The U.S. Postwar Miracle – By David R. Henderson [Mercatus Center – GMU]

We often hear that big cuts in government spending over a short time are a bad idea. The
case against big cuts, typically made by Keynesian economists, is twofold. First, large
cuts in government spending, with no offsetting tax cuts, would lead to a large drop in
aggregate demand for goods and services, thus causing a recession or even a depression.
Second, with a major shift in demand (fewer government goods and services and more
private ones), the economy will experience a wrenching readjustment, during which
people will be unemployed and the economy will slow.
Yet, this scenario has already occurred in the United States, and the result was an
astonishing boom. In the four years from peak World War II spending in 1944 to 1948,
the U.S. government cut spending by $72 billion—a 75-percent reduction.
It brought federal spending down from a peak of 44 percent of gross national product (GNP) in 1944 to only 8.9 percent in 1948, a drop of over 35 percentage points of GNP (see figure
1).

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