It Can Happen Here

Government really can be cut: case studies from Canada, New Zealand, and the United States

In an era of frightful budgets and frightened politicians, cutting government may seem like a flatly impossible task. But a look around the world—and at our own recent economic history—turns up a few inspirational examples of knife work that not only trimmed back budget deficits but created the conditions for unprecedented prosperity.

New Zealand, Canada, and the postwar United States all managed to slash the state on a grand scale. Governments shed responsibility for forests, railways, radio spectrum, and more while relaxing labor markets, slimming the welfare state, and ending price controls. Far from damaging economies or increasing unemployment, these reductions in the size and scope of government boosted GDP, improved services, and created jobs.

Government cutters faced opposition along the way, from skeptical Keynesians to Kiwi bureaucrats. But they also found unlikely allies, with left-wing parties playing major roles in the Canadian and New Zealand examples. The stories below should encourage would-be cutters and reassure skeptics: It can be done.

Turning Guns to Butter
How postwar America brought the boys home without bringing the economy down
Arnold Kling

When World War II ended in 1945, President Harry Truman faced a problem. Public opinion called for a rapid demobilization that would bring the boys home as soon as possible. But the Keynesians who were gaining prominence in the economics profession warned that a rapid decline in government spending and the size of the public work force would produce, in the late economist Paul Samuelson’s words, “the greatest period of unemployment and dislocation which any economy has ever faced.”

Thankfully, Truman ignored the Keynesians. Government spending plummeted by nearly two-thirds between 1945 and 1947, from $93 billion to $36.3 billion in nominal terms. If we used the “multiplier” of 1.5 for government spending that is favored by Obama administration economists, that $63.7 billion plunge should have caused GDP to fall by $95 billion, a 40 percent economic decline. In reality, GDP increased almost 10 percent during that period, from $223 billion in 1945 to $244.1 billion in 1947. This is a rare precedent of a large drop in government spending, so its economic consequences are important to understand.

The end of World War II thrust more than 10 million demobilized servicemen back into the labor market, but without the catastrophic consequences Keynesians feared. Close to 1 million took advantage of the GI bill to attend college. In addition, some of the increase in the male work force was offset by a decline in female labor force participation from World War II levels. But if Rosie the Riveter became a housewife, many of her friends continued to work outside the home. Over all, from 1945 to 1947 the civilian labor force increased by 7 million, or 12 percent. The vast majority found work, as civilian employment rose by 5 million, an increase of 9 percent.

In addition to the demobilized servicemen, the federal government let go of more than a third of its civilian employees—over 1 million workers. Many of these civilians had been engaged in government attempts to manage the economy. As the economist Gary M. Anderson has pointed out in The Freeman, more than 150,000 people were employed by various wartime economic regulatory agencies, such as the War Production Board, the War Labor Board, the Office of Civilian Supply, and the Office of Price Administration.

With responsibilities that extended well beyond wartime production to include restrictions and controls on the civilian nonmilitary economy, those agencies and boards disbanded with great reluctance. The 1946 election, which gave Republicans a majority in the House of Representatives for the first time since 1930, prompted a change of heart, with Price Administrator Chester Bowles removing virtually all remaining price controls five days after the vote. 

The conversion to a peacetime economy was a remarkable undertaking by the private sector. It did not merely involve converting wartime manufacturing to peacetime uses. For example, of the 2.8 million workers let go by the “other transportation equipment” sector between 1943 and 1948, when military vehicles were no longer needed, just half a million were absorbed by the civilian automobile industry. The big employment gains turned out not to be in manufacturing at all. The sectors that saw the most hiring were retail trade, services, contract construction, and wholesale trade, which together added nearly 4 million workers. 

There are important differences between circumstances today and the circumstances in 1945, of course. Back then, federal spending was much larger as a share of GDP (40 percent, vs. less than 10 percent today), and government employment was a much larger share of the labor force than now (20 percent vs. 2 percent), so a more significant adjustment was required.

