Did Big Government Prevent a Second Great Depression?

Paul Krugman says yes. I think he might be right, though counterfactuals are tricky. Most countries that have financial crises don't end up mired in a decade-long depression, even with remarkably crappy policy.

The question remains, what kind of Big Government? It wasn't the stimulus, which has barely started. Rather, we did three things differently than we did in 1932:

  1. We didn't follow a contractionary monetary policy
  2. We shoveled gigantic wads of cash into the banking system without much regard for who it was going to, or what they might spend it on
  3. We maintained a high level of spending that kept aggregate demand from contracting as powerfully as it did in 1932.

Only the last, I think, can be seen as a vindication of "Big Government" in the sense that Krugman means.  It's also totally unsustainable, and it will be interesting to see what happens to the economy as the government is forced to pull back on the stimulus over the next year or so by either raising taxes, or cutting back on spending.  State and local governments are already in huge trouble.  The federal government can't just keep topping up their shortfalls. Nor can it simply keep ratcheting up its role as borrower of last resort in order to counterbalance the fact that the American personal savings rate still needs to rise so we can work down that mountain of debt we've accumulated, and, I don't know, maybe actually invest something in the future.

I'm not sure what we just went through validates any reasonable philosophy of government, except "give officials room to make ad-hoc decisions, and hope they don't do too badly."