A short history of stimulus spending by the US government...
IN NOVEMBER of 1929, and in reaction to the breakdown of the stock market, Herbert Hoover immediately called for a raft of economy-supporting programs including substantial spending on public works projects, writes Nathan Lewis for The Daily Reckoning.
This round of public spending resulted in San Francisco's Bay Bridge, the Los Angeles Aqueduct, Hoover Dam on the Colorado River, and many other such projects.
Although environmentalists might argue, Hoover Dam is perhaps the most iconic of all of these efforts.
In terms of its benefits – such as electricity generation and water supply for agriculture and eventually urban use – the Dam is about as useful and worthwhile a public work as anyone could ever hope for. When it was completed, it was the world's largest electric-power generation facility and the world's largest concrete structure.
Planning for Hoover Dam began in 1922, and was overseen by Herbert Hoover himself. Construction on the project was approved by Congress in December 1928 – long before the deep economic depression emerged. It was, in contemporary terms, as close to a "shovel-ready" project as you'd find.
The initial appropriation for construction was made in July 1930. The project officially began in September 1930. The contract for construction was awarded to a joint venture of six private companies in March, 1931. And the first thing they had to do was to make a small city for the workers who would be working on the project. Boulder City was occupied in the spring of 1932. Roughly 16,000 workers were part of the construction, and many brought their families to live in Boulder City.
Initial construction on the dam project itself began with the upper cofferdam in September 1932. Construction was completed in March 1936. It was considered a great accomplishment to complete such an ambitious project so quickly. But of course, as a result of these spending programs, the Federal budget ballooned enormously.
In 1929, the government had $3.862 billion of tax revenue, and spent $3.127 billion, enjoying a surplus of $734 million. Come 1931, and the US government had its first deficit in eleven years, totaling $462 million. In 1932, the government then spent $4.659 billion, a 49% increase despite the "deflationary" environment.
Perhaps this, and the spending commitments then forthcoming, is why Hoover pushed through an enormous tax hike in April 1932, enacted in June of that year. The top income tax rate in the United States rose to 63%, up from 25% previously. Inheritance taxes were doubled, corporate tax rates rose, and a long list of excise taxes were imposed.
Hoover's moves were predicted to raise $1.1 billion in new revenue, in an effort to close the budget deficit. But the tax didn't help the economy much, however, and revenues remained weak. Through 1932, revenue collapsed to $1.924 billion, and fell again to only $1.997 billion in 1933. The budget deficit exploded to $2.735 billion in 1932 and $2.602 billion in 1933.
What to do? John Maynard Keynes once argued that, in a depression, it would be worthwhile to pay workers to dig holes, and to pay other workers to fill them up. But how is this different than paying workers to do absolutely nothing? The main advantages appear to be psychological. "Workers" maintain a better morality and work ethic, and are less likely to revolt, than "welfare recipients". And they can be counted as "employed" while a welfare recipient might remain "unemployed" until they actually found something productive to do in the economy.
Either way, you can see that it is not so easy to just "push money into an economy" via public works projects. The more useful they are, the more likely it is that they will take years of planning and construction. If the goal is to supposedly avoid some sort of downward spiral over the next six months, it is more likely that the funds will end up directed into something more like Keynes' hole-digging exercise.
Thus, we can also see that, when short-term "stimulus" becomes the focus, the effect is more likely to be short-term welfare. There is nothing particularly wrong with welfare in a depression. Better than having people dying in the streets. But, increased welfare spending isn't much of an economic program in itself.
In retrospect, Hoover Dam was probably a worthwhile project. It produced something of value, and kept 16,000 workers busy over the 1931-1935 period, the worst part of the Great Depression. However, one effect of this aggressive deficit spending was an eventual rise in tax rates, which did additional harm to the economy.
Roosevelt then continued along the same path. Under his "New Deal", spending soared up to $9.468 billion in 1940, and tax rates soared higher as well, with the top rate hitting 81% in 1940 (even reaching 94% in 1945).
Politicians always like to spend other peoples' money, so it is no surprise that they – always and everywhere – flock around those economic advisors that tell them that enormous spending projects are the key to resolving economic difficulties. Nor is it a surprise that economists are quick to tell people what they want to hear. If you're going to be wrong all the time, you might as well be popular, well-paid, and wrong. Economics being what it is, you can always argue later that you were wrong because "people didn't do enough."
These ideas were solidified in a book written by John Maynard Keynes and published in 1936. Governments worldwide had already been hard at work at "stimulus" for a half-decade or more by that point, but you could say that the book was a how-to guide for economists to justify policies that were already more popular than "doing nothing".
When you get past the cloud of nonsense surrounding "stimulus spending", with its output gaps, multipliers and so forth, it seems to me that government spending during a recession accomplishes roughly what it does during any other time. Mostly, it is a big waste of money, but it might keep some people employed and maybe you'll even be left with something useful afterwards. I would suggest a decent rail system, at least as good as that of France. Since we're spending trillions anyway, how about as good as the US had in 1910?
That would be, I argue, the least bad of all possible boondoggles.