But there are other factors that make change more difficult today. During World War II, the personal savings rate climbed to more than 20 percent, so after the war households were able to offset the decline in government spending by consuming a larger share of their incomes. Today, with a savings rate of about 5 percent, households have much less room to expand. In addition, the skill requirements of today’s industries make it more difficult to match workers with jobs than was the case in the much simpler economy of the 1940s.

Any way you look at it, though, America’s experience from 1945 to 1947 demonstrates that the private sector is capable of overcoming a tremendous drop in government spending. As a percentage of GDP, the decrease in government purchases then was larger than would result from the total elimination of government today. While no one can be sure what would happen if the government were to shrink that quickly, the ’40s boom offers a hopeful example. 

Arnold Kling (arnoldsk@us.net) is a member of the Financial Markets Working Group at the Mercatus Center at George Mason University. He blogs at econlog.econlib.org.

The New Zealand Miracle
When left and right worked together on far-reaching market reforms
Maurice McTigue

In the early 1980s, New Zealand was on the fast track to bankruptcy. By 1984, when the conservative National Party called a snap election, the deficit was approaching a massive 9 percent of GDP with no budget in place. The government’s share of GDP was 45 percent, unemployment was 9 percent (it would later peak at 11 percent), the top tax rate was 66 percent, and the rate of economic growth was a sluggish 2 percent.

A decade later, New Zealand had one of the most competitive economies in the developed world. The government’s share of GDP had fallen to 27 percent, unemployment was a healthy 3 percent, and the top tax rate was 30 percent. The government went from 23 years of deficits to 17 years of surpluses and repaid most of the nation’s debt.

This remarkable change was not only possible; it was fast and comparatively easy. The incoming Labour Party government paved the way in 1984 with its market-oriented approach to the economy; the National Party administration that took over in 1990 enthusiastically expanded the successful reforms. To solve deep economic problems, successive governments of New Zealand set out to eliminate the deficit, lower unemployment, and increase investment by shrinking the public sector, reforming or eliminating expensive programs, privatizing government enterprises, and reforming a burdensome regulatory process that was weakening our economy. Here’s how it happened.

Privatization: From 1986 through the mid-1990s, New Zealand sold off airlines, airports, maritime ports, shipping lines, irrigation projects, radio spectrum, printing offices, insurance companies, banks, securities, mortgages, railways, bus services, hotels, farms, forests, and more. The capital released by privatization paid down the debt and was reinvested in higher priorities. In each of the services sold, productivity increased and costs went down; the country’s competitiveness improved, and taxes poured into government coffers.

Rightsizing government agencies: After we eliminated those government functions, the bureaucracies that used to perform them were too large to perform their remaining tasks. So the civil service was reduced by 66 percent. Some agencies remained almost the same size, while others were reduced by 90 percent to 100 percent. After we privatized our forests, for example, only 17 of the Ministry of Forestry’s former 17,000 employees were deemed necessary.

Cutting taxes: At the same time, we reformed the revenue system by eliminating capital gains taxes, inheritance taxes, luxury taxes, and excise duties and by allowing income to be taxed only once. We halved tax rates, eliminated all deductions that were not a cost of earning income, and created a system where one-third of revenue came from consumption taxes and two-thirds came from income taxes. Under the simplified system, about 65 percent of the population no longer had to file tax returns—a major selling point for reform.

Reforming the appropriations process: Before 1987, a government appropriation was simply a grant to spend on a specific activity. If money was appropriated to employment programs, for example, there was no expectation that a certain number of unemployed people would become employed as a result. With the State Sector Act of 1987 and subsequent laws, funding was linked directly to results. Agency heads were now CEOs, chosen for capability. They received fixed-term contracts: five years with a possible three-year extension. The only grounds for removal was nonperformance, so a newly elected government couldn’t replace department heads with its own people. In the new appropriations process, these CEOs signed a purchase contract identifying exactly what was to be produced for the money allocated. 

