Research supports the connection that is often made between fiscal policy during the Great Depression and the results that followed. Through analysis, Ohanian demonstrates the positive relationship between World War II fiscal policy and GNP growth. As Ohanian notes, real GNP increased by 40 percent between the years 1941 and 145, which resulted in an average growth rate of 8.4 percent per year (Ohanian 23). Further, government spending increased by 124 percent during World War II, the capital tax rate increased from 44 percent before World War II to 60.2 percent, and the percentage of government expenditures financed by debt and seignorage totaled 59 percent (25). Through an economic model simulation, Ohanian demonstrated that modest government spending and the adoption of a balanced budget policy would have required a 3 percent increase in consumption in order to close the recession gap (37). Thus, Ohanian makes the case that the World War II recovery demonstrated weaknesses in the classical model and validated Keynesian economic theory.
Monetary Policy in the Great Depression: ..
posed by those great cycles of prosperity and depression ..
US monetary and fiscal policy in the 1930s