David Henderson, of the Hoover Institution has a history lesson for us. It concerns the Second World War and its aftermath, so appropriately he begins by lining up a target in his sights:
The example that Henderson has in mind is the aftermath of the Second World War when the US Government made some truly spectacular cuts in government spending:
35 percentage points! That is some cut back. Obviously, compared to the modern day welfare state, de-mobilising a wartime command economy allows for bigger and faster reductions in government spending. Yet, from a macroeconomic viewpoint, the nature of government spending isn’t the issue, but rather its overall level.
So, what was the result of such a rapid retrenchment?
Needless to say, there have been all sorts of arguments as to why these particular circumstances were exceptional. Naturally, these only occurred to the Keynesians after the boom had occurred; beforehand they were confident – as economists tend to be – that their general theories would apply.
Of course, winning a war is a rather special event. There can be no clearer signal to investors and consumers that the crisis is over and normality restored. The anti-austerity economists of our own day should ask themselves whether a sudden splurge of government spending would send anything as clear a signal or whether it would be perceived as a last, desperate throw of the dice.