Consider this case from one of my own portfolios, the Ministry for Employment. Under the old system, a total of $60 million was appropriated in 1989 to 34 different programs, which found jobs for 40,000 clients. After 1990, under the new purchase agreements, the same amount was allocated to just four programs; the other 30 were terminated. The contract required the ministry to place 120,000 people in jobs, with 56 percent of that figure drawn from the long-term unemployed, 25 percent from the Maori, 14 percent from people with disabilities, and 7 percent from people with social and drug or alcohol dependence problems. The ministry successfully placed 135,000 people in jobs that year.

Welfare policy: We now aimed not just to shrink the state but to reduce the number of people dependent upon it. Welfare had evolved into an entitlement to state support for social circumstances such as solo parenting, unemployment, health problems, and other forms of dependency. Under the new approach, resources were devoted to resolving health problems, education problems, social problems, and poor work skills. This approach moved 300 percent more people from dependency to independent living. It was a carrot-and-stick approach, though: If work was available and a citizen was capable of doing the job, he or she had to take it or forgo benefits.

As the New Zealand example demonstrates, it is possible to meet a crisis with serious, substantial reforms. All it requires is a good plan and strong political leadership. 

Maurice McTigue (mmctigue@gmu.edu) helped guide New Zealand’s reforms as a member of parliament, cabinet minister, and ambassador. He is currently the director of the Government Accountability Project at the Mercatus Center at George Mason University.

If Canada Can Do It…
Slashing the state in the Great White North
David R. Henderson

In 1994 government debt was 68 percent of Canada’s GDP. By 2008 that number was down to 29 percent. Finance Minister Paul Martin Jr. and Prime Minister Jean Chrétien, both of the Liberal Party, are the two unlikely stars in this heroic tale of fiscal discipline. 

Paul Martin’s father was also known as “the father of Medicare,” Canada’s federally mandated single-payer health care plan, so revered by American liberals. Chrétien was the political heir of Pierre Trudeau, prime minister of Canada for all but nine months between 1968 and 1984, who bore a great deal of the responsibility for accumulating all that debt to begin with.

In the 1993 election, the Liberal Party promised to reduce the deficit. Almost unbelievably, its candidates actually kept this pledge after winning office. Chrétien and Martin accomplished the task with large budget cuts—not cuts in the growth of spending, but cuts in nominal dollars spent—and only small increases in taxes.

In assembling these cuts, Paul Martin didn’t follow the usual pattern of consulting interest groups one by one. Instead, he held four televised regional consultations in which various lobbyists, experts, and ordinary citizens contended with one another. Martin also spoke directly to the public about what was needed to turn Canada’s budget around. In October 1994, his Department of Finance published a report, A New Framework for Economic Policy, showing that in order to keep the ratio of debt to GDP from rising, government had to run a substantial surplus on its program budget—that is, have revenues significantly exceeding state expenditures.

Martin and Chrétien enforced discipline on other cabinet members with a zero-sum ground rule: If a cabinet member wanted a smaller cut in one program, he had to propose a bigger cut in another.

Martin’s 1995 budget remains a shining example of how to deliver on promises of aggressive fiscal discipline. Government spending didn’t just grow more slowly; it actually shrank. Spending on programs (as opposed to debt service) was lower in dollar terms, and therefore even lower when adjusted for inflation, than spending in 1993–94. Indeed, program spending was lower as a percentage of GDP than it had been at any time since 1951. The 1995 budget also privatized a number of government corporations, including a railway, a uranium company, and the air traffic control system; and it tightened Canada’s unemployment insurance program.

In this and later budgets, Martin used conservative assumptions to make sure he achieved his goals come “hell or high water,” an expression he used so often it became the title of his autobiography. Because his assumptions often turned out to be too pessimistic—a refreshing change from the usual budgetary wishful thinking—the ratio of debt to GDP fell even faster than projected. Martin also had a “no-deficit rule”: Once he had managed to get rid of the deficit, he pledged to avoid future deficits by keeping spending in check.

