When Deficit Spending Works Wonders

(Originally published Feb. 18, 2009)

One of the issues that has been debated regarding the pending Stimulus Plan has been concern over how much the proposed spending would add to an already enlarged federal deficit. This is a legitimate concern especially considering that President Bush and his advisors took what was a surplus federal budget and turned it into a serious deficit federal budget in relatively short time. Folks worry that we have already mortgaged our future and that large expenditures in a Stimulus Plan would only add to an intolerable burden.

This led me to think about a time when the U.S. chose a path of massive deficits. When was that?

Fuel Oil Ration Coupon by Seattle Municipal Archives under Creative Commons License


Virtually everyone who has studied the Great Depression has noted that the New Deal did not bring the U.S. out of the depression. WWII did. It is ironic that the Federal Government was far more willing to spend on a huge scale to fight the war rather than spend like that to bring us out of the Great Depression.

But, it did work.

The Gross National Product rose quickly from 200 billion in 1940 (in 1954 dollars) to 320 billion in 1944—a 60% gain. This allowed the nation to meet the large war expenses while providing civilians with more money to spend than there were consumer goods to buy. There were few civilian goods since the U.S. chose to engage in wartime rationing and to convert America’s manufacturing base into defense industries.

The latter was done with astonishing speed. The last passenger cars rolled off the assembly line in February of 1942 to be replaced by jeeps, supply trucks, planes and tanks. Production of these goods rose so much that by the end of 1943 production even exceeded demand which had the salutary effect of prompting many corporations to begin planning for reconversion to peacetime needs.

Government purchases of goods and services increased from about 18% in 1940 to 56% in 1944. The U.S. has never before or since had such a gigantic role for government in the economy.

It is well to keep that in mind during the current discussions. The latest Newsweek’s front cover alleges that we are all socialists now due to the increasing role of the federal government in the economy. That appears to be over-hyped given our track record in WWII.

Deficit spending met the needs of the U.S. in wartime in WWII. Perhaps, if it is well managed now, it will meet the needs of the current crisis. And, if it does, then the role of government will diminish just as it did once WWII came to an end. Further, it is highly doubtful that the U.S. government’s purchases of goods and services will come anywhere close to the 56% of the GNP that it achieved in 1944.

That’s my opinion, but what do you think?

Thanks for reading,
Dr. Art Pitz
The Professor’s House