[izendejas]

It's obvious government spending had to decrease and that's what should happen after the country is somewhat back on track and growing. But did WWII and (thus deficit spending) not get us out of the great depression? It's obvious the quality of life wasn't great when you had people forgoing resources to fund an important war.

The growth after the great depression came as a result of the Cold War when the US started spending on nuclear technology, missile defense, what have you. The US also invested on its citizens and education with the GI Bill among others, etc. This does not refute my point--and that is, to clarify, perhaps, that the problem isn't government spending, it's what it gets spent on.

Only the market can evaluate the true cost of things? This assumes markets have all the information or that someone is willing to invest the money to obtain it--otherwise you have an inefficient market. Here's where for the good of all, some central body like a government, can put in the cost to find out or to avoid a market collapse. For example, what would have been the cost of letting AIG and major banks fail? The markets wouldn't care since every individual would be concerned with their losses in the panic. That is, the markets aren't always as rational as people make them out to be--you know this. To argue otherwise is as idealistic as well, you name it. In fact, your last point validates this point. The cost of not passing TARP and the Recovery act would have been passed on to us--and some argue, and I believe, such cost would be greater... also, assuming you can control spending when the country is back on track (due to debt). So either way, we're paying... might as well, then, ensure our financial system is stable and that we can continue to invest in education and green technology instead of risking an entire system collapse as we ensure our economy grows.

When interest rates are at 0% and the country isn't growing, something has to give. Cutting government spending is stupid. If you're running a business how's a tax break going to help you? Will you keep people employed? Not very likely. So as employment continues to rise, more people freak out, and more people are let go. Is that the kind of downard spiral we want? This is when a government needs to step in and say, no.. we're keeping these jobs, we're creating some here, otherwise, who's going to take the risk? There's a psychology to this, I think, that often gets lost in "market analysis." People who are uncertain about the economy will stop spending, so how do you promote spending? By giving them a few hundred dollars without ensuring that their job isn't going to be there a year or two from now?

[pg]

I was also taught this story that WWII got the US out of the Depression, but I suspect it may not actually be true. The bottom of the stock market was in 1932; from that point till 1938, when fears of war caused another crash, it was sharply up.

http://symonsez.files.wordpress.com/2008/10/graphic_chart_cr...

[jswinghammer]

The Federal Reserve was able to start the boom bust cycle again until 1937 when the bust started another mini-depression. I'm sure speculation about war had some part to play in this but the markets are usually bad about predicting wars. The immediate impact of war in Europe wouldn't have been that bad for Americans at least because international trade had dropped off considerably following a wave of rising tariffs and uncertainty in the global banking system.

World War 2 more than anything else forced the government to cut spending and pay off debt and while there was a depression following the war it followed the pattern of the 1920-1921 depression. In that depression the government did nothing to intervene and the recession while severe was over and almost no one remembers it. The other major factor in the recovery was the fact that the US had almost no competition for its factories and agriculture having been basically untouched at home by the war.

In the end war cannot create wealth it can only direct the wealth that was created for peaceful means elsewhere for the purposes of destroying wealth somewhere else.

[apsec112]

"World War 2 more than anything else forced the government to cut spending and pay off debt"

Yer what? US debt-to-GDP ratio in WWII was at an all-time record high, because they were busy paying for the whole war thing. War is extremely expensive. See this graph: http://www.preemptivekarma.com/archives/National-Debt-GDP.gi...

[jswinghammer]

After the war the US was forced to cut spending and pay back debt. The spending they had to cut were the New Deal programs that were holding back the economy from recovering.

[izendejas]

Right. Technically we came out of the great depression, had a recession in between, etc. That's where neo-keynesians criticize FDR. The dip in 1937 coincided with a FDR being pressured into balancing the budget. It's much more complicated than this, but I used the WWII reference because usu. the next best answer is WWII. Now I'm told, that WWII wasn't responsible either!? What gives?

[kingkongreveng_]

> markets have all the information

Markets do have all the available information. But no person or group of people can ever process all the information in a meaningful way. Only the market itself can process the huge amount information dispersed among participants.

The rest of your post is silly "animal spirits" pseudo-keynesianism. No, the government cannot usefully manipulate the business cycle or limit damage from failing businesses. Even Keynes himself only ever really tried to say government could stop a major slide from happening in the first place. He said it would be too late to intervene post-crash.

[izendejas]

Markets don't have all the information. You didn't disprove that.* My point is that someone needs to help with making "all available info" (whatever that means) possible in the first place. It's not always efficient for markets to do that themselves, at least upfront.

*For markets to have all information upfront, it means we know exactly how the universe works and we can predict that an 8.8 earthquake is going to strike Chile on February... etc. Because of this, markets are greatly reactionary and my point above is also that markets don't always react rationally. I'm not arguing that they are not the most efficient system we have under most industries, also--to be clear.