Politicians’ knee-jerk tendency is to spend money. They receive credit for accomplishing something while spending other people’s money. Economists often help politicians by promoting the myth that federal spending stimulates the economy. In fact, federal spending consistently weakens the economy, lowers living standards, and often creates serious problems.
The stimulus myth does not apply to the real world. It works only in theory and in the minds of certain economists. Evidence from the latest surge in federal spending is consistent with our nation’s history whereby excessive federal spending undermines growth and prosperity.
The Historical Record
Boom to Bust
The earliest attempt to use federal spending to stimulate the economy was in 1913. President Woodrow Wilson was convinced that more government spending and regulations would improve the economy. Over the course of his administration (1913–21), federal spending increased five times faster than total spending (GDP). After eight years, Wilson’s reliance on more government brought an abrupt end to the prosperity that preceded his failed experiment, and the prosperity that would follow.Bust to Boom
In 1920, federal spending was $6 billion. During the 1920s, free-market politicians voted to cut the federal spending by more than 50 percent. These massive cuts ushered in a decade of unprecedented prosperity known as the Roaring Twenties.Boom to Bust
Federal spending made a comeback under President Herbert Hoover. His first budget, beginning in mid-1929, increased federal spending by 6 percent at a time when total spending was declining by 2 percent. From 1929 to 1933, federal spending increased by 47 percent, while total spending (GDP) fell 42 percent. Hoover also signed the infamous Smoot-Hawley Tariff Act of 1930, which implemented protectionist trade policies and consequently undermined international trade. The combination of Smoot-Hawley along with substantial increases in federal spending contributed to the onset of the Great Depression.
