Financial Lessons from 1946 | Jason E. Taylor | Cato Institute: Commentary

Financial Lessons from 1946 | Jason E. Taylor | Cato Institute: Commentary: "Keynesian economists of the day ([1946]) argued forcefully that if the government disbanded the army and stopped producing armaments, unemployment would rise back to Depression-era levels. Despite these protests, the government sent most soldiers home, canceled war contracts and removed wartime economic controls. Forecasts of economic Armageddon followed. In September 1945 forecasters predicted that the U.S. unemployment rate would rise to anywhere between 12% and 35%.

Despite these warnings government spending fell from $84 billion in 1945 to under $30 billion by 1946, and by 1947 the U.S. was running a budget surplus of close to 6% of GDP to pay off the debt it had accrued during the war. It was the 'Great De-stimulus' — the largest and fastest turnaround from deficit to surplus in history. And here's the kicker: Despite widespread predictions to the contrary, unemployment remained under 4.5% between 1945 and 1948.

How did this happen? Labor markets adjusted quickly and efficiently once they were finally unfettered. Most economists today acknowledge that constant intervention during the 1930s, particularly on wages, extended the length and depth of the Great Depression."

"the data show that despite the huge withdrawal of government stimulus from the economy, civilian employment grew by over 4 million between 1945 and 1947 at a time when Keynesian models forecast that it would drop like a stone.

The irony is that just three short years ago, Keynesian fiscal policy was considered an intellectual dead end. History (via a substantial body of empirical research) has shown that fiscal stimuli are a largely ineffective tonic for an ailing economy."