FDR’s Bad Deal.

Here’s John L. Chapman:

This spending-leads-to-growth concept is a perennial failure that can actually harm an economy. Its advocates suffer from a crucial error in their understanding of economics: for in fact, consumption is an effect, and not a cause, of economic growth. Stated simply, more spending without the greater output of goods and services that results from increased saving and investment – and concomitant higher real incomes — can only lead to higher prices and inflation. Alternatively, if government spending programs engender uncertainty and loss of confidence, while at the same time excluding incentives to invest (such as through tax cuts on profits or capital gains), the demand for money holding can increase dramatically, choking off recovery. The former scenario played out in the U.S. stagflation of the 1970s, while the latter occurred in the U.S. in the 1930s and Japan in the 1990s.

Mr. Obama is an admirer of FDR’s New Deal, but the explosion in public works spending still left unemployment at 17% in 1940, eight years into his administration; so much uncertainty was created by all the New Deal programs that private investment did not recover until after 1943. And Japan’s “lost decade” of the 1990s is a particularly tragic example of spending waste, because at least eight separate stimulus measures pursued by Tokyo between 1992 and 1999 totaled over $100 trillion yen (more than $1 trillion at current exchange rates), yet unemployment grew throughout the decade (to almost 5% from 1%), and GDP growth averaged an anemic 1% for over 10 years (and close to zero between 1996-2002). Meanwhile Japan’s debt-to-GDP ratio has tripled since 1990, burdening future growth.