit from 1936 to 1937 leads right into the recession.
Let's now look at unemployment with the added supplement of a help-wanted ads in newspapers index.
Unemployment (blue and green) and help wanted ads (red).
Unemployment was certainly affected by the recession, and I also see an earlier change in unemployment in 1934 when government spending and the deficit contracted.  As for the government spending that ended the depression it was also marked by a recession in 1945 in which factory workers (mainly female) were laid-off once the war ended.  And that wasn't exactly the end.
Unprecedented government spending (blue) and deficits (red).
To put the post-WWII lay-off into perspective, here is 74 years of employment change per month, though it is missing most depression era data.
Courtesy of the BLS (Bureau of Labor Statistics) and subsequently conditionally formatted (heat mapped) by month and annual change.

1 comment:

  1. The postwar was a curious period. We'd had a LOT of managerial and technological advancement, 1940-45, and millions of Americans got pretty good OJT in many areas (albeit maybe a million didn't benefit from the war at all due to being killed, maimed, or mentally traumatized).

    And a LOT of deferred demand, due to wartime rationing and the preceding 10 years of suckiness.

    And a LOT of "savings", due to said rationing and other wartime price controls.

    Population was 140M, less than half of now, showing we still had room to grow, compared to now at least.