Let’s return to the discussion of New Deal economics, that is the role of fiscal policy during the first two FDR administrations and look at the discussion from Alex Tabarrok:
Thus, an accurate portrayal of fiscal policy during the Great Depression - entirely consistent with Krugman - is that we had much greater spending, much greater taxes and not much economic stimulus.
Raising tax rates during a period when aggregate demand falls far short of potential GDP does seem silly but I have to challenge this notion that we tried a massive increase in government purchases. Using BEA data, I have provided graphs of real government purchases (G/Prices in terms of 2000$) and the ratio of government purchases to GDP (G/GDP). Before 1941, the increase in government purchases roughly mirrored the increase in GDP so this claim of “much greater spending” sounds a bit suspicious. Of course, government purchases did increase substantially starting in 1941 but then as the graph of output to potential output provided by Paul Krugman notes – that is when fiscal stimulus did restore full employment.
Update: Marginal Revolution reader Marmico challenges the notion that tax collections rose substantially during FDR’s first two terms providing us with this link. As Marmico notes:
Conflating high individual marginal tax rates with much greater taxes is bunk.
To be fair, Marmico’s graph shows only a subset of Federal tax revenues as a share of GDP so I have added a graph of total government revenue (Rev) relative to GDP.