Wealth effects and fiscal policy in the 1930s
In two recent articles Middleton and Broadberry have addressed the question of whether interwar fiscal policy acted as a stabilizing or destabilizing force.2 This issue continues to be important because it forms part of a more wide-ranging debate on the interpretation of the economic history of the interwar period. The traditional Keynesian position was that fluctuations in output and employment could best be explained in terms of a combination of exogenous demand shocks and misguided government policy. This view has been increasingly challenged by a new classical analysis which emphasizes the role of supply side disturbances such as the introduction of unemployment benefits and the unionization of the labour force.3 With respect to budgetary policy the debate has centred on whether the authorities, whose thinking was dominated by the pre-Keynesian orthodoxy of balanced budgets, unwittingly acted to destabilize the economy. Middleton has concluded that this was the case by adjusting taxation receipts and expenditures for deviations from full employment output. Broadberry provides results which are more consistent with the new classical reinterpretation. He argues that, if allowance is made for the increase in the real value of the outstanding stock of government debt, policy can be seen to be expansionary during the crucial fiscal years I930/I to I933/4 in which the depression was at its worst.