NCPA - National Center for Policy Analysis


November 26, 2008

It's an undying Democratic Party myth that Franklin Roosevelt's New Deal spending helped end the Great Depression (or at least relieved suffering).  The hard fact is that unemployment stayed well into the double digits until the early stages of World War II, says Investor's Business Daily (IBD).

There seems less argument over a more recent case of failed big-government stimulus, that of Japan in the 1990s.  The incoming administration should study that lost decade well, because it started with disturbing parallels to our own time and place, says IBD:

  • Japan got into trouble with the collapse of a real-estate bubble and a subsequent breakdown of its banking system.
  • The Japanese government made one mistake that U.S. policymakers are at least trying to avoid now: It did not move aggressively to clean up the bad debt on banks' balance sheets.
  • Then it made another error that the pending Obama administration seems tempted to repeat. It tried to revive the economy by increasing the government's share of it.

The result was plenty of pork and almost no growth, explains IBD:

  • Japanese government spending (at all levels) grew from 31 percent during the 1990s to 38 percent of gross domestic product (GDP) more recently.
  • Meanwhile, average Japanese annual economic growth fell from 4.1 percent in the 1980s to just 1 percent in the 1990s.
  • From 1992 to 1999, industrial output grew only 0.7 percent compared with nearly 40 percent in the United States, which spent the decade reducing government spending as a share of GDP.

There's a cautionary tale here for Barack Obama, but also a reminder that he has a choice, says IBD.  The current crisis is serious enough to excuse, even demand, changes in positions he had staked out during much different conditions on the campaign trail.

He also can find precedent for sound policy in his own party's history.  FDR is not his only model in the Democrat pantheon.  He should take his cue in this case from a liberal with whom he is often compared, John Kennedy, who chose tax cuts as a way to spur growth by freeing up private capital, says IBD.

Members of Obama's party, along with his own ideas on tax "fairness," will be pushing him toward the slow lane of big spending.  As JFK knew, there's a better way.

Source: Editorial, "Big Spending And Long Slumps," Investor's Business Daily, November 25, 2008.


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