From 1992–93 to 2000–01, Canadian spending on federal programs fell from 17.5 percent of GDP to 11.3 percent. The Canadian economist Thomas Courchene notes that the latter figure was the lowest “in more than half a century.”

Not everything Martin did would meet with universal libertarian approval. Although there were six to seven dollars in budget cuts for every dollar of tax hikes, he did raise taxes. Virtually all of these increases were announced in the 1994 and 1995 budgets, and most were nickel-and-dime stuff: a reduction in the deductibility of meal and entertainment expenses, elimination of the $100,000 capital-gains tax exemption that a taxpayer could claim cumulatively over a lifetime, a 5.7-cent-per-gallon increase in the gasoline tax, a reduction of the upper limit on deductible contributions to Registered Retirement Savings Plans (Canada’s version of a deductible IRA), an increase in the corporate income tax rate from 39.14 percent to 39.52 percent, and a few others. 

Martin did not raise individual income tax rates. He did, however, increase the degree of means testing for various federal benefits. Within some income ranges, benefits ended up falling for every additional dollar of income, so the implicit marginal tax was several percentage points higher than the explicit rate.

As a result of this fiscal discipline, in every year between 1997 and 2008 Canada’s federal government ran a budget surplus. In one fiscal year, 2000–01, its surplus was a whopping 1.8 percent of GDP. If the U.S. government had such a surplus today, it would amount to a cool $263 billion rather than the current deficit of more than $1.5 trillion.

Chrétien and Martin’s efforts were so successful that in 2000 they reduced the corporate tax rate by seven percentage points, cut income taxes, decreased the amount of capital gains subject to taxation, and increased the contribution limit for retirement accounts. Through most of this time period, Canada’s economy boomed, thus belying the Keynesian view that large budget cuts reduce economic growth. If the Canadians can do it, maybe, just maybe, we can too. 

Contributing Editor David R. Henderson (davidrhenderson1950@gmail.com), a former Canadian, is an associate professor of economics in the Graduate School of Business and Public Policy at the Naval Postgraduate School in Monterey, California, and a research fellow with the Hoover Institution at Stanford University.

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  • Jordan Elliot||

    How that guy didn't do time for attempted rape is beyond me.

  • ||

    Looks more like attempted throat surgery.

  • Dick Cheney||

    Only Big Government you safe, from yourself

  • Johnny Longtorso||

    Since MNG hasn't shown up yet, I'll answer for him:

    OHMIGOD!!! If the govt becomes so much as one dollar smaller we'll all die!!!!! NOT ONE DOLLAR!!!!! AWWW!!!!!!

  • kc||

    Makes any cuts the Republicans (even Paul Ryan) propose seem wimpy in comparison. How do we either get more politicians to grow some, or generate the public pressure and will, to get this done?

  • The Public||

    "How do we either get more politicians to grow some, or generate the public pressure and will, to get this done?" You don't we want all this free stuff from the government. The public has spoken...Government for the people, by the people!

  • bill||

    Those don't count. Those are proposed cuts. Our politicians don't make many actual cuts and when they do, they are more than offset by spending on one of their pet projects for their district.

    Talk is cheap.

  • ||

    Asking a politician to voluntarily cut spending is like asking a heroin addict to voluntarily give up the needle. Politics is power, and the power to seize and disperse vast sums of money is the addiction. Few can resist the temptation, and most can justify--through a truly disgusting and almost pitiable ability to lie, grovel, cheat and claw--spending every dollar they have expropriated, and billions and trillions more that exist only in theory.

  • kc||

    yeah, yeah, yeah -- so are the examples in the articles bullshit, or did they really get it done? and if they did really get it done, what was the key? The leaders in the examples were hardly new to politics, all appear to have been career politicians. Do how did they break the addiction? Was there strong public pressure, or more like Thatcher, a strong leadership vision, despite not having public pressure, that got it done?
    I want to learn more -- not just that it appears to have been done, but politically how it got done.

