Look first at total government spending — federal, state and local. Adjusted for population growth and inflation, such spending has recently been falling at a rate not seen since the demobilization that followed the Korean War.
Is this possible? Don Boudreaux says no, but he doesn’t really make his case because he only adjusts total government spending for inflation, not for population growth. Boudreaux points out that the spending decrease is only in relation to the spending increases of recent years, and is still more spending than in the pre-recession years. But Krugman, I presume, would see that as an irrelevant argument, since he thinks still more spending is what is necessary. That is, I doubt Krugman thinks pre-recession spending is a meaningful benchmark when you’re still trying to recover from a recession, so I doubt Boudreaux’s critique is on-point there.
But neither of them actually tells us how fast spending fell after the Korean War. Notably, the source he uses doesn’t provide total spending changes for the years following the Korean War, but only gives us 1950 and 1960. So where does Krugman get his data on total government spending following the war? He may have a source, but he doesn’t share it in his article, not even by vague allusion. That means there’s no way for anyone to verify his claims, and that’s unsettling.
Nor does either one say what where the economic effects of post Korean-war spending decline. Here’s the GDP of the U.S. from 19549 to 1955 (the Korean War ran from mid 1950 to mid 1953). The middle column shows GDP in billions of current dollars, while the right column shows GDP in 2005 dollars (source: BEA).
1950….. 293.7….. 2,004.20
1951….. 339.3…… 2,159.30
1952….. 358.3…… 2,242.00
1953….. 379.3…… 2,345.20
1954….. 380.4….. 2,330.40
1955…… 414.7….. 2,498.2
In constant (nominal) dollars, there was actually a small increase in GDP from 1953 to 1954, but the inflation-adjusted dollars show a small decrease, just over a half percent. That’s not a huge decrease in GDP, especially when you consider the growth the next year, over 7% (9% in constant dollars).
What are we supposed to be worried about? According to Krugman,
Over all, the picture for America in 2012 bears a stunning resemblance to the great mistake of 1937, when F.D.R. prematurely slashed spending, sending the U.S. economy — which had actually been recovering fairly fast until that point — into the second leg of the Great Depression.
There are, of course, competing theories. Some argue that the Court’s switch to upholding the New Deal regulation in the 1937 case of West Coast Hotel v. Parrish severely damaged investor confidence, which had–so the argument goes–improved after much of the early New Deal legislation was struck down. And the monetarists point to changes in banking laws that increased reserve requirements, taking money out of the economy. But of course Krugman’s considered position is that fiscal policy is the key. But he doesn’t really make the case in this opinion that the post-Korean spending reductions were that significant, or that the spending cuts going on now really resemble 1937 that closely.
Update: Krugman provides a perhaps useful graph here. He repeats his claim that we haven’t seen this level of spending cuts since the demobilization after the Korean War, but the late 1960s decline is clearly bigger than today’s. And of course it’s still not clear what the significance of the comparison to the 1950s is, since that decline didn’t seem to have much economic effect. I have a vague impression this is something like saying, “I haven’t had that much to drink since my last communion!”