Purpose one: writing a travelogue to describe my various trips.

Purpose two: muse.

Saturday, September 26, 2009

Defensive Keynesians

It has been interesting to watch the economics debate during the recent crisis. What I have noticed is that a Keynesian approach is used as a matter of course by the Federal government, which is depressing, but also that this time around, Keynesians have been in need of defending their ideas, which is encouraging.

One knee-jerk Keynesian is Jim Jubak, who writes for MSN Money. There are parallels between Jubak and Keynes. Like Keynes, Jubak is a successful investor. Like Keynes, Jubak is not an economist. Like Keynes, this does not stop him from making economics commentary.

In a recent article, Jubak blamed a reduction in Federal spending for the recession of 1937. He claimed that Federal spending decreased by 18% in 1937. This did not sound right, so I looked it up. I collected data for receipts (Recs), outlays (outs), spending change (inc), GDP, GDP Increase (GInc) and spending as percent of GDP (S/GDP) for the years 1935-1939:


Federal spending shrank 8% in 1937, not 18% as Jubak claims in his article. There are also several items he omits from his account. In 1935, when Federal spending was first cut since 1927, the economy grew by 11%. In the period he describes, 1937 and 1938, while spending slowed, receipts grew dramatically (37% and 25%), representing a large, effective tax increase. Lastly, the economy grew an impressive 10% in 1937, so while there was a recession later in the year, a better understanding of how the growth and the spending were aligned in time is necessary.