In 1946, the US economy shrank by 11%. Back to the Great Depression, right? Yes — but only for government. Of that 11 percentage point drop, government spending accounted for a massive 29 percentage points. But the private-sector economy did just fine. Private-sector GDP, both consumer spending and business investment, added 7 points to GDP. As government spending fell by 66%, private investment rose by 156%.
How about unemployment? Well, as Russ Roberts reminds us:
Paul Samuelson, a prominent Keynesian who later won one of the first Nobel Prizes, worried that if the war ended suddenly and government spending contracted quickly, we would face “the greatest period of unemployment and industrial dislocation which any economy has ever faced.”
The jobless rate was 3.9% in 1945, 4.1% in 1946. Indeed, for all the talk of how Keynesian government spending ended the Great Depression, a look inside the GDP numbers reveals government exploding but the private-sector remaining in a funk. Roberts: “Government spending on the military didn’t stimulate private consumption—it crowded it out.”
I don’t want to overstate things. The macro situation in 1946 is not the same as in 2013. But I think this historical example provides a needed caveat to all those predictions of economic gloom if the sequester spending cuts take hold with full force.