  • ||

    We're a republic. It has to come from the will of the citizens.

  • The Ghost of Benjamin Franklin||

    A republic, if you can keep it.

  • ||

    through the 10 step program, politicans annoymous.

    1. first step, admit there is a God, and pray for forgivness for your fiscal sins.

  • DJK||

    It's just a shame that it's not "from the will of the citizens" minus the illegals and inner city poor mutherfuckers who live on welfare.

  • ||

    I believe NZ did it over the objection of its citizens. Alberta followed NZ's example: cut early and cut deep. Force the cram-down on everybody. Alberta premier Ralph Klein got out in front by hacking politicians' pay and pensions.
    The Chretien Liberals achieved their surpluses by slashing transfer payments to the provinces. They merely off-loaded the fiscal burden. As bogus an achievement as the Clinton "surpluses."

  • ||

    I'm Canadian. I voted for the Liberals because of their focus on the economy. It wasn't a myth, KC. It happened. Canada balanced its books. On the flip side, the Liberals acted like a bunch of clowns when it came to other issues like the military and foreign policy and its reactionary anti-American impulses.

    Nonetheless, the Liberals were given THREE solid majorities - that's 12 years in power. So I'd say the people were cool with it because of the fiscal angle.

    On the other hand, the Conservatives are trying to further keep spending under control (though they jumped on the bail out garbage and still give money to corporate bums like Bombardier) but it's met with derision.

    Lame.

  • Bradley||

    On the other hand, the Conservatives are trying to further keep spending under control

    If they're trying at all, it's not hard enough.

  • Typical American Liberal||

    I am not completely sure why, but that reduction of spending must have been raaaaacist.

  • Rich||

    "[The Republicans are] counting on ... black folks staying home," President Obama said at a rally in Philadelphia.

    I am not completely sure why, but that statement must have been raaaaacist.

  • Republican Ad Campaign||

    "[The Republicans are] counting on ... black folks" - Barack Obama, first black president.

  • Rich||

    the federal government let go ... over 1 million workers. Many of these civilians had been engaged in government attempts to manage the economy.

    "Engaged in attempts to manage the economy." What does that even mean? One might argue that *anything* the government does is an attempt to manage the economy, and that the private sector in fact manages the economy.

  • ||

    You cowardly Americans will never have the courage to cut our costs at the government.

    Even Reagan tripled the national debt, and doubled employment taxes for the self employed.

    This is a fairy tale.

    youareproperty.blogspot.com/2010/05/just-way-you-wanted-it.html

  • ||

    One thing left out of this article is that both New Zealand and Canada accomplished this by gutting their respective militaries.

    One of the reasons why Canada is so big into peacekeeping is the fact that they largely lack the ability to engage in modern warfighting.

    These are feasible and to a degree reasoned approaches for small countries that can let go of many of their defense responsibilities, because a bigger country like Australia or the US will pick up the majority of the deterrence mission. This is not an option for the US.

    The US is without question the security guarantor for the majority of the Western world and a significant portion of Asia. Any significant decrease in military spending would quickly lead to a loss of deterrence and an increase in security instability.

  • Charles 3E||

    Tom,

    Asia, maybe, the US should be playing a peace-keeping role (but not nearly to the extent we currently do). But why in the West? The Europeans can afford to do that. And from whom are we protecting them? A declining, wannabe Russian empire? There's no good reason for the US to have the kind of presence in Europe it does.

  • ||

    Europe is not really "the west." They are the equivalent of Ohio calling themselves midwest.

  • kiwi dave||

    That's not really true. Even before the reforms, defense was only a comparatively small part of the NZ budget, dwarfed by the welfare system, subsidies and the costs of propping up state-owned businesses. Like Canada, the atrophying of NZ's military after WWII was a long-term process independent of domestic politics. Also, far from getting Aus and the US to pick up the slack, the Lange-Douglas government managed to alienate them by going nuclear-free and destroying the ANZUS alliance.

