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Friday, September 9, 2011

Depression, War, and Recovery

The way not to go.

In a recent mini-debate on the radio with a Keynesian economist, I ran into the increasingly popular claim that massive spending during World War II ended the Great Depression. In an odd way this is progress. If it took World War II to end the Depression, that must mean the New Deal didn’t do it.

Be that as it may, advocates of peace and freedom can’t be comforted by the war explanation. No Keynesian I know of wishes for war to stimulate the economy, but some have lamented that it’s too bad it takes a war to win mass support for government spending large enough to end a big downturn. There’s something to this, of course. John T. Flynn, the Old Right opponent of the New Deal and foreign intervention, pointed out in As We Go Marching that military spending is the one variety of government spending that will unfailingly win conservative support. Hence the tendency toward militarism.

For the sake of peace, then, we peace-and-freedom-mongers must refute the World-War-II-got-us-out-of-the-Great-Depression argument.

It’s not hard to do when you break things down to their elements.

I begin by asking anyone who makes this argument: What do you mean by “end the Depression”? Since depressions and recessions are marked by a general loss of economic well-being, a commonsense definition of “end the Depression” should be: “a general rise in economic well-being,” with well-being indicating growing opportunities for consumption and leisure.

GDP and Unemployment

But that’s not what Keynesians  mean. The one I debated talked not about prosperity but rather changes in GDP and unemployment, as if those were indicators of well-being. I guess they might be, but not necessarily. A rise in well-being will probably be reflected in GDP and employment statistics, but the reverse is not necessarily so. A rise in those indicators may not signify an increase in well-being.

To see this, we need only look at what was going on during the war. Robert Higgs has done the heavy lifting on this subject, so my debt is to him. GDP supposedly measures national output, but it includes government spending. During the war of course the government spent a huge amount of money, making any rise in GDP is misleading. (Murray Rothbard once suggested that government spending be subtracted from GDP.)

Higgs writes:

Yes, national output as conventionally measured did grow hugely during the war.  . . . [G]ross domestic product (in constant 1987 prices) increased by 84 percent between 1940 and 1944. What the orthodox account neglects, however, is that this “miracle of production” consisted entirely (and then some) of increased government spending, nearly all of it for war materials and equipment and military personnel. The private component of GDP (consumption plus investment) actually fell after 1941, and while the war lasted, private output never recovered to its pre-Pearl Harbor level. In 1943, real private GDP was 14 percent lower than it had been in 1941. If a nation produces an abundance of guns and ammunition, it does not thereby achieve genuine prosperity. [Emphasis added.]

With the government diverting resources from butter to guns, it does not seem that the average person would have been better off economically in the 1940s than in the 1930s.

Higgs goes on:

Those who lived through the war . . . forget the scarcity of decent housing, the hassles in commuting to work, and the severe rationing or complete absence of basic consumer goods. . . .

. . . Because of the many other ways that the well-being of consumers deteriorated during the war, which the official data fail to capture, actual wartime conditions were even worse than [the] figures suggest.

Well, what about unemployment? It fell from 14.6 percent in 1940 to 1.2 percent in 1944. “There you go! Case proved,” a Keynesian might say.

Hang on, Higgs replies:

What the orthodox account neglects, however, is that during that same period the government, mostly by conscription, increased the active-duty personnel of the armed forces by 11 million persons, equivalent to almost 20 percent of the total labor force (employed plus unemployed) in 1940. If a nation shoves 11 million persons into military service and, as a result, reduces the number of unemployed persons by eight million, that performance scarcely signifies the achievement of true prosperity. [Emphasis added.]

Prosperity did not become a feature of life until after war. Do we really need technical economics to understand this? Except for government contractors and politicians with privileged access to stashes of goods, who else can prosper during a war in which government commandeers the entire economy and devotes virtually all resources to that effort? You can’t eat bullets, tanks, or planes. What good is a job if there is nothing to buy?

Keynesians find comfort in the rising macroeconomic aggregates while ignoring how flesh-and-blood people actually lived. How else can they blithely declare that war spending ended the Great Depression?

In no sense did the war end the Depression. It delayed recovery — just as government spending delays recovery today.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.