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We Dealt With it in 1945, We Can Deal With it Now

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by Ben Cohen

Paul Krugman points out that relative to the resources available, the post World War Two debt was greater than it will be post bailout 2008-2010.

It’s true that it was relatively easy to cut spending after World War II. However, during the war the United States ran massive deficits — more than 20 percent of GDP for three
years. What the big cuts in defense spending after the war did was
mostly to close those deficits; big defense spending during the war
didn’t somehow make it easier to pay down debt after the war was over.
The fact is that the war left America with a big debt — bigger,
relative to our resources, than we’re likely to face when the economic
rescue is over. We dealt with it.

World War Two also taught state planners that massive government spending was a fantastic way to boost economic growth, create jobs, and make new markets that otherwise could not exist under a more laissez faire model. Writes Noam Chomsky:

World War Two was a grand success economically; there was a kind of
semi-command economy, directed by corporate executives who flocked to
Washington to run it, and they learned the lessons. It was confidently
predicted, across the board, that the US would go right back into
depression after the war; therefore something had to be done...

Fortune and Business Week reported that high-tech industry cannot
survive in a 'pure, competitive, unsubsidised, "free enterprise"
economy' (specifically the aircraft industry, though the point was more
general), and 'the government is their only possible saviour.' The
only question is how. Well, they understood perfectly well. There was
an interesting discussion in the business press in the late forties.
They understood that social spending could serve to stimulate and
sustain the economy, but they much preferred, and quickly hit upon, an
alternative; namely, the Pentagon, Department of Energy, NASA, the
Atomic Energy Commission, the whole Pentagon system.

Perhaps Obama will adopt a slightly more humane system for economic recovery (ie. building a decent health care infrastructure, schools, roads etc), but the picture is clear: the road to economic recovery begins with huge government spending and massive debt. At some point, the debt has to be paid down, but preferably not while you are in the midst of accruing it.