In 2021, the Biden administration secured $42.5 billion from Congress to extend broadband Internet access to small and ever-shrinking portions of the country that didn’t yet have it. Four years later, that federal program still hasn’t connected one single person to the Internet.
Elon Musk’s DOGE efforts have so far uncovered tens of billions more in “waste, fraud, and abuse.” For example, the $40 billion USAID budget, DOGE found, is bloated with billions for indefensible bilge — from sex changes in Guatemala to tourism in Egypt.
Is there anyone in his right mind who would argue that the federal government stimulated the economy by this spending? Or if the money instead had been left in the private sector, it would have hurt the economy? Is it humanly possible to waste other people’s money more thoroughly than the government does?
Imagine a pickpocket who steals cash from the wallets and purses of unsuspecting shoppers in a mall. Then he goes from store to store and spends the loot. Whether or not he stimulated the mall economy depends on whom you interview — shopkeepers who are grateful for the pickpocket’s patronage or the thief’s dispirited victims who discover they must go home empty-handed.
When we employ our instinctive common sense, especially if we zero in on egregious and inexcusable profligacy, we are drawn to the conclusion that Milton Friedman expressed so well: “Nobody spends somebody else’s money as carefully as he spends his own.” Moreover, robbing Peter to pay Paul makes Paul richer but Peter equally poorer at the least.
But if we adopt a Keynesian “macro” perspective, we will assert that more government spending energizes economic activity, and that less government spending sends the economy into a tailspin. Is it not simply amazing that politicians possess such powers the rest of us do not?! When they spend your money, the magical multiplier kicks in, but when you and I spend our money (or save it in the bank so the bank can spend it), we just don’t get the same bang for the buck. Just think how prosperous we would be if we laundered everything through the government (like they do in poverty-stricken North Korea).
John Maynard Keynes himself once claimed that if the government simply paid people to dig holes and fill them back in, we could stimulate the economy. It didn’t matter to him what the government spent it for so long as it was the government doing the spending. In any event, he flippantly declared, “In the long run, we’re all dead anyway.”
If DOGE ends up cutting federal expenditures by the trillion dollars or more that Musk has promised, expect every unrepentant Keynesian to warn of dire consequences. It would be the same wrong-headed thinking that led Keynesians in the 1940s to predict another depression when World War II ended.
If another depression is in our future, it will not occur because government spends less. When it did spend less — decisively less — after World War II, depression didn’t materialize. Just the opposite.
Under the influence of the Keynesian consensus, a committee chaired by New York Senator James Mead issued a report in 1945. It argued that with the imminent end of the war, “the United States would find itself largely unprepared to overcome unemployment on a large scale.” Even President Harry Truman, in September of that year, told The New York Times that it was “obvious” that the process of reducing federal employment and spending would yield “a great deal of inevitable unemployment.” Indeed, between June 1945 and June 1946, more than ten million people were lopped off the federal payroll (mostly military), and millions returned from overseas to the US job market, while Keynesians held their breath and expected the worst.
One of the best assessments of what actually happened, in contrast to the Keynesian forecasts echoed by future Nobel laureates Paul Samuelson and Gunnar Myrdal, is that of economist David Henderson. In a November 2010 paper for the Mercatus Center titled The US Post-War Miracle, Henderson noted,
In the four years from peak World War II spending in 1944 to 1948, the US government cut spending by $72 billion — a 75-percent reduction. It brought federal spending down from a peak of 44 percent of gross national product (GNP) in 1944 to only 8.9 percent in 1948, a drop of over 35 percentage points of GNP.
While government spending fell like a stone, federal tax revenues fell only a little, from a peak of $44.4 billion in 1945 to $39.7 billion in 1947 and $41.4 billion in 1948. In other words, from peak to trough, tax revenues fell by only $4.7 billion, or 10.6 percent. Yet, the economy boomed. The unemployment rate, which was artificially low at the end of the war because many millions of workers had been drafted into the US armed services, did increase. But during the years from 1945 to 1948, it reached its peak at only 3.9 percent [italics mine] in 1946, and, for the months from September 1945 to December 1948, the average unemployment rate was only 3.5 percent.
Let that sink in: Federal spending plummeted by 75 percent. Millions re-entered the private job market. Yet unemployment remained lower than it is today, and the economy took off. Keynesians, with all their vaunted “New Economics” and sophisticated equations, got it dead wrong. Common sense would have served them much better.
One reason for the unexpected post-war “economic miracle” was the Revenue Act of 1945. Go to the search engine Bing.com. Type in “top corporate income tax rate 1944,” tap “Enter” and voila! The resulting number is staggering: 94 percent. Next, just change one digit in your search terms, from 1944 to 1945. The new figure? 38 percent. The Revenue Act cut marginal tax rates (on both business and personal income) a little, but more importantly, it eliminated surtaxes such as an “excess profits tax” that had driven rates so high.
You need only common sense, no equations required, to know that there’ll be a whole lot more risk-taking entrepreneurship and business investment when you cut tax rates dramatically.
Another reason for the boom was the abolition of all price controls. We had plenty of them during the war, but by 1946, they were all gone. Prices were freed to reflect supply and demand conditions in the marketplace, not the arbitrary whims of Congress or bureaucracies. The rationing of consumer goods ended as well.
Prone to mathematize and oversimplify, Keynesians love to boil an economy down to three main components: Consumption plus Investment plus Government Spending, they claim, equals GNP. C + I + G = Y is the Keynesian formula we all had to learn from our Keynesian economics profs. Their ideological bias prevented them from understanding that when there’s a lot less G, there’s a lot more C and I. That’s because ultimately, G has nothing that it doesn’t sooner or later take from C and I. This would be true even if G didn’t waste a penny.
Common sense tells me that the 75 percent reduction in federal spending after the war may have been the most significant contributor to the economic boom. It diverted resources away from blowing things up on the battlefield. Instead, we could now make cars, refrigerators, and an array of consumer goods of which Americans had been deprived for years. At the very least, the Keynesian fear that massive government spending cuts would tank the economy proved to be utterly and embarrassingly unfounded.
The US boom was no outlier. Once post-war Germany under Ludwig Erhard placed its faith in markets instead of government spending, the world began referring to “the German economic miracle.” Japan experienced a “Japanese economic miracle” for similar reasons. Hong Kong pursued smaller government/free-market policies after the war and awed the world with decades of phenomenal growth. Meantime, under a new socialist government, Britain plunged headlong into an expensive welfare state and became, by the 1970s, the “sick man of Europe.”
In the 1980s, New Zealand transformed itself from a slow-growth welfare state into a free and vibrant economy. In just two years, it slashed government spending from 60 percent of GDP to 40 percent. Once again, Keynesians expected a bust, but the country got a boom instead.
Some people besotted with Keynesian hangovers are worried that if DOGE cuts federal spending a lot, the American economy will lose the “stimulus” we somehow get from it all. But considering both common sense and the historical track record, our biggest concern should be that DOGE won’t cut enough.