  • ||

    We should tell the Europeans, Japan, South Korea, Israel etc... that we are leaving in 5 years. They either need to take care of their own areas or deal with the consequences. We can no longer afford to be Team America World Police.

  • Barry Loberfeld||

    Spot on, Mark.

  • ||

    OR they can pay us to keep our military there.

    Think of us as guns for hire!

  • Jorj X. McKie||

    Keen, we can be like the Peacekeepers on Farscape (but without, perhaps, the "red wedge" as an emblem).

  • Brian R||

    It might be tough getting people to volunteer for the military if we turned them into out-and-out mercenaries. You can't really wave the flag after that.

  • ||

    OR they can pay us to keep our military there.

    Think of us as guns for hire!

  • ||

    Or we could be bribing the Muslims not to attack us for the time being, and with our money enable them to instead attack you guys on American soil - once again! They hate you and Israel more than they hate us, so no doubt they will accept our offer.

  • asdf||

    We have like 32,000 active and nonactive nuclear weapons, I think we're cool on deterrence.

  • ||

    Deterrence is not just a nuclear issue.
    Our globalized economy is extremely susceptible to bad actors screwing up the lines of supply. Bad actors tend to behave when they are afraid of someone and tend to cause lots of trouble when they aren't. The whole Somalia piracy issue is a very low key example of what will happen when the bad guys aren't afraid. This doesn’t address the fact that we used to be able to hide behind two oceans and geography to avoid other people’s problems. The mess in NY set the US economy back the better part of $1 trillion once all of the damages were counted in. Our networked and highly integrated economy couldn’t afford too many of these events and it took almost eight years of non-stop warfare to equal the costs of one really bad day in September.
    Read The Savage Wars of Peace by Max Boot to see what happens when no one is playing world police. The world ends up being a lot more unstable and you end up fighting a lot to keep lines of supply and access to materials going.
    Regarding New Zealand and defense spending, the earlier comments are simply incorrect. They got rid of their F-16s and basically disbanded their air force. Their ground component took a huge hit as well. This works for New Zealand as they know that in the event anyone makes a move on them the Australians will come to their rescue, not unlike the US and the Europeans.

  • ||

    considering that China is doing all the shipping (well, we ship our garbage to them...I don't think there's much danger to that being pirated), we can let them defend the sea lanes for a while.
    Of course, I can be sanguine as I have my 55 inch flat screen already...

  • kiwi dave||

    Regarding New Zealand and defense spending, the earlier comments are simply incorrect. They got rid of their F-16s and basically disbanded their air force. Their ground component took a huge hit as well. This works for New Zealand as they know that in the event anyone makes a move on them the Australians will come to their rescue, not unlike the US and the Europeans.

    While the last sentence is undoubtedly right, the connection you draw between the economic reforms and weakening defense is just not historically accurate. For a start, NZ never had F16s -- they had contracted to buy them second-hand from the Pakistanis in 1998, years after the economic reforms and retrenchment that are the subject of discussion here. The F16 transaction was later nixed by the Clark Labour Govt, an administration that was steadily increasing government spending across the board. The shutting down of the combat wing of the RNZAF (they were using Skyhawks) was part of a defense policy shift that involved moving away from a three-force policy that was never going to work for a country of 4 million people -- and focusing on ground forces and niche contributions (which makes sense for a small country). It is certainly true that NZ, like all other western countries, let its military atrophy over time, and became reliant on its bigger allies, but, again, that had nothing to do with the economic reforms.

  • ||

    I agree with a lot of what you said, but it is plainly clear that the resulting boom of the 20's was the result of the US having the world reserve currency combined with the fact that the UK was attempting to return to the gold standard at the pre war parity, and the US central bank was keeping interest rates low to aid them in this process. The boom years of the 1920's were simply a bubble created by global monetary policy.

  • ||

    Damn, I was replying to a different comment. Sorry.

  • ||

    [One of the reasons why Canada is so big into peacekeeping is the fact that they largely lack the ability to engage in modern warfighting.]

