In 1893 the United States faced a depression, then called a panic. With no Fed and no stimulus packages the country adjusted and came out of it in a few years.
In 1920-21 the country was in a severe recession and the country rebounded in one year and went on to the prosperous Roaring Twenties.
Then in 1929 with a Federal Reserve designed to avoid recessions and panics we entered a true depression with unemployment soaring to 25%. At first the government did nothing and then with the election of Franklin Roosevelt the country executed the mother of all stimulus packages. One result was that the country stayed mired in a depression for 15 years.
Many forget that the unemployment was still at 15% on the eve of WW II.
We still delude ourselves that the economy can be managed and controlled. The government is best at providing the environment for success; property rights and protection, infrastructure, tolerance and justice, and regulation that strives for transparency and accountability rather than social engineering.
This costs money and the government may spend as much as 20% of the GDP to achieve the environment for Americans to prosper. But when the government spends 40% and more of the GDP to achieve an endless array of social and political goals then they begin to squeeze the private sector out of the capital markets. This kills capital growth and wealth creation. It also kills the tax generating income that the government spending programs rely on.
This is the economic reality behind Margaret Thatcher’s quote, “The problem with socialism is that you eventually run out of other people’s money.”
It was this delusion that the “proper” elitist government officials can fine tune and control the economy that led to the Great Inflation that started under Kennedy and ended under Reagan.
We must remember that the government can not create a single job, much less the three million that the administration promises. Every dollar the government spends on a paycheck of their choosing comes out of the private sector and thus kills another paycheck. Actually because of the lack of market discipline and government overhead, a federal dollar spent costs much more than an equivalent dollar from the private sector.
Finding the proper role for government in America is the obsession of American politics, especially in a period that appears to be defined by a massive failure in the private sector. Yet I would argue that this financial crisis was as much caused by the government itself as by the private sector, by both ineptly enforced regulations as by delusions that the government could provide benefits and ignore the costs.
In seeking the proper balance between the size of the private and public sector the solution likely lies not in one severely encroaching on the power of the other, but in each accomplishing their respective roles more effectively.