Two or three weeks ago I might have said we are all Keynesians now. But recently some conservatives have begun to express concern about too much government spending via stimulus and other measures. (This was apparently a somewhat effective point used by Saxby Chambliss in the Georgia runoff.) One talking point is that the New Deal did not in fact end the Great Depression. This is, strictly speaking, true, but it undermines rather than supports the opposition to massive government spending. Roosevelt's efforts to balance the budget created another dip in 1937, and it wasn't until the truly massive stimulus of WWII that the economy turned around.
Here's my prediction: In the relatively near future, fiscal conservatives will talk less about the Great Depression and start talking about the near-great depressions that preceded it. In 1893, for example, following over-expansion in railroads, banks collapsed, consumer confidence plummeted, foreigners withdrew capital, and the economy shrank. President Cleveland did not respond with Keynesian stimulus, however. (John Maynard Keynes was 10 years old at the time.) Yet, after about 4 years of severe economic distress, the economy recovered anyway.
What Keynes showed was that economic activity can reach an equilibrium far below healthy capacity, but what the pre-1930s depressions arguably show is that the economy can bounce off of that equilibrium even without Keynesian stimulus. The key here is "arguably" and the key question is "how fast?". Even if economic recovery can eventually occur without government spending as stimulus, the latter should be able to accelerate it. Nonetheless, in the coming weeks and months, look for fiscal conservatives to start pointing to earlier depressions (while continuing to mischaracterize the 1930s) as reasons to oppose the stimulus.
Posted by Mike Dorf