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According to Ben Bernanke, the current Chairman of the Federal Reserve, the stock market crash and the subsequent Depression were actually caused by tight monetary policies that the Federal Reserve instituted at that time.
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Bottom line...thanks to the Fed, there was just not enough money in circulation to get the economy going again. Instead of pumping money into the economy, and increasing the money supply, the Fed allowed the money supply to fall 30%.
That's all fine and dandy but it has little to do with the effect of the stimulus on the length and severity of recessions ... which is what I was specifically talking about. The Fed could alter the money supply without passing a trillion dollar *stimulus*. One can stop the collapse of banks and financial institutions without passing a stimulus bill of the sort Obama and the democrats passed. The question is whether the stimulus has or will help shorten the current recession ... which is what Obama and company claimed was the reason for passing it in the first place.
Now one wonders how they could know if they couldn't even come close to predicting what the peak unemployment rate was going to be without stimulus spending. Remember, they assured us that with the stimulus spending, the unemployment rate would peak at about 8%. They assured us that without the stimulus spending, the peak unemployment would be 9.5%. But here we are, with the stimulus spending, and peak unemployment approaching 10%.
In any case, the problem with determining whether the stimulus has lessened the severity and length of the recession from what happens during the current recession is difficult because if the recession seems to be ending then the Obama administration will just say ... see, what we did worked, it would have been much longer if we hadn't intervened. There no way to prove that wrong, even though it might be wrong. It actually is possible that had he done nothing ... had he done the opposite and cut spending ... the recession would have ended even sooner. Only a look at the historical record of what happened in many different recessions can one get a clue as to whether stimulus spending or cutting spending is the right approach.
And I'm telling you that historical data indicates that stimulus type spending does the opposite of ending recessions faster. I challenge you to look at what happened in all the instances in our history where the government didn't increase spending during a recession or depression but instead cut it. Look at the recessions/depressions in 1815, 1837, 1873, 1893, 1920, 1958 or 1979. In every one of those, the government cut spending and in every one of them the economy recovered much faster than it did on average, during the New Deal ... or now.
Consider the depression of 1837. It was so serious that 4 million people lost their jobs (that was a lot back then compared to the size of the population). Out of 850 banks in the US, 343 outright failed and another 62 partially failed. Property values that had been in a speculative bubble (much like ours) collapsed dramatically. It looked a lot like what you folks warned us would happen if we didn't intervene in a massive way. And democrat President Grover Cleveland's response was to cut taxes AND spending. And lo and behold, the economy recovered relatively quickly.
In February 1921, President Harding inherited one of the sharpest recessions in US history. Unemployment rose over 700% in just one year. Production fell 23%. The stock market dropped 18%. Yet within a year, it was over and the economy was booming. What happened to make this possible? Harding cut government spending by 40%, instead of massively increasing it.
The truth is that in example after example, one can see that cutting government spending led to recovery. And example after example seems to suggest that massive *stimulus* spending lengthens and deepens recessions. And since you brought up the Great Depression, let's examine it in particular, since Hoover and Roosevelt spent like crazy.
Eight years after the New Deal began, FDR's own Secretary of the Treasury admitted that all the money they'd spent had utterly failed to reduce unemployment or stimulate the economy. He said "We have tried spending money. We are spending more than we have ever spent before and it does not work. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. ... I say after eight years of this administration we have just as much unemployment as when we started .... and an enormous debt to boot!" Arthur Schlesinger, Jr., an acclaimed New Deal historian and an admirer of FDR admitted in his book that the New Deal "did not produce recovery". The Brookings Institute (a left-leaning organization) recognized this. In fact, in 1935, it published a report on the impact of the New Deal's National Recovery Administration and concluded that "on the whole it
retarded recovery." Even FDR seems to have eventually learned the lesson because when the economy collapsed for a second time in September of 1937 ... in the midst of government spending that was four times what it had been prior to the 1929 crash ... FDR's answer was not another massive increase in spending. And lo and behold, the economy began to recover.
The truth is that as a result of this long history of experience, the consensus until very recently among economists was that attempts at stimulus through emergency fiscal policies ... as opposed to monetary policies ... were useless. Martin Eichenbaum of Northwestern University in the American Economic Review in 1997 wrote “There is now widespread agreement that countercyclical discretionary fiscal policy is neither desirable nor politically feasible.” Martin Feldstein, president of the National Bureau of Economic Research in 2002 stated that fiscal stimulus “has not contributed to economic stability and may have actually been destabilizing.” Then came Obama who turned everything upside down, thinking himself an expert.
