austerity vs stimulus

An FT reader writes that it is much too early to conclude that “the UK government’s austerity measures have failed”. Keynesian stimulus, he believes, failed in the 1930s and would similarly fail today, so we must be patient and allow austerity to work its magic.

[I]t is a Keynesian conceit that Roosevelt’s New Deal pulled the US out of its 1930s recession. It did not and US recovery at that time can be credited almost entirely to rearmament ahead of and during the second world war. It is doubtful that any of us would relish a solution of this kind, so perhaps we should give … [the UK government’s austerity measures] a while longer ….

Gregory Shenkman, “Much longer than two years is needed to judge Osborne’s success or failure“, letter to the editor, Financial Times, 13 June 2012.

If the New Deal failed to pull the US out of recession, could it be because the stimulus was too small? After all, rearmament was a stimulus, and by the writer’s own admission generated economic recovery. Surely government spending on things other than arms could also produce a recovery, provided the spending is large enough.


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