A new report released today by the Institute of Economic Affairs, No Case for Plan B – Lessons for the Great Recession from the Great Depression , argues that any switch to a Plan B on the economy which involves more government borrowing will not boost growth and will instead simply increase government debt.
- The recessions of the 1920s and 1930s were overcome through varying approaches to monetary policy, but, in both cases, with a commitment to fiscal austerity.
- Contrary to popular belief, economic models demonstrate that Keynesian stimulus policies would have had little effect on the overall outcome in the 1930s.
- Current levels of government borrowing are far higher now than in the 1930s and this, combined with other aspects of the policy environment, means that looser fiscal policy would have even less effect today.
Four years into the Great Depression, economic growth took off and returned the economy to full capacity within another four years. This was in an environment of fiscal austerity and a broadly balanced budget.