The United States, under President Hoover, rapidly increased government spending in real terms by over 70% between 1930 and 1932 (from $2.7b to $4.7b, adjusted for deflation), despite revenue collapsing by over 40% ($3.3b. to $1.9b, adjusting for deflation). The goal? Stimulating the economy. By 1934, US. Government spending had increased a whopping 250% over 1929 levels. In contrast, the Australian government in August 1930 resolved to cut Federal spending by 20%, and restore a balanced budget.
As such, it is clear that 1931 is the year the policies diverge. From the beginning of the year, the U.S increases spending by 45%, Australia cuts it by 15%. If the fundamental theory underpinning ‘stimulus’ economics holds, we should see, almost immediately, a change in outcomes. Australia’s GDP should decrease, whilst GDP should increase in the U.S. Similarly, unemployment should go up in Australia, and fall in the U.S.
Australia’s GDP starts to grow. In the U.S it continues plummeting.
In fact, almost immediately after Australia resolved to slash the size of government, its GDP began to rise.
I can not stress this enough: in the year that US Government spending increased 45%, GDP fell a whopping 17%. I repeat, 17%. In Australia, where government spending fell 15%, GDP increased 5%. In the following year, while the U.S “stimulated” economy fell 2%, Australia’s grew a whopping 7%.
While the U.S economy eventually begins to improve, as the business cycle kicks in, it does so at a considerably delayed rate to Australia, where the government did not crowd out the private sector thereby delaying the recovery.
There could be no better example of how the economics behind ‘stimulus’ packages fail.
Now let us look at unemployment rates. Again, please note, the critical year here is 1931, the year the two countries diverged in policy.
(Note: The Institute of Public Affairs last week released a paper entitled "Five and a half big things Kevin Rudd doesn’t understand about the Australian economy" which discusses the Australian economic climate during the Great Depression in greater detail)