Saturday, August 13, 2011

An Economic Lesson from Harry Truman

The appointment of yet another deficit commission, to make recommendations for reducing the programmed increases in our national debt over the next 10 years, demonstrates just how dysfunctional the political system has really become.

President Obama appointed a bi-partisan deficit commission last year. In December, they came back with a modest proposal to reduce the planned increase in the debt by $4 trillion over the next 10 years.

Obama should of went on TV, held the plan up, and told the American people that we need to do this to fix the economy. Then he should have dumped it in John Boehner's and Harry Reid's laps and focused like a laser beam on building support for it around the country. That's what Reagan and Clinton would have done.

Instead, Obama ran away from it. It was his own debt commission. Democrats and Republicans on the commission voted for it. But Obama ran away from it like it was the plague.

Over the last few months a bi-partisan group in the Senate, known as the Gang of Six, also came up with a modest proposal to reduce the increase in the debt by $4 trillion over the next 10 years. Both Democrat Majority leader Harry Reid and President Obama ran away from it.

Now, as part of the deal to raise the debt ceiling by a whopping $2.4 trillion over the next 18 months, the House and Senate have appointed yet another deficit commission tasked with finding future savings in the budget, amounting to a lousy $1.6 trillion over the next 10 years. This won't do a thing to solve our economic woes.

The big problem here is that Democrats just don't want to cut spending.

They are sustained by various Keynesian economists, like Paul Krugman who warn of dire economic consequences if we cut government spending.

Keynesian economists also warned Harry Truman not to cut government spending at the end of WWII. They actually tried to get Truman to keep the wartime economy in tact. They argued that we should continue to build military equipment and just bury it in the desert in the name of "full employment".

Fortunately, President Truman told the Keynesian's to take a hike.

Truman oversaw a massive transformation from a government directed economy to a private one. Yes, there were some minor dislocations as there are in all transformations, but the economy did not collapse, millions of people were not thrown out of work, and we did not enter a second Great Depression as the Keynesian's claimed would happen.

The following table, from the White House Office of Management and budget, illustrates spending during the Truman era versus today:

Year 1944 1945 1946 1947 1949 1949 1950 1951 1952 2011
National Defense 37.8 37.5 19.2 5.5 3.5 4.8 5.0 7.4 13.2 5.1
Human Resources 0.9 0.8 2.5 4.2 3.8 4.0 5.2 3.4 3.4 16.6
Physical Resources 2.6 0.8 0.4 0.5 0.9 1.1 1.3 1.2 1.2 1.4
Net Interest 1.1 1.4 1.8 1.8 1.7 1.7 1.8 1.5 1.3 1.4
Other 1.8 2.0 1.6 3.4 2.3 3.3 2.9 1.5 1.2 1.4
Undistributed offsetting receipts -0.6 -0.6 -0.7 -0.7 -0.6 -0.7 -0.7 -0.7 -1.0 -0.6
Total 43.6 41.9 24.8 14.8 11.6 14.3 15.6 14.2 19.4 25.3

Look how fast Truman wound down the war time economy: Government spending went from a peek of 43.6% of GDP to 11.6% of GDP in 4 years. Truman kept government spending at about 15% of GDP between 1947 and 1951. Yes federal spending jumped to 19.4% of GDP in 1952, but this was entirely due to increases in national defense to fight the Korean war.

Unless you were a black in the south, life during the late 40s and early 50s was pretty good, because the government mostly kept it's nose out of our business.

Look at the chart carefully. The problem we have today is very clear -- a bloated and unsustainable welfare / entitlement system, which now comprises nearly 17% of GDP. It will continue to grow and squeeze out the private economy as baby boomers head into retirement.

We need to take a lesson from Truman and unwind as much government spending as possible in as short a time as possible.

We don't need to go from 43.6% of GDP to 11.6% of GDP as Truman did. We only need to go from 25.3% to 18% or so. That, plus simplification of the 80,000 page tax code is all we need to do to restart the economy and balance the budget.

Harry Truman does not get enough credit from history for saving the country.

Had Truman listened to the Keynesian's, who wanted to build tanks and bury them in the desert, America would be a poor country today.

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