    It has always been thus. Easy to have national health care when your navy consists of two fishing boats. Canada should humbly mail us 5% of their GNP each year, earmarked as "protection money". If they hadn't been nestled under America's armpit they'd have been part of the USSR eons ago.

  • kiwi dave||

    Actually, it hasn't "always" been thus. It has been thus since the 1960s. Until then, Canada was one of the most free-market economies in the world, and also a pretty significant military power: as of 1945, they had the world's third largest surface navy (after US and UK), and had made a huge contribution to both world wars (read about Ypres, Dieppe and Juno Beach). Prior to WWII, far from relying on the US for defense, there was basically no relationship between the Canadian and US militaries, and the US had contingency plans for invading Canada.

    Canada's demilitarization occurred in a period of increasing statism.

    Yes, I understand massive military expenses are an obstacle for shrinking the US federal budget, but this idea that defense needs prevent the US from doing any budget cutting at all is no more than a pathetic excuse.

  • ||

    Harvard, I'll mail you 5% of our GNP when you forward it to all the innocent foreigners you and your war-mongoloid countrymen have murdered in the name of "defence."

  • ||

    Or maybe if you didn't spend trillions bombing women and children abroad, you'd have more money for important things, like, you know, health care.

  • ||

    Tom, true up to a point. The fact is Canada was drawing down soon after WWII when its military was the THIRD largest in the world if you can believe it.

    It became "officially" a peacekeeping country under Lester B. Pearson in the 1960s.

    Still, even at that we don't really pull our weight. We over gutted the military to the point that some experts feel it probably can't be entirely rebuilt in terms of the traditional standing army. Since we're essentially under the protection of the U.S. we may as well focus on light infantry, special forces and stuff like that.

    So, yeah, we saved money.

  • Obama||

    "Government really can be cut: case studies from Canada, New Zealand, and the United States."
    Right!!!

  • JoshINHB||

    Back then, federal spending was much larger as a share of GDP (40 percent, vs. less than 10 percent today)

    I'm not a mathematician but I'm pretty sure that 3.8 trillion in federal spending is slightly more than 10% of the 14 trillion GDP.

  • DK||

    I was confused by this as well. Where are they pulling this 10% from? With just the items counted in the $3.8 trillion budget, we're at 28%. If we include non-budgetary spending (e.g. Iraq and Afghanistan) the number shoots to around 40% (depending on the source).

  • ||

    I'm pretty sure that the 3.8 trillion dollar figure includes the war spending. The war doesn't cost that much on a yearly basis. True, many costs of the war are included in budget add ons after the fact that aren't included in initial budget estimates, but policy wonks usually include the spending in their numbers.

    A lot of leftists that I argued with who were saying that Bush is more responsible for deficits than Obama. They always claimed that the numbers I was giving them didn't include wartime spending. I showed them that they did, but they just kept on claiming that my numbers couldn't have included all of the off budget additional defense spending, because those figures were added to the budget after the fact. I had to explain to them slowly that, yes, although that is true, those numbers have been added to the data in the meantime.

  • ||

    This was poorly written, because I just woke up.

  • ||

    We spend around 20% of GDP today, not 10%.

  • ||

    See my comment below.

  • ||

    I think that the 10% figure is the federal spending before deficits and entitlements. I would like an explanation of the numbers too.

  • Old Mexican||

    Any way you look at it, though, America’s experience from 1945 to 1947 demonstrates that the private sector is capable of overcoming a tremendous drop in government spending.

    One does not need to look at one example - the exact thing happened after the little known depression of 1920-1921, when the Harding government cut spending and taxes, a process continued by his successor (Coolidge) until 1929. The industrial and economic boom of the 20s were the result of this austerity policy followed by these two administrations.

    A decade later, New Zealand had one of the most competitive economies in the developed world. The government’s share of GDP had fallen to 27 percent, unemployment was a healthy 3 percent, and the top tax rate was 30 percent. The government went from 23 years of deficits to 17 years of surpluses and repaid most of the nation’s debt.

