Toro
Diamond Member
Actually it didn't end until after WW2 when spending was cut and taxes were cut. War-time spending certainly didn't get us out, because that's always destructive to the economy.
This is incorrect.
If the government significantly increases demand to go blow things up over there, then the war is stimulative to the domestic economy. It is bad for over there but it is good for right here.
For example, corporate profits hit a multi-decade high in 1918 and were not surpassed until the 1950s.
A majority of production moving into supplying instruments of war is not helpful to the economy at home, because the only demand is from the military and not any domestic sources. Furthermore, the money spent on the war was taken from the citizens through taxation and inflation, which of course takes us to Bastiat's "What is seen and unseen."
Military demand is the domestic source.
But of course, domestic source does not matter. Exports are not a domestic source yet they add to the aggregate demand of the economy.
Your statement is only correct if there is no excess capacity in the economy. There was significant excess capacity after the Depression.
It also assumes that the velocity of money is high. If the velocity of money is low, government spending is stimulative even if there is taxation. For example, if everyone is sitting on their hands not spending and letting the money sit in the bank (or their mattress as was common during the Depression), the government taking the money and spending increases economic activity. This is known as The Paradox of Thrift.