Thursday, July 26, 2012

Would You Really Want a Keynesian World War II Solution to Our Current Economic Crisis?

Bob Murphy smashes forever the idea that World War II got us out of the Great Depression. He writes:
When pressed for a “success story” of their policies, Keynesians point with pride to World War II. They claim that it is the perfect illustration of the ability of massive government spending to lift an economy out of the doldrums...

Before diving into the data, let me make a quick observation. I have heard many conservatives say, “FDR’s New Deal had nothing to do with fixing the economy. It was World War II that got us out of the Depression!” Yet when they say this, they give away the whole game. They are admitting that government spending can cure an economic downturn, and are just quibbling over whether it was FDR’s spending on schools and bridges, versus his spending on tanks and aircraft carriers....

Even on the Keynesians’ own terms, private GDP—the share of the economy devoted to civilian purposes—was lower during the height of the war than during 1933, the very worst year of the Great Depression. When we take into account the increase in population during the decade in between, the impact on the homefront is even more astounding.

Let us suppose, then, that the government today did exactly what Paul Krugman recommends, and engaged in massive government purchases comparable to those during World War II. Yet rather than build tanks and bombers, instead the government today buys socially useful things (in Krugman’s vision) such as roads, bridges, parks, the services of additional police and firefighters, etc. If things turned out today the way they did during the war years, would Americans be happy with the result?

I suggest they would not; they would reject the bargain, even on Krugman’s own terms. Suppose people took today as equivalent to 1941, and then the country proceeded to have similar government spending and economic performance as the official statistics show happened during World War II. That means private economic output would fall a total of 55 percent between now and 2015, or at an annualized rate of about 24 percent per year. Does the average American household right now want to suffer a 24 percent annual drop in their private standard of living, for three years in a row? This would put their standard of living back to around 1984 levels (and again, I’m not even accounting for population changes). Would the average household’s answer be affected if we told them about how many potholes would be filled, and how many new schools would be built during those three years?

But wait, it gets worse. It’s not merely that there would be a 3-year period of extreme penury (in terms of private goods and services), in exchange for those things the government provides. After this burst of Keynesianism—again using World War II as the model, now by comparing 1941 to 1946—the federal government’s gross debt held by the public would have grown by a factor of five. Since the federal debt held by the public right now is about $10 trillion, that means mimicking the World War II experience would yield a federal debt of $50 trillion by 2017. This new fact is on top of the reversion to 1984 levels of private GDP.
Murphy's full column is here.

1 comment:

  1. Ultimately, I think the Keynesian argument boils down to the nonsensical idea that the war gave the economy "momentum", which is just another dishonest analogy of human exchange with physics.