I have mentioned on many occasions that I think the Federal Government should increase stimulus spending in the short-term.
And in my last post I outlined how the Feds tightened monetary policy and decreased spending in 1936 and 1937. So here are a couple consequences.
- GDP sank:
- The unemployment rate went from 9.2 in 1937 to 12.5 in 1938.
With a quick glance at my previous post, you can see when spending picked up both GDP and unemployment started to look better. The money supply also increased again.
Now is it possible the monetary and fiscal contraction were not the cause of the 1938 recession? Or that maybe only monetary or fiscal policy matters?
Of course; however, given the past fallout from such contractionary policies I don’t believe it is prudent to do either at this moment. This is especially true since inflation and interest rates are low. As such, the risk/reward trade-off of cutting back seems heavily skewed toward risk.
