Deficit Spending in the Nazi Recovery, 1933-1938: A Critical Reassessment

Abstract

This paper examines the effects of deficits spending and work-creation on the Nazi recovery. Although deficits were substantial and full employment was reached within four years, archival data on public deficits suggest that their fiscal impulse was too small to account for the speed of recovery. VAR forecasts of output using fiscal and monetary policy instruments also suggest only a minor role for active policy during the recovery. Nazi policies deliberately crowded out private demand to ensure high rates of rearmament. Military spending dominated civilian work-creation already in 1934. Investment in autobahn construction was minimal during the recovery and gained momentum only in 1936 when full employment was approaching. Continued fiscal and monetary expansion after that date may have prevented the economy from sliding back into recession. We find some effects of the Four Years Plan of late 1936, which boosted government spending further and tightened public control over the economy.

Keywords: Nazi Recovery, Deficit Spending, Work-Creation, War Preparation, VAR Forecasts

JEL Classification: N44, N14, E52, E47, E65, E27