Steven Horwitz and Michael J. McPhillips have a new paper in The Independent Review building off of Robert Higgs’ work dispelling the myth of wartime prosperity, this idea that World War II brought the U.S. out of the Great Depression. They begin by pointing out how popular an idea it is that government spending on war helps the economy, and how
Paul Krugman has even argued that the threat of an invasion by aliens from outer space would help because it would lead to massive defense spending that would boost the economy.
It’s true, Krugman really did say that, as you can see for yourself in the video above. Moving on in the paper, the authors present further evidence that
confirms Higgs’s argument that wartime prosperity was largely an illusion and, thus, that wartime spending is not the path to genuine recovery from recession or depression.
What if, when we dig below the traditional economic aggregates, we find that the war reduced the standard of living for many Americans, even as conventional measures of economic well-being make matters seem to be the reverse?
They note the main argument supporting the myth:
The usual argument for the economic benefits of the war focuses on unemployment and GNP. To be sure, the war effort wiped out unemployment almost completely…. The double-digit jumps in GNP between 1940 and 1944 are another factor that has contributed largely to the myth of wartime prosperity.
The trouble with this argument is:
Even though GNP statistics signaled a massive increase in production, the American consumer in fact had fewer purchasing options available…. It is very easy to reduce the unemployment rate through a military draft that removes millions of men from the labor market…. In view of the draft of 10 million men and the enormous demand for workers to build tanks, guns, and ships, it is no surprise that the war drove down the unemployment rate. Like the increase in GNP, however, this drop in unemployment did not translate into improved standards of living or a genuinely recovered private economy…. GNP uses market prices to measure the value of final products. If those prices are capped by law, market prices do not reflect the actual value to consumers, and GNP is accordingly distorted.
They note that
Even as national income rose, the standard of living was actually falling during the war. The apparent prosperity seen in economic aggregates was illusory.
The authors observe that
Americans were forced to live poorer lives during the war owing to the reduced quality, quantity, and variety of products available…. In an effort to conserve resources, there was also a movement to eliminate unneeded luxuries. Consumers were given fewer choices because production was limited…. To enforce rationing policies, the government resorted to numerous propaganda campaigns designed to shame Americans into using less. These campaigns sought to make all Americans feel they were part of the war effort through appeals to patriotism and the duty to share the sacrifice.
As Ludwig von Mises said,
War prosperity is like the prosperity that an earthquake or plague brings.
The authors also note:
Speculation about how the economy would accommodate the 10 million servicemen who would enter the civilian labor market included astronomical rates of unemployment. It was assumed that without careful government planning the U.S. economy would sink back into a depression.
But what actually happened?
The prediction of a postwar depression, however, never came true. In 1946, 10 million servicemen returned to the civilian labor market, and orders for war supplies were nearly halted. These changes resulted in the single greatest one-year drop in GNP in the nation’s history—20.6 percent, which was greater even than the drop in 1932 in the depths of the Depression. But no real depression was experienced; instead, an era of unprecedented private-sector growth ensued. The other major factor that led to economic growth following the war was a dramatic increase in private investment, which had dropped significantly at the onset of the Depression, had remained low owing to the “regime uncertainty” in the late 1930s, and had nearly ceased during the war.
Rather than economic recovery resulting from government wartime spending,
the postwar recovery was the product of a change in policy regimes characterized by the scaling back of government’s role in the economy….
That is not something you well ever hear from Paul “Conscience of a Liberal” Krugman. “The only clear force for recovery I see”, he wrote, for example (as I note in my book Ron Paul vs. Paul Krugman), in February 2002, during the recession caused by the bursting of the dot-com bubble, “is the administration’s military splurge. After all, even useless weapons spending does create jobs, at least for a while.” He apparently considered it at the time a very unlikely possibility that space aliens might invade and provide the government with the excuse it needed to pull the country out of recession. Good thing they had the next best thing, the bogeymen Osama bin Laden and Saddam Hussein. Krugman, incidentally, also had this to say about the 9/11 attacks (again from my book):
Three days after the terrorist attacks of September 11, 2001, Paul Krugman wrote that “Ghastly as it may seem to say this, the terror attack—like the original day of infamy, which brought an end to the Great Depression—could even do some economic good.” He argued, “If people rush out to buy bottled water and canned goods, that will actually boost the economy”, and “rebuilding will generate at least some increase in business spending.”
That’s right, the destruction of 9/11 was good for the economy, according to Krugman. Returning to wartime spending, I recommend reading the whole paper.