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Home Publications Blogs Beat the Press Robert Samuelson is Half Right: China Could Save the World

Robert Samuelson is Half Right: China Could Save the World

Monday, 26 September 2011 04:34

Robert Samuelson has a piece today arguing that China's intervention is necessary to save the world economy. He of course is right in arguing that China has enough economic strength to save the euro and prevent a downward spiral that would throw the world economy back into recession, as some of us have argued

However, the fact that China may have to play this role is due to the failings of the political leadership in both Europe and the United States. It is essential to remember that this is a crisis of a lack of demand, not supply. For this reason, it is ungodly stupid that so many people are being made to suffer from unemployment and declining living standards.

We know how to get out of this mess, we have known how for 70 years. We just need the government to generate demand. That means spending money. Ideally it would spend money on useful things like education, health care, and infrastructure, but even if it spent money in wasteful ways it would still create jobs and put people to work.

In the 30s we got much of the way back to full employment with the Works Progress Administration and other programs. Much of what was done was useful -- look around, you won't have to go far to find infrastructure built by depression-era programs. However, it took the massive spending associated with World War II to get the economy back to full employment. There is no magic associated with war that makes military spending more effective in creating jobs. The only difference was that the threat to the nation from the Axis powers removed the political obstacles to the necessary spending. 

The same situation applies today. We just need to spend money. That applies to both the United States and the euro zone countries. The problem is that we have more people in political leadership positions who want to be morality cops and lecture about balancing budgets rather than focus on policies that will restore economic growth. This includes the top officials at the European Central Bank, many of the voting members of the Federal Reserve Board's Open Market Committee and much of the political leadership in the euro zone countries, the United Kingdom and of course here.

The reason why the world might need China to come to the rescue is that our economic policy is being designed by people who prefer to impose their warped sense of morality rather than pursue serious economic policy. The real humiliation of turning to China is not that we actually need China, it's that our political leaders are prevented us from saving ourselves.

Comments (14)Add Comment
written by Robert W. Mann, September 26, 2011 7:00
What I don't understand is why our spending in Iraq and Afghanistan hasn't had the stimulative effect as did WWII. I think I have read that we have now spent more than we did then. Thanks for your continual presentation of these facts about the economy. I imagine that it gets boring to you when you say the same thing over and over and the opposition doesn't seem to get the point.
written by Bizono, September 26, 2011 10:47
@Robert W. Mann

I would guess that the difference between military spending during WWII and now is that in the 1940s we were spending money on war machinary that was much more labor-intensive.
WWII and All That Jazz
written by Ellen1910, September 26, 2011 10:51
Was it spending or the compulsory levy of the employed and the unemployed (up to 15 million at one time) that produced "full employment?

Of course when the 15 million got demobbed, there was massive unemployment. Nah -- those were just women and as we all know, women couldn't be unemployed. They always had a job in the kitchen and the nursery.
Stimulus from World War II and Iraq
written by Dean, September 26, 2011 10:56

the main difference between two is the size of the spending relative to the size of the economy. The spending on WWII was more than 20 percent of GDP at its peak. Spending on the Iraq/Afghan wars never exceeded 2 percent of GDP.

There are various ways of calculating the cost of a war. Some people, like Joe Stiglitz, have done calculations including indirect costs, like the disability payments to wounded soldiers over a lifetime. This substantially raises the costs of the Iraq/Afghan wars, although if we do an apples to apples comparison, we would have to do the same sort of calculations for World War II veterans. That would also give an enormous number.
written by PeakVT, September 26, 2011 11:13
What I don't understand is why our spending in Iraq and Afghanistan hasn't had the stimulative effect as did WWII.

