Monday, December 6, 2010

Empirical Evidence that Keynesians are Wrong

From Dom Armentano at Lew Rockwell

The period 1945-1950 is (almost) a scientific test of the Keynesian hypothesis. Despite repeated warnings by most mainstream economists that cutting government spending at the conclusion of WW 2 would bring back the Great Depression, the Congress dramatically lowered government spending between 1945 and 1950. Federal government expenditures fell from $106.9 billion in 1945 to $44.8 billion in 1950.

But what happened to overall economic output and unemployment? Despite the massive economic transitions from wartime to domestic production, GDP actually increased (confounding all of the Keynesians) from $223 billion in 1945 to $244.2 billion in 1947 and then to $293.8 billion by 1950. And despite millions of returning servicemen and women, the unemployment rate averaged a very low 4.5% between 1945 and 1950. 
You know how I feel about Keynesian gems such as one person digging a hole and another person filling it, or burying money in bottles for other people to dig up.

1 comment:

Taylor Conant said...

What was the money supply doing during that time?