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September 04, 2011

Arthur Herman calls Bullshit on the "WW2 ended the Depression" myth. [ArthurK]

For as long as I can remember I've been taught that FDR's New Deal and WW2 ended the Depression. Or the New Deal saved American and WW2 ended the Depression. Or something like that. When you're lying it's hard to tell a consistent story.

More recently, there's been a lot published on how FDR took his inherited Depression and turned it into the Great Depression.

But what ended FDR's Great Depression? I keep hearing that America's mass production of war material shocked us into prosperity. Arthur Herman ain't buying it. Herman isn't the first person to make this case - but I like the clarity of his arguments and supporting stats.

Before I start tantalizing you with choice excerpts (RTWT) I want to emphasize a point Herman makes. FDR didn't bring down unemployment with New Deal measures. Unemployment stayed sky high until millions of working age men were drafted into the Army and Navy.

As Washington waits for President Obama’s plan on how to revive the economy and pull us out of our 9 percent unemployment rut, a growing chorus on the left is calling for us to go to war - or at least the economic equivalent of war.

... Krugman, who argues that the only thing that will save the economy now is "a burst of deficit-financed government spending" on a scale like that launched in World War Two. In fact, "if we discovered that space aliens were planning to attack and we needed a massive [military] build-up," he said on a recent television show, "this slump would be over in 18 months."

... he’s a fan of big deficits as a form of economic stimulus. During World War Two, that involved government borrowing to the tune of $30 trillion in today’s dollars - a sum that makes Obama’s 2009 $800 billion stimulus look like pocket change. But since that’s what turned around the economy in World War Two, wiped out 9 percent unemployment, and finally ended the Great Depression, goes the argument, then that’s the scale of spending that is required now.

It's fair to wonder who we would borrow $30 trillion from. Krugman's martians?

But did World War Two really end the Great Depression? ... the massive mobilization for war may actually have prolonged the Depression, ...

This flies in the face of conventional wisdom ... GNP, which more than doubled. As America’s factories turned out planes and tanks and other munitions in unheard-of numbers, unemployment plummeted from 9.5 percent to about 1.2 percent even as wages soared far faster than business profits, thanks to a wartime excess profits tax. "Pyramid-building, earthquakes, even wars may serve to increase wealth" by multiplying economic demand across the board, John Maynard Keynes had written in 1936. To generations of Keynesian economists and their students, America’s experience in World War Two seemed to prove it.

Yet those amazing numbers are softer than they look at first glance.

"the data show that output expanded during World War Two by less than the increase in military purchases." Other measures of economic output in the form of private consumption, private investment, nonmilitary government purchases, and net exports actually fell so that resources could go to military production.

... nongovernment GNP growth, which was moving ahead in 1940, actually slowed down in 1942 and then slowed still further in 1943. Far from getting stimulated by the frenzy of government spending, the nongovernment share of GNP recovered its earlier pace of growth only once the war was over.

In short, the war may have killed off a recovery already under way. All evidence suggests that the crucial turnaround from the Great Depression came before U.S. entry into the war: GNP jumped from $90.5 billion in 1939 to $124.5 billion just before Pearl Harbor, when government spending was still at relatively low levels. Then with mobilization, private consumption and investment slowed and headed south - while government deficit spending headed sharply north, rising from $6 billion in 1940 to $89 billion in 1944.

Still, advocates of the conventional wisdom will reply, at least all that government spending and all-out wartime production ended unemployment. Yet those numbers turn out to be equally illusory.

The biggest change in the employment picture was the fact that some 16 million men were pulled out of the labor market and into the armed services - more than 22 percent of the prewar labor force. Most were draftees, and most were young men in the prime of life who, under normal circumstances, would have been making cars or refrigerators ... instead of dropping bombs on German cities or lobbing mortar shells on Japanese positions on Iwo Jima.

No one can deny their service to their country was invaluable. Its value to the economy is another matter. Instead of producing things of value, they were destroying them in prodigious amounts. ...

Next he talks about the economic output of the "Rosie the Riveters". Too much to excerpt - read the article.

In short, it wasn’t the war that created a strong economy. It was the strong economy that made mobilization for war possible in the first place. All the war did was sacrifice present growth to a massive rearmament to defeat the Axis. Yet "as the war ended," writes Higgs, "real prosperity returned almost overnight."

This postwar boom has always posed a problem for Keynesians like Krugman. As government spending plummeted with the coming of peace - military spending alone collapsed from 37.5 percent of GDP in 1945 to just 5.5 percent in 1947 - many predicted that, without this prop and with the new burden of millions of returning veterans looking for work, the economy would sink once more into the abyss. ...

Instead, after a brief hiccup in 1946, the economy rebounded, growing from $231 billion GDP in 1947 - roughly what it was in 1945 - to $258 billion in 1948, and from there to $285 billion in 1950. Unemployment, despite the dire predictions, increased only to 3.9 percent between 1945 and 1947, in spite of the fact that some 10 million new workers came into the civilian labor market.

Making predictions, testing them. That's science. Considering that economists largely ignore experimental evidence of the failure of Keynesian theories in practice you understand why economics is called the dismal science.

The next section (not quoted) refute the Keynesians theory that a consumer spending spree acted as a stimulus. And then...

With the release from wartime restrictions and regulations, all that was needed was one more shove to trigger a real boom and complete the shift back to making things the market, not the Pentagon, wanted.

This time the shove came from Washington, in the form of a tax cut. The Revenue Act of 1945 cut the top marginal tax rate from 94 percent to 86.45 percent, and the lowest marginal rate from 23 percent to 19 percent. It also reduced corporate tax rates and eliminated FDR’s wartime excess profits tax and price controls. .., Georgia senator Walter George ... predicted the tax cut would "so stimulate the expansion of business as to bring in a greater total revenue." He was right. Revenues soared even as government expenditure continued to fall, and America’s postwar boom was on. In the two decades after 1948, GNP grew at an average annual rate of 4 percent - while a Republican Congress elected in 1946, followed by a Republican president in 1952, ensured that nothing stood in the way of the renewed flow of prosperity.

Since it wouldn't be right to copy the whole article, I trust those excerpts persuade you to Read The Whole Thing.

BTW, when I was writing that smart-ass unoriginal comment about FDR turning the Depression into the Great Depression I wondered if there was a parallel with Obama and his inherited recession. Let's see. Obama takes office with a sharp recession - afterwards it's common to call it the Great Recession. FDR had chronically high unemployment - Obama's rates (once you count the underemployed and discouraged) are 16% or higher. Hey, maybe Obama is FDR without the charisma! (Obama had charisma while campaigning. In office - not so much.)

(Published out of Draft by Ace.)

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posted by Open Blogger at 07:26 PM

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