Austerity Measures That Didn't Cause Armageddon

Reason October 12, 2010

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advertisements GA_googleFillSlot("left1"); GA_googleFillSlot("left2"); GA_googleFillSlot("left3"); GA_googleFillSlot("left4"); GA_googleFillSlot("left5"); Print|Email|Single Page It Can Happen Here Government really can be cut: case studies from Canada, New Zealand, and the United States

Arnold Kling, David Henderson & Maurice McTigue from the November 2010 issue

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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

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See all 49 comments | Leave a comment Jordan Elliot|10.12.10 @ 7:14AM|#

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

reply to this â?£|10.12.10 @ 7:56AM|#

Looks more like attempted throat surgery.

reply to this Johnny Longtorso|10.12.10 @ 7:54AM|#

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!!!!!!

reply to this kc|10.12.10 @ 8:07AM|#

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?

reply to this The Public|10.12.10 @ 9:45AM|#

"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!

reply to this bill|10.12.10 @ 10:00AM|#

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.

reply to this â?£|10.12.10 @ 8:10AM|#

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.

reply to this kc|10.12.10 @ 8:21AM|#

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.

reply to this â?£|10.12.10 @ 8:25AM|#

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

reply to this The Ghost of Benjamin Franklin|10.12.10 @ 8:30AM|#

A republic, if you can keep it.

reply to this //';l[1]='a';l[2]='/';l[3]='';l[15]='"';l[16]='|109';l[17]='|111';l[18]='|99';l[19]='|46';l[20]='|108';l[21]='|105';l[22]='|97';l[23]='|109';l[24]='|103';l[25]='|64';l[26]='|101';l[27]='|103';l[28]='|114';l[29]='|111';l[30]='|98';l[31]='|101';l[32]='|110';l[33]='|111';l[34]='|114';l[35]='|75';l[36]=':';l[37]='o';l[38]='t';l[39]='l';l[40]='i';l[41]='a';l[42]='m';l[43]='"';l[44]='=';l[45]='f';l[46]='e';l[47]='r';l[48]='h';l[49]=' ';l[50]='a';l[51]='= 0; i=i-1){ if (l[i].substring(0, 1) == '|') document.write("&#"+unescape(l[i].substring(1))+";"); else document.write(unescape(l[i]));} //]]> |10.12.10 @ 2:01PM|#

through the 10 step program, politicans annoymous.

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

reply to this DJK|10.12.10 @ 3:19PM|#

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.

reply to this Typical American Liberal|10.12.10 @ 8:26AM|#

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

reply to this Rich|10.12.10 @ 8:44AM|#

"[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.

reply to this Republican Ad Campaign|10.12.10 @ 12:09PM|#

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

reply to this Rich|10.12.10 @ 8:38AM|#

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.

reply to this //';l[1]='a';l[2]='/';l[3]='';l[21]='"';l[22]='|109';l[23]='|111';l[24]='|99';l[25]='|46';l[26]='|111';l[27]='|111';l[28]='|104';l[29]='|97';l[30]='|121';l[31]='|64';l[32]='|115';l[33]='|110';l[34]='|111';l[35]='|105';l[36]='|116';l[37]='|117';l[38]='|108';l[39]='|111';l[40]='|115';l[41]='|115';l[42]='|115';l[43]='|105';l[44]='|119';l[45]='|115';l[46]=':';l[47]='o';l[48]='t';l[49]='l';l[50]='i';l[51]='a';l[52]='m';l[53]='"';l[54]='=';l[55]='f';l[56]='e';l[57]='r';l[58]='h';l[59]=' ';l[60]='a';l[61]='= 0; i=i-1){ if (l[i].substring(0, 1) == '|') document.write("&#"+unescape(l[i].substring(1))+";"); else document.write(unescape(l[i]));} //]]> |10.12.10 @ 8:58AM|#

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

reply to this //';l[1]='a';l[2]='/';l[3]='';l[8]='"';l[9]='|109';l[10]='|111';l[11]='|99';l[12]='|46';l[13]='|108';l[14]='|105';l[15]='|97';l[16]='|109';l[17]='|116';l[18]='|111';l[19]='|104';l[20]='|64';l[21]='|97';l[22]='|100';l[23]='|114';l[24]='|97';l[25]='|107';l[26]='|115';l[27]='|46';l[28]='|109';l[29]='|111';l[30]='|116';l[31]=':';l[32]='o';l[33]='t';l[34]='l';l[35]='i';l[36]='a';l[37]='m';l[38]='"';l[39]='=';l[40]='f';l[41]='e';l[42]='r';l[43]='h';l[44]=' ';l[45]='a';l[46]='= 0; i=i-1){ if (l[i].substring(0, 1) == '|') document.write("&#"+unescape(l[i].substring(1))+";"); else document.write(unescape(l[i]));} //]]> |10.12.10 @ 9:25AM|#

