Skip to main content
Trump Pentagon Spending

In my various blog pieces, twitter comments, and radio show presentations and interviews, I’ve argued that in a war time economic crisis environment–of which the Covid 19 has created–it is necessary for the federal government to raise its level of government spending as a percent of annual GDP to at least 40%. That’s what we did in the USA in 1941-42. That’s real spending, not tax cutting, that takes the form of household consumption and/or business real investment in plant, equipment, production expansion–that hires more workers and provides a continuation of wage income that in turn stimulates more consumption.

On the eve of World War II the US government spending percent of GDP was barely 15%, given even the New Deal social programs. In 1929 it was a mere 3%. A wartime spending stimulus quickly raised it to 40% where it remained the next four years until 1945. Unemployment quickly fell from more than 10% in 1940 to only 1.9% by 1943.

As I’ve been arguing for months, the March 2020 Cares Act amounted to only an increase of 5% more actual government spending as a percent of GDP, which was around 20% before the crisis–where it’s more or less averaged in the post 1947 period. The Cares Act called for $3.2 trillion, but $650 billion of that was in business-investor tax cuts which were, and remain, largely hoarded or unused. It’s never gotten into the US economy as a true fiscal stimulus.

Tax cuts in deep crises typically get hoarded. In addition, about $1.7 trillion more of the Cares Act was set aside in the form of loans to medium and large businesses. Only around $150B of that has actually been borrowed and gotten into the economy. It’s still sitting there waiting to be claimed by businesses, medium and large.

Only $500 billion in unemployment benefits and household checks plus $525 billion of grants to small businesses have actually gotten into the economy. That’s barely 5% of GDP. This deep contraction of the real economy since March is 4 times worse than 2008-09, during which the fiscal stimulus package was also about 5%.

We’ve had no real fiscal stimulus to date. The Cares Act was a mitigation act, designed to buy time of 8 weeks or so until a real stimulus could be introduced. McConnell-Trump have made sure so far it has not been introduced. That’s why the ‘rebound’ from reopening the economy is now waning and a relapse is on the horizon. That, by the way, is a W-shape “recovery” trajectory.

As I’ve been arguing for months, the March 2020 Cares Act amounted to only an increase of 5% more actual government spending.

Scroll to Continue

Recommended Articles

Now to my other point. In a recent interview I gave with JKunstler on his radio show, I explained this previous analysis. One of the listeners has taken issue, however, with the idea we need to spend 40% of GDP. He argues that was possible in World War II when the US had 70% of the world’s assets; now it doesn’t even have “two nickels to rub” (note that’s a metaphor and not an economic statistic of analysis). Beware of economics by metaphor, by professionals or amateurs. It usually means they have no explanation and substitute metaphors for economic analysis.

Here’s my reply elsewhere on line to the gentlemen without ‘two nickels’ and his argument that the US had 70% of world’s assets in the 1940s and thus could afford to spend 40% of GDP, but now is essentially broke! (By the way, government’s that control the world currency (the US$) don’t go broke ever. And the private sector in the US is sitting on tens of trillions of dollars of assets far greater than during the 1940s that could be taxed without negatively affecting the economy, since most of that is sitting on corporate balance sheets unused or being pittered away in financial market speculation globally).

Again here’s my reply to Mr. ‘not two nickels’, why we can, and should, spend 40% of GDP in stimulus if we’re ever to get out of this crisis economically’:

“In absolute terms the USA has far more wealth assets than it did in 1944. The 70% then was based on the ROW having very little. So please no simple percentage analyses! “now have not two nickels” is just a misleading subjective anecdotal phrase.

Finally, government spending potential is not based on the magnitude of private asset accumulation, especially when the latter is just fictitious financial securities price level measured.

The US government could deficit spend $15 trillion over revenues, which would bring its national debt approximately even with that of Japan’s. And the latter appears to be able to absorb an 180% of GDP deficit and debt without collapsing. So go back and start with the 40% GDP war time spending experience.

We’re already at around 25%+ of annual GDP. We need at least another $3 trillion in direct spending (not tax cuts that get hoarded in these kind of situations). To date only about $1.1T of actual spending has occurred in the Cares Act. The rest is medium-large business loans that haven’t been taken up by corporations and $650B in investor-business tax cuts that have had little direct effect on stimulus as investment thus far.

jack ramus 200

[dc]L[/dc]ike the corporate loans it’s been mostly still hoarded on bank balance sheets and not gotten into the economy as yet. Try reading Keynes’ General Theory and find out why tax cuts, interest rate cuts, and business cost cutting in general does not get transmitted into real investment in conditions of the business cycle like we face today.”

Jack Rasmus
Predicting the Global Economic Crisis