The Af-Pak/Iraq/DHS spending, while significant, was/is on the order of 2-3% of GDP, and it ramped up slowly over several years, from 2002 to 2005. The WWII spending was much greater, and it ramped up very rapidly. By the time the current recession hit, the Af-Pak/Iraq spending had become a normal part of the economy, and so couldn't have any effect on the latest downturn.
Quote fail
written by PeakVT, September 26, 2011 11:18
Argh. My previous comment was a reply Robert W. Mann.
A First!
written by EMichael, September 26, 2011 11:37
Robert Samuelson is half right?

Who'd thunk that would ever happen?
Post WWII Stimulus
written by bakho, September 26, 2011 12:08
The Post WWII stimulus in the form of the GI Bill was huge. The first 10 years of GI Bill was more domestic spending was far more money than the first 10 years of New Deal Spending.

GI Bill provide almost free college eduction, guaranteed home loans to soldiers that might not otherwise qualify for loans and business loans. It was a lot of stimulus.

Many in Congress would not have voted for GI Bill but were shamed into doing something to thank the troops.
Then and now
written by Anad, September 26, 2011 12:30
Didn't WWII destroy some of the productive power of the competitors to US producers? That would seem to be stimulative to US producers and the labor market. That would be a big difference between WWII spending and current war spending.
Other post-WWII stimuli
written by Douglas Rusta, September 26, 2011 1:44
Our investment in the reconstruction of Western Europe via the Marshall Plan, the construction of the Interstate Highway system, and the release of pent-up demand after years of shortages contributed to the economic recovery and the subsequent creation of modern America. It is unfortunate that nearly all of our business and political leaders have not recognized that the process was not stablized when we entered our Viet Nam adventure. We continued to pursue an expanding empire which, like all before it, could not be supported economically or politically. Now, lawyers who are innumerant, and faith-based political opportunists, are in the saddle riding in the direction of the edge of a very deep chasm.
Dean, You had me up to
written by Floccina, September 26, 2011 3:46
Dean, You had me up to when you said:

useful things like education, health care

By education I assume that you mean schooling (rather than say PBS and NPR), in which case there are very few things that we can spend money on that yield less benefits than schooling and health care. Capital improvement and research are much better bets. Most of benefits to schooling beyond the early grades are positional. On healthcare and schooling we seem to be beyond the point were marginal spending yields any benefit at all.

Also borrowed money comes out of the economy and must be paid back.
written by skeptonomist, September 26, 2011 4:27
One important ingredient of the WW-II and post-war success was the very high marginal tax rates. There were excess profits taxes on corporations and many CEOs became dollar-a-year men during the war. The idea that people at the top of the income scale would not be productive under high taxes is complete nonsense; in fact it is likely that under high tax rates those people are forced to direct their efforts, and the investment they control, to long-term growth rather than rapid speculative profits.
written by Jethro, September 26, 2011 8:43
Contrary to your hypothesis - drawing a comparison from then to now is not practical. For instance, how do you know what was productive back then, what might have been the "numbers" had there not been high taxes. Your starting assumptions are what is complete nonsense.
written by Calgacus, September 27, 2011 5:37
Ellen1910, you had a good question on deficit spending and reserves down at Rogue Economist Rants. Saw it late. If you haven't seen it, I think my answer got to your point best.

One point of view is that the current economy is much MORE sexist than the post WWII economy. People back then had a choice. Now they don't. Two incomes are now necessary for a married couple to have the lifestyle one income provided back then. One can think of this as modern married working women having a wage of zero.

One thing not yet mentioned is the high postwar government debt/GDP ratio. Contrary to modern mainstream quackonomics, and following the rule that it is always 100% wrong, this is usually a good thing. It just means that the economy is full of risk-free, liquid government debt=money, which makes for financial stability - especially as it was not then hyperconcentrated at the top. The finances of the US economy lived off this high ratio for many decades, until now, when we need to raise it again.

Floccina: No, borrowed money, if you mean government bond sales, does not come out of the economy. That's the core of MMT - correct accounting. Health care & education are the best investments there are. Much of what the USA spends on "health care" is not really that, but just transfer payments to wealthy predators, like the current governor of Florida.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.