Saturday, June 30, 2012

More Evidence that WW II Didn't End the Great Depression

Most economists, but especially Keynesian economists such as Paul Krugman, have long promoted the idea that government spending as a result of World War II created a boom economy that finally launched the economy out of the Great Depression. Krugman has written:
The story of 1937, of F.D.R.’s disastrous decision to heed those who said that it was time to slash the deficit, is well known....Then came the war.

From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 — the equivalent of roughly $30 trillion today.
Had anyone proposed spending even a fraction that much before the war, people would have said the same things they’re saying today. They would have warned about crushing debt and runaway inflation. They would also have said, rightly, that the Depression was in large part caused by excess debt — and then have declared that it was impossible to fix this problem by issuing even more debt.

But guess what? Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity. Overall debt in the economy — public plus private — actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts.

Economist Robert Higgs is a pioneer, in revisionist economic history, taking the view that:
World War II got the economy out of the Great Depression, but not in the manner described by the orthodox story. The war itself did not get the economy out of the Depression. The economy produced neither a “carnival of consumption” nor an investment boom, however successfully it overwhelmed the nation’s enemies with bombs, shells, and bullets.

Now, economists  Steven Horwitz and Michael J. McPhillips in a new paper, The Reality of the Wartime Economy: More Historical Evidence, on Whether World War Il Ended the Great Depression have taken Higgs' pioneer work further. From the abstract of their new paper:
In response to contemporary arguments that the expenditures associated with World War II were a major factor in ending the Great Depression and should therefore be imitated today, we offer historical evidence to suggest that the wartime economy was hardly a model of success in the eyes of most Americans. Expanding on Robert Higgs’ criticisms of the ability of conventional macroeconomic data to tell the real story, we examine newspapers, diaries, and other primary source material to reveal the retrogression in living standards in the US during the war. Our investigation suggests that wartime prosperity is largely a myth and hardly a model for recovery from the Great Recession.

The full paper can be downloaded here.

5 comments:

  1. Using perfectly good resources (labor and material) to produce goods that are both destroyed in use and destroy other goods (lives, material, buildings, vehicles, roads, bridges, etc.)...this is somehow believed to be wealth producing.

    That people can believe this...now THAT is depressing.

    ReplyDelete
  2. The link wasn't working for some reason, so here's an alternate link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2095699

    ReplyDelete
  3. I guess the reason why these guys had a dissecting opinion about the WWII scenario was because there were less loan modification lawyers active back then compared to today's situation.

    ReplyDelete
  4. I guess the reason why these guys had a dissecting opinion about the WWII scenario was because there were less loan modification lawyers active back then compared to today's situation.

    ReplyDelete
  5. Now that could be something the mortgage companies in massachusetts could ponder on. They'd probably get a bigger picture of why a lot of people even went to them for help in the first place.

    ReplyDelete