It Would Be Cheaper to Fight World War II Again
By Robert Higgs • Thursday February 26, 2009 8:14 PM PDT • 6 Comments
What is the right word to describe the U.S. government’s current and proposed fiscal condition: fantastic, unbelievable, surreal? The Obama administration now expects a budget deficit in fiscal year 2009 of $1,750 billion, or more than 12 percent of GDP. Total federal spending this year is expected to be $3,940 billion, or 27 percent of GDP. President Barack Obama promises that the deficit will be brought down to $1,170 billion in fiscal year 2010. Don’t bank on it.
Did anyone, even two or three years ago, expect this situation to develop? We need to go back only ten years, to fiscal year 1999, to reach a time when the government’s total outlays were smaller than this year’s deficit. Ay, mamacita, what’s going on here?
To get some perspective on how totally crazy the government has gone in its almost incredible overreaction to the financial and economic developments of the past year, consider that during World War II, which was paid for mainly by borrowing, the government ran deficits during the fiscal years 1941-46 that added about $191 billion to the national debt by the end of this period. Since 1947, when price controls no longer distorted the price indexes, the GDP deflator has increased about 8 times and the consumer price index almost 10 times. To be conservative for present purposes, let’s use the CPI to adjust the purchasing power of the dollar. We may conclude then that in present dollars, the deficits the government incurred to fight the greatest war in history, for the six years in total, amounted to about $1,910 billion, or only 9 percent more than the deficit expected in the current fiscal year — a wartime year, to be sure, but the present wars are certainly not large ones by historical standards.
Maybe it would be better if the government scrapped its present budget entirely, and provoked the Japanese to bomb Pearl Harbor again. Then we could fight World War II over. Yes, yes, many people would have to die, but the Pentagon could compensate these unfortunates by awarding each of them a posthumous Silver Star, and in a strictly financial sense, this plan would be much cheaper than what the government is doing now. The largest deficit of the war, incurred in fiscal year 1943, was, in today’s dollar’s, about $546 billion, or less than a third of the deficit the Obama regime (building on the Bush regime’s proligacy, to be sure) will run this year.
Tags: American History, Bailouts, Budget and Tax Policy, Economics, The State, War 
Robert: Thanks for all your posts and podcasts,.. i have listened to most of them ... I have been trying to get an idea about how large the entire toxic asset pools are inside all of the 19 or 20 banks and bernanke referred to in his last speech before the senate finance committee. No one seems to know how much bad stuff is out there...do you have any ideas,... dont you think that our senators should ask the fed chairman for a ball park number ?? is it 5 trillion 20 or 50?
Dana Gardiner | Feb 27, 2009 | Reply
Dear Dana Gardiner,
Assets do not come in two discrete types, toxic and non-toxic. All securities have a degree of risk. The so-called toxic assets are, for the most part, mortgage-related derivatives that are now believed to be risker than they were when the present holders acquired them, owing to the housing bust and all of the mortgage foreclosures and homeowner failures to make scheduled mortgage payments on time. Just what these derivatives are worth can be determined only by private suppliers and demanders in open markets.
Many commentators claim that the markets for these securities are “frozen.” To the extent that they are, this condition arises because the current owners prefer to hold out for a government purchase that will bring them a higher price than they believe they could get for the securities in an open market. In sum, the prospect of the profitable bailout causes the “freeze.”
Nearly all these “toxic” assets have a positive value, because it would be strange to find a derivative whose components have all failed (or will fail) to perform entirely, leaving the income stream at zero. Of course, no Treasury official or committee of hired experts can find the “correct” value; only open markets can do so. Any value the government puts on these “toxic” assets will be arbitrary — and almost certainly greater than the market would establish, thereby yielding a welfare payment to the firm at public expense.
Robert Higgs | Feb 28, 2009 | Reply
The response I hear from Obama backers is “well, WWII got us out of the depression.” My Lord, it took Hoover a while to respond to the REAL depression that began (seriously) in 1930, and even FDR looks like a cautious milquetoast compared to this current crowd. They WANT a depression, I’m convinced of it. Do what we say or we all lose our jobs, the planet will warm over, etc., etc. Perhaps example of crisis theory in action. But the audacity, given the real magnitude of the crisis, is stunning.
PS: I read media details of the Obama budget proposal and will read the whole document later (it’s about 134 pages, I’m told). He seems to be waging a war on capital. Capital gains tax from 15% to 39.5%!!! All the other tax and regulatory provisions are designed to punish private investment, discourage private exploration of oil and gas, and so on. You don’t get more “transparent” than this — if the GOP doesn’t fight this ad get a blue dog Democrat or two, it’s really something else. And a little history: It was the Democrats who first cut the capital gains tax below the income tax rate — back in 1978. There has been a bipartisan consensus around that notion. It may not be the best policy but it’s better than the current proposal.
Jonathan Bean | Mar 1, 2009 | Reply
thanks robert...i appreciate you response
Dana Gardiner | Mar 1, 2009 | Reply