I’ve never really gotten that argument about how the Federal Reserve and U.S. government tightened too soon in the late-1930s and, as a result, induced another recession. In his column today, Paul Krugman notes:

“The boom, not the slump, is the right time for austerity at the Treasury.” So declared John Maynard Keynes in 1937, even as F.D.R. was about to prove him right by trying to balance the budget too soon, sending the United States economy — which had been steadily recovering up to that point — into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.

Yet, anyone able to look at the data back in 1937 would hardly see the U.S. economy as “depressed”, not after three straight years of real GDP growth averaging 11 percent. While perhaps not a “boom”, a “strong recovery” was certainly underway by then.

To be sure, the 1930-1933 downturn was severe, but, according to the data from the BEA above, the U.S. economy had returned to its 1929 bubble output by 1937 when all the policy mistakes were supposedly made.