IBD cited 1930s America, 1990s Japan as evidence that stimulus spending doesn't work, but economists disagree on both counts

In criticizing a large-scale economic stimulus plan favored by President-elect Barack Obama and congressional Democrats, a January 2 Investor's Business Daily editorial echoed other media by citing two historical examples -- the New Deal and Japan's "lost decade" -- as purported evidence that stimulus spending is "the least effective way to give the economy a boost." However, as Media Matters for America has noted, according to prominent economists, economic conditions in both 1930s America and 1990s Japan were improving following major increases in stimulus spending -- trends that were reversed only when the respective governments decided to cut spending and raise taxes in an attempt to reduce the deficit.

Criticizing the New Deal, IBD asserted:

In the 1930s, for instance, we went on an infrastructure binge, building new roads, dams and schools; electrifying the rural south and enlarging our ports, among other major tasks.

Granted, some infrastructure improvement was called for. But all that activity didn't pull the the [sic] country out of depression -- not by a long shot. Unemployment averaged 17% in the '30s, and it wasn't until 1941 -- the start of World War II -- that GDP returned to its 1929 level.

However, IBD's use of the average unemployment rate during the 1930s is misleading; historians and progressive economists have noted that unemployment fell from the time the New Deal was launched until 1937, when, according to Nobel laureate and New York Times columnist Paul Krugman, President Franklin D. Roosevelt reversed course. In a November 10 Times column, Krugman wrote: "After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections."

Additionally, IBD's assertion that "[u]employment averaged 17% in the '30s" appears to be based on unemployment data that does not include government-relief employment created by New Deal programs. Indeed, former Wall Street Journal writer Amity Shlaes -- whose 2007 book, The Forgotten Man: A New History of the Great Depression, has been frequently cited by conservative media figures to dismiss the effectiveness of the New Deal -- acknowledged that her unemployment figures excluded "make-work jobs," instead relying on data compiled for the Bureau of Labor Statistics (BLS) by economist Stanley Lebergott. In a November 29 Wall Street Journal column, Shlaes wrote, "To be sure, Michael Darby of UCLA has argued that make-work jobs should be counted. Even so, his chart shows that from 1931 to 1940, New Deal joblessness ranges as high as 16% (1934) but never gets below 9 percent" [emphasis in original]. After World War II, BLS ceased counting those in work-relief programs as unemployed, as noted by economist Gene Smiley in a 1983 Journal of Economic History article.

Of Japan's "lost decade," IBD wrote:

Japan followed the same Keynesian game plan after its real estate bust of 1989. To the applause of many American liberals, hundreds of trillions of yen were spent on infrastructure, raising outlays on big projects from 6.5% of GDP in 1990 to 8.3% in 1996 -- even more than contemplated under Obama's plan.

That didn't work either. The 1990s were a "lost decade" for Japan's economy, and the country is still stagnating. Its infrastructure boom did have one lasting legacy, however: Japan is now the most heavily indebted nation in the OECD.

However, contrary to IBD's assertion that stimulus spending "didn't work" in Japan, Adam Posen, deputy director of the Peterson Institute for International Economics, wrote in his September 1998 book, Restoring Japan's Economic Growth, that "the 1995 stimulus package ... did result in solid growth in 1996, demonstrating that fiscal policy does work when it is tried. As on earlier occasions in the 1990s, however, the positive response to fiscal stimulus was undercut by fiscal contraction in 1996 and 1997." Other economists and media figures agree with Posen that the positive effects of the mid-decade stimulus packages in Japan were curtailed by attempts to scale back spending and increase sales taxes, as Media Matters has noted. Krugman, for one, points to Japan's fiscal stimulus packages as having "probably prevented a weak economy from plunging into an actual depression."

From IBD's January 2 editorial, "For Real Stimulus":

The massive new spending program that is being pushed by congressional Democrats emboldened by their newly enhanced majorities may come up as soon as Tuesday, when they return from their holiday breaks.

Unfortunately, they've picked the least effective way to give the economy a boost. Those who argue for hundreds of billions of dollars for infrastructure projects and "green jobs" have it all wrong. We've tried those remedies before and found them wanting.

In the 1930s, for instance, we went on an infrastructure binge, building new roads, dams and schools; electrifying the rural south and enlarging our ports, among other major tasks.

Granted, some infrastructure improvement was called for. But all that activity didn't pull the the [sic] country out of depression -- not by a long shot. Unemployment averaged 17% in the '30s, and it wasn't until 1941 -- the start of World War II -- that GDP returned to its 1929 level.

Japan followed the same Keynesian game plan after its real estate bust of 1989. To the applause of many American liberals, hundreds of trillions of yen were spent on infrastructure, raising outlays on big projects from 6.5% of GDP in 1990 to 8.3% in 1996 -- even more than contemplated under Obama's plan.

That didn't work either. The 1990s were a "lost decade" for Japan's economy, and the country is still stagnating. Its infrastructure boom did have one lasting legacy, however: Japan is now the most heavily indebted nation in the OECD.

If President Obama and his fellow Democrats get their way, the U.S. may soon be trudging down the same path. Next year, reckons budget expert Stan Collender, the deficit may hit $1.3 trillion, or 8% of GDP, as Congress tries to spend its way out of recession. That's roughly $13,000 for every taxpayer.