The Cato Institute recently published a superb piece illustrating the budget policies of the immediate post World War II period and the 80th Session of the US Congress that was elected in 1946.
The newly installed Republican Congress, led by Senator Taft of Ohio, continued to reduced federal outlays considerably, as had been done when the war came to a close in August of 1945. The study found that these budget actions did not cause a renewed economic downturn but actually paved the way (along with other actions like Taft-Hartley) for robust private sector economic growth.
However, one need not look this far back in history but to the actions of the 104th Session of Congress for further proof that cutting spending and taxes leads to economic growth. The 104th Congress famously ended 40 years of Democrat dominance of the Congress and was installed at a time of much uncertainty regarding the economy. Coming off the mild regional recession in the early 1990s and tax increases of the new Clinton Administration, it was by no means thought that brisk growth was on the horizon.
Beginning with a rescissions bill to pay for earthquake damage in California that cut two dollars for every new dollar spending, the GOP controlled Congress began to reduce actual outlays in discretionary spending for the first time in decades. The projected baseline increases even after President Clinton forced some concessions in the spring of 1996 were reduced substantially. Although the categories are somewhat difficult to compare over time, domestic discretionary spending rose half as much during the 1990s as in the first decade of the 21st Century under President George W. Bush.
These battles over spending were coupled in early 1997 with a budget agreement between Clinton and the GOP Congress, which cut a variety of taxes, including the capitol gains tax and other pro-growth measures. These spending and tax changes, along with NAFTA (passed with GOP votes in 1993 over the loud objections of organized labor and liberals) and the historic welfare reforms in 1996 placed the US economy on sound footing and helped pull the global economy through Central and South American debts crises, along with portions of the Pacific rim.
One need not be a credentialed economist to search in vain for any Keynesian policies implemented in the mid-1990s. In fact, the left in the US routinely criticized President Clinton for cementing largely Reaganite ideas until impeachment, perjury and obstruction of justice pushed the left back into the Democrat fold.
Although it is coming at a very painful cost, the historical narrative of the New Deal historians is being dismantled before our very eyes. Cutting taxes, reducing government spending, increasing trade and lowering the burden of government regulations are what lead to private sector economic growth. No amount of media cheerleading for President Obama can obfuscate these basic historical facts. Unfortunately, this generation must learn the lessons that all who came before it did. The key question is how much structural damage will the American republic endure this time around?