Is the government deficit too large? Some are saying yes; some are saying no. Who's right? Paul Davidson, Editor of the Journal of Post Keynesian Economics and author of The Keynes Solution: The Path to Global Economic Prosperity, decided to look at some hard evidence -- namely, the history of our national debt. What he found is that the U.S. has had a significant outstanding debt ever since the economy went into a deep recession in 1837. But the real history lessons are to be gleaned from FDR's presidency. During his first term, the national debt increased to $33.7 billion -- or approximately 40% of GDP -- causing many "experts" to cry disaster and worry over the plight of future generations. Sound familiar?
So Roosevelt listened (briefly), and as part of his reelection campaign cut spending dramatically, leading the economy to fall into a steep recession all over again. The economy didn't really get cooking until the war in 1945, when the national debt increased to $258 billion -- or about 120% of GDP. National security concerns trumped deficit concerns as we fought World War II, and we exited the war with a booming economy. It lead to "the golden age of economic development for the United States as the rich grew richer while the poor gained even more in a rapidly rising level of income that created a large American middle class," Davidson says.
The moral of this story? "Just as we expect the Federal government to spend whatever is necessary to protect us from foreign enemies during a war, we should also expect the government to spend whatever is necessary to protect us from the economic terrorism of a great recession," he says.