How Welfare Prolongs the Obama Depression

The Wilson Quarterly is published by the Woodrow Wilson International Center for Scholars.  Its board includes such luminaries as Secretary of State Hillary Rodham Clinton and Health and Human Services Secretary Kathleen Sebelius.  We don't know how much time these people actually spend at the Center, but their lending their names to its masthead is a pretty reliable indicator of where the Center's politics lie.

The Quarterly's Winter of 2012 issue included "Revisiting the Great Depression" which sums up a liberal view of why the Depression occurred and how it was cured.  It comes as no surprise that the Quarterly gives Roosevelt's "tax and spend" policies credit for ending the Depression.

The article ignores the inconvenient truth that the Depression didn't really end until WWII destroyed our competitors, leaving wide-open markets for all our manufacturers for the three decades it took for the rest of the world to rebuild.  Its summary of what happened after the Depression is accurate, however:

The Great Depression cast a dark shadow over the 20th century. It arguably led to World War II, because without the Depression, Adolf Hitler might never have come to power. It discredited unfettered capitalism—which was blamed for the collapse—and inspired the expansion of government as the essential overseer of markets. [emphasis added]

Then as now, liberals who yearn to expand the role of the state give government programs far too much credit for the boom that came after WWII.

The article makes two main points:

1. Up until the Depression, most nations based their money on gold.  The gold standard made it impossible to expand the money supply to combat the Depression, so most nations abandoned it.  This led to hyperinflation in Germany, of course, followed by Hitler.
2. The modern welfare system is playing the same destructive role in today's Obama Depression as gold played in the Great Depression.

Depressions occur when "powerful historical, social, and political changes overwhelm the normal market and policy responses."  This is what happened to the gold standard.  Sound money was blamed for government's being unable to end the Depression, so politicians separated money from gold and were able to print as much money as they liked.

There had been 100 years of political argument about whether to stay on the gold standard or to allow the money supply to increase before America abandoned the gold standard in 1934.  As a moment's thought about the battles over government pensions shows, it's very difficult and very painful and very noisy to change such longstanding social habits.

Alas!  Increasing the money supply allowed spending to expand, but didn't really help the economy.  The pro-government folks simply can't admit that and never will, of course.

A Thought Experiment

Let's assume for purposes of argument that the gold standard kept governments from increasing the money supply and that the increased spending after it was abandoned actually helped the recovery.  That's the standard liberal / progressive view of the Depression - the spending-driven recovery proved that government must have a very large role in managing the economy.

Assume that it's true.  What of the article's second point which argues that the welfare system as we know it prolongs the Obama Depression?  If government spending is what ended the Great Depression, why wouldn't the tremendous spending by our vastly enhanced social safety net end the Obama Depression?

Something similar is happening today, with the welfare state—the social safety net of wealthy democracies—playing gold’s destructive role. In Europe, government spending is routinely 40 percent or more of national income. In the United States, it exceeds a third. Like the gold standard 80 years ago, these protections command broad support. They mediate between impersonal market forces and widely shared norms of fairness. The trouble is that many countries can no longer afford their costly welfare states.  [emphasis added]

It's true that welfare state spending commands "broad support."  Londoners and Greeks rioted when their welfare benefits were threatened even though excess spending is ruining their economies and taking away their job prospects.

In saying that many countries can no longer afford their costly welfare states, the Quarterly speaks truth.  Its editors adroitly steer around the inconvenient fundamental truth which would offend the luminaries on its masthead, namely, that their party's policies are and have always been the problem.  Governmetn spending doesn't cure depressions, government policies cause them and make them worse.

A Really Inconvenient Truth

The Quarterly explains what went wrong with the welfare state:

Even in the United States, with its sizable military budget, “payments for individuals” (which means entitlements such as Social Security and Medicare) amounted to two-thirds of federal spending in 2010, up from a quarter in 1960.

But this system required favorable economics and demographics—and both have moved adversely. A younger population was needed to lighten the burden of supporting the old, the largest claimants of benefits. Rapid economic growth was needed to generate the tax revenues to pay for benefits. Indeed, the great expansion of benefits started in the 1950s and ’60s, when annual economic growth in Europe and the United States averaged about four percent or more, and the expectation was that this would continue indefinitely. Long-term economic growth is now reckoned closer to two percent a year, a little more for the United States, a little less for Europe. Meanwhile, older populations are exploding.

Once this happened, welfare states became an engine of international austerity. Countries’ choices were constricted. To maintain existing levels of spending, they needed to borrow. But lenders demanded higher interest rates, and to keep these down, governments had to resort to austerity, which meant cutting social programs and raising taxes.

Despite all the evidence, the Quarterly tries to cling to the old "tax and spend" mantra:

Governments are losing control over their economic fates, because high debt also undermines standard Keynesian anti-recessionary tools, a.k.a. “stimulus,” spending more and taxing less in times of economic weakness.

The fact that welfare spending is killing all the economies in which it has mestatasized shows that Keynesian spending isn't the cure.  If it were, welfare would be just as good a way to shovel money out the door as any.  Government is spending a bigger percentage of GNP than when Roosevelt was fighting the depression with the same lack of constructive results.  Here's what Roosevelt's Treasury Secretary Henry Morgenthau had to say:

We have tried spending money. We are spending more than we have ever spent before and it does not work... After eight years of this administration we have just as much unemployment as when we started... and an enormous debt to boot!

Instead of helping the economy, welfare is forcing governments to cut back.  There are two ways to remedy the situation - the hard way, where governments voluntarily cut back, or the very hard way where entire economies collapse.

Either way, however, the Quarterly, whether they recognize it or not, have demonstrated conclusively that government spending isn't the cure for recession.  If only they'd get government out of the way, the economy could recover.