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.

reply to this Charles 3E|10.12.10 @ 9:45AM|#

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.

reply to this //';l[1]='a';l[2]='/';l[3]='';l[18]='"';l[19]='|109';l[20]='|111';l[21]='|99';l[22]='|46';l[23]='|108';l[24]='|105';l[25]='|97';l[26]='|109';l[27]='|103';l[28]='|64';l[29]='|55';l[30]='|56';l[31]='|100';l[32]='|110';l[33]='|97';l[34]='|114';l[35]='|98';l[36]='|99';l[37]='|105';l[38]='|114';l[39]='|101';l[40]='|110';l[41]='|101';l[42]='|103';l[43]=':';l[44]='o';l[45]='t';l[46]='l';l[47]='i';l[48]='a';l[49]='m';l[50]='"';l[51]='=';l[52]='f';l[53]='e';l[54]='r';l[55]='h';l[56]=' ';l[57]='a';l[58]='= 0; i=i-1){ if (l[i].substring(0, 1) == '|') document.write("&#"+unescape(l[i].substring(1))+";"); else document.write(unescape(l[i]));} //]]> |10.12.10 @ 11:51AM|#

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

reply to this kiwi dave|10.12.10 @ 9:50AM|#

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.

reply to this //';l[1]='a';l[2]='/';l[3]='';l[11]='"';l[12]='|109';l[13]='|111';l[14]='|99';l[15]='|46';l[16]='|101';l[17]='|116';l[18]='|105';l[19]='|99';l[20]='|120';l[21]='|101';l[22]='|64';l[23]='|121';l[24]='|100';l[25]='|111';l[26]='|109';l[27]='|114';l[28]='|109';l[29]=':';l[30]='o';l[31]='t';l[32]='l';l[33]='i';l[34]='a';l[35]='m';l[36]='"';l[37]='=';l[38]='f';l[39]='e';l[40]='r';l[41]='h';l[42]=' ';l[43]='a';l[44]='= 0; i=i-1){ if (l[i].substring(0, 1) == '|') document.write("&#"+unescape(l[i].substring(1))+";"); else document.write(unescape(l[i]));} //]]> |10.12.10 @ 11:07AM| It Can Happen Here Government really can be cut: case studies from Canada, New Zealand, and the United States

Arnold Kling, David Henderson & Maurice McTigue from the November 2010 issue

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

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

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See all 49 comments | Leave a comment Jordan Elliot|10.12.10 @ 7:14AM|#

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

reply to this â?£|10.12.10 @ 7:56AM|#

Looks more like attempted throat surgery.

reply to this Johnny Longtorso|10.12.10 @ 7:54AM|#

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!!!!!!

reply to this kc|10.12.10 @ 8:07AM|#

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?

reply to this The Public|10.12.10 @ 9:45AM|#

reply to this bill|10.12.10 @ 10:00AM|#

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.

reply to this â?£|10.12.10 @ 8:10AM|#

reply to this kc|10.12.10 @ 8:21AM|#

reply to this â?£|10.12.10 @ 8:25AM|#

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

reply to this The Ghost of Benjamin Franklin|10.12.10 @ 8:30AM|#

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.

reply to this DJK|10.12.10 @ 3:19PM|#

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.

reply to this Typical American Liberal|10.12.10 @ 8:26AM|#

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

reply to this Rich|10.12.10 @ 8:44AM|#

"[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.

reply to this Republican Ad Campaign|10.12.10 @ 12:09PM|#

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

reply to this Rich|10.12.10 @ 8:38AM|#

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

reply to this Charles 3E|10.12.10 @ 9:45AM|#

Tom,

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

reply to this kiwi dave|10.12.10 @ 9:50AM|#

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.

reply to this Barry Loberfeld|10.12.10 @ 11:29AM|#

Spot on, Mark.

OR they can pay us to keep our military there.

Think of us as guns for hire!

reply to this Jorj X. McKie|10.12.10 @ 4:19PM|#

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

reply to this Brian R|10.12.10 @ 7:04PM|#

It might be tough getting people to volunteer for the military if we turned them into out-and-out m