This article assesses the extent and nature of the stimulus that will be required to end the economic crisis that opened in 2008. It compares the present economic situation to that which opened in 1929 and studies the relation between state spending, investment, and employment.Keywords: Credit Crunch; Investment; Liquidity Preference; Rate of Profit; State; Welfare State; War; Military Keynesianism

Freeman, Alan

English

Research Papers in Economics

How much is enough? 
By Alan Freeman, University of Manitoba 
 
Abstract 
This article assesses the extent and nature of the stimulus that will be required to end the economic 
crisis that opened in 2008. It compares the present economic situation to that which opened in 1929 
and studies the relation between state spending, investment, and employment. 
 
Keywords: Credit Crunch, Investment, Liquidity Preference, Rate of Profit, State, Welfare State, 
War 
 
 
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Government spending + private investment
Government spending (% of GDP)
Gross private investment (% of GDP)
Unemployment (% of workforce)
Sources: GDP components, Bureau of Economic Analysis
Unemployment rate: Bureau of Labour Statistics and John T. Dunlop and 
Walter Galenson, eds., Labor in the Twentieth Century (New York, 
Academic Press, 1978), p. 30.
How much is enough? 
By Alan Freeman, University of Manitoba 
How much is needed to get us out of the crisis? 
From the historical evidence, a lot more than 
we’ve seen so far. Obama’s stimulus, at five per 
cent of GDP, outstrips all others in the Western 
world –which on its own sheds doubt on them. 
Yet even this may not be enough. 
All but the wilfully stupid now know this is no 
‘ordinary’ recession. Downturns like 1974 pale 
into insignificance beside it.  Only two crises in 
modern history  – 1929 and 1893 – compare with 
it. With few exceptions, economists in Bush’s 
inimitable words ‘misunderestimated’ this from 
day one.  
It is driven, like those of ’29 and’93, by a failure 
of  of investment, in turn caused by a system-wide 
crisis of profitability. When the return on capital 
sinks to present levels, investors simply retreat 
from productive investment into ever more 
irrational speculation. 
This occurs rarely, but when it does, the 
conventional belief that ‘the market always 
works’ is worse than useless. One must be guided 
not by  doctrine but the facts. It is an open secret that Obama has expressed more interest in the 
1933 US ‘New Deal’ than in the views of his closest economic advisors. So let’s take a look at it. 
Who blessed America? 
By 1933, US unemployment reached the unprecedented level of 25%. It’s not hard to see why: 
capital stopped investing. By 1932, private investment of all types had fallen to the all-time low of 
2.2 per cent of GDP, from 15.9 per cent only three years earlier. 
An investment failure goes beyond lack of demand. You can cut taxes and interest rates as far as 
you like, but unless investors put their money where their large mouths are, the economy goes 
nowhere fast. The state has to step in directly. In words used by Keynes but conveniently ignored 
by his recent converts, it must ‘socialise investment’. But on what scale? Like Obama – but two 
years too late – the New Deal hiked state spending by five per cent of GDP, cutting unemployment 
to 16 per cent until the mini-recession of 1937-38. 
Cool – but not a recovery. The ‘golden age’ boom of 1942-1968 finally saw the back of the 
depression. It dates not from the New Deal, but the War. Between 1938 and 1944, government 
spending trebled, approaching half of GDP – compared with a miserable three per cent from private 
investors. And when the war was over, state investment stayed at double its prewar level despite 
repeated foolish attempts to cut it back. This was what it took, economically, to ‘solve’ the crisis. 
It’s common to speak as if the war was ‘economically abnormal’. Well, so is the present situation. 
So here’s an ‘uncomfortable truth’: before the US economy saw a meaningful recovery, the state 
took over half its economy, supplanting private investment for three years, and following that, 
retained both investments and spending which were double their prewar levels. And it happened in wartime, when private investors accepted measures they would not tolerate in 
peacetime. That’s food for thought. It means the way out of the crisis involves something never 
seen before – wartime state involvement on a peacetime basis. 
In simultaneous polls in the USA and Canada, two-thirds of those interviewed said that they wanted 
direct state spending instead of tax cuts – a historic shift of opinion. North American economists 
haven’t caught up and, according to the Wall Street Journal, are still arguing for tax cuts – which 
just means they want the poor to pay. This is so last Millenium. As France and Iceland show, it 
won’t play in Peoria. 
Maybe it’s time the politicians stopped listening to their economic ill-advisors, and started listening 
to their own people – and the lessons of history. Capital, move over. Public, move in. 
 

How much is enough?

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