    But only because they hated the poor so much . . . Oooops! Sorry, I was channeling Tony there, for a while...

  • ||

    I agree with a lot of what you said, but it is plainly clear that the resulting boom of the 20's was the result of the US having the world reserve currency combined with the fact that the UK was attempting to return to the gold standard at the pre war parity, and the US central bank was keeping interest rates low to aid them in this process. The boom years of the 1920's were simply a bubble created by global monetary policy.

  • ||

    I'm not saying that the response to the recession of 1920 wasn't positive, and I completely agree that it was a telling example of how big government isn't necessary to end a recession, but lets not go overboard. Also, if you want better examples of a non government based economic recovery, the 1800's is rife with examples. There were two major recessions between 1870 and 1890, and in the complete absence of deficits, welfare, or inflationary monetary policy (as we know it today) the economy recovered nicely.

  • ||

    Over all, from 1945 to 1947 the civilian labor force increased by 7 million, or 12 percent. The vast majority found work, as civilian employment rose by 5 million, an increase of 9 percent.

    What exactly is the difference between the labor force and employment? I would think the employment rise number would be higher if labor force only indicated a certain type of worker (i.e. manual, blue-collar, et al.)

  • Brian R||

    I believe the labor force is everyone available for work, whereas employment is just the employed. Restated...

    Labor Force = (Employed Workers) + (Unemployed Workers)

  • mr simple||

    Meanwhile our Fed is talking further quantitative easing and inflating the asset bubble. That worked so well before.

  • bill||

    funny thing about new zealand was that rogernomics were introduced by labour, right after the protectionism of muldoon and the nationals.

    but it was also much easier to make radical changes like that in new zealand because of their parliamentary system, it doesn't have to pass two houses and a president and courts

  • ||

    The reason Keynes is krap is simple. Pretend that the magic multiplier exists, whatever the actual number may be, under whatever circumstances. If, as the story goes, government putting money into the economy has a positive multiplier effect, then government taking the money out in the first place in order to have it to put back into the economy produces a negative multiplier effect, initially, at the time the money is taxed, borrowed, what-have-you out of the economy. To quote another famous economist - to wit, Stevie Wonder - "Nothin' from nothin' leaves nothin'." Therefore, Keynesean notions of the government being able to spend us into prosperity are wrong. Q.E.D.

  • ||

    To me it was always recycled money.

  • ||

    Billy Preston, not Stevie Wonder.

  • Earl Harding||

    Of course, after WWII the US was the only place with any manufacturing base that hadn't been blasted to smithereens in air raids.

    Also, the manufacturing base had grown to service the war needs, thanks to government spending.

    So the only country in the world that anyone could turn to for manufacturing was the US. No big surprise then that the economy grew. Everyone and anyone bought the goods and services to rebuild their shattered countries from the US.

    No such situation exists today and to draw parallels with the growth following WWII coupled with a decrease in government spending is to miss the point entirely.

    Of course, that said the budget is way to big. But we will not see post WWII levels of growth when it is cut.

  • ||

    Yes spending can be cut! Remember that spending had been cut all the way to 18.4% of GDP at the end of the Clinton term. The result was budget surpluses.

    Spending skyrocketed to its' current $3.55 trillion (25% of GDP)level in only two years. The last Repub controlled budget, fy2007, was only $2.7 trillion. Two years later it was $3.5 trillion. Cutting spending back to pre Dem controlled Congress levels, would reduce the deficit by $850 billion.

  • Karl from Chicago||

    FY 2009 was President Bush's last budget. No major spending was passed over his veto so it is his budget, except for the $100 billion of ARRA stimulus spending and the $100 billion of ARRA tax cuts in FY 2009. The main FY 2009 increases were $250 billion from TARP and about $450 billion from the 8.4 million jobs lost in the 2008-2009 recession ($54 billion per 1 million jobs).

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