Brad DeLong quotes a 1939 John M. Keynes piece on the Second World War and the power of fiscal stimulus. The post’s title provides the context (hard to believe some people still doubt the ability for fiscal stimulus to boost production in a liquidity trap). The final sentence of the excerpt is the one I’m most interested in,
If we can cure unemployment for the wasted purpose of armaments, we can cure it for the productive purposes of peace.
What I find hard to believe is that the lessons of the socialist calculation debate are still not being applied to broader economic theory.
Few people doubt that the Second World War brought the U.S. economy to “full employment.” Indeed, whoever wasn’t conscripted into the military had ample opportunity work in a factory geared towards wartime production. But, targeting full employment for full employment’s sake doesn’t imply a productive a economy, and Keynes acknowledges this (when comparing the “productive purposes of peace” to the “wasted purpose of armaments”).
What Keynes — and, much worse, those reading Keynes today who should know better — doesn’t acknowledge is the debate revolving around the allocation of resources, which culminated during the 1920s and the 1930s. There’s two ways to pose the challenge. First, an institution not subject to profit and loss is likely to invest towards “second-best” (or third-, fourth-, …, best) projects. Second, non-localized investment is not as privy to the relevant knowledge that should command spending. The conclusion reached through these two arguments is that even peacetime public spending is likely to be “unproductive” in relation to the investments that could have been (opportunity cost).
The case against fiscal stimulus is not that it can’t bring an economy to full employment. It’s that that full employment market will be less productive than that which would have manifested through the market process.
I don’t mean to downplay the more complicated arguments in favor of fiscal stimulus (the liquidity trap implies market failure, et cetera), but Keynes, in that excerpt, isn’t just considering the liquidity trap. In fact, Keynes was unsure if the Great Depression even represented such a liquidity trap! He timidly suggests that the United States may have experienced such an event in 1932 — I’m citing from memory, so let me know if I’m wrong —, but clearly the case for fiscal stimulus doesn’t rely on the liquidity trap. My only point is that we can reach full employment through fiscal stimulus, and we can conceivably change the level of “productivity” (which really means the degree to which production actually engages consumers’ preferences), but that this level of full employment will not be as “productive” as that which would result from only private spending.
If you don’t buy the auxiliary Keynesian arguments that suggest markets under-invest during depressionary episodes (without obstacles created by interventionism), then there’s a good reason to not support fiscal stimulus. As implied above, the debate can be more sophisticated, but simple arguments deserve simple responses.