By ROBERT P. MURPHY
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.
In the effort to battle this myth, Steve Horwitz and Michael J.
McPhillips offer an interesting new
article that analyzes diaries,
newspapers, and other primary source documents from the wartime era. They show
that average Americans on the home front certainly did not think
they were living amidst a great economic recovery. Yet as I’ll show in this
article—relying on the pioneering efforts of Robert
Higgs—we can use even the official statistics to turn the
conventional Keynesian account on its head.
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.
Now let’s get hip-deep in the actual numbers. Here are the official data
for “Real Gross Domestic Product,” i.e. total economic output adjusting for
changes in the purchasing power of the dollar. These are the government’s official estimates for how much “total stuff” the U.S.
economy produced from 1929 through 1950:
Private and Government Components of Real GDP,
1929-1950
It is easy enough to see why the Keynesians think they have a slam-dunk
case. Real GDP collapsed from 1929-1933. Then, with the start of FDR’s New
Deal, output began a rapid recovery. However, the recovery faltered in 1938
(which the Keynesians blame on a foolishly early withdrawal of
stimulus), meaning the country didn’t really escape the Great Depression until
the massive wartime expenditures starting in the early 1940s.
As I mentioned earlier, the economic historian Robert Higgs has
peer-reviewed articles and book-length treatments of these issues. Higgs has
pointed out several problems with using the official GDP statistics as a gauge
of actual economic prosperity.
For example, one major problem is that the government statistics count
$1 million of military spending as the same amount of “real output” as $1
million of consumer spending on (say) automobiles. Yet this is wrong, because
of the different institutional settings. When consumers voluntarily spend their
money on automobiles, they are choosing to buy those particular goods rather
than other ones, or rather than saving the money for the future. Thus, it is
prima facie evidence that the “$1 million in vehicles” really do constitute a
stock of output that confers genuine services to the new owners.
In contrast, when government officials steer $1 million to military
contractors to purchase some new tanks, we have much less reason to believe
that this is the same amount of “real output.” The money was obtained
involuntarily through taxation (or through deferred taxation in the form of
government deficits), so we don’t know that the citizens value the tanks as
much as they’d value new cars with the same price tag.
Moreover, the government officials in charge of defense procurement
can’t simplypocket the money if they choose not to spend
it; their budgets are probably of the “use it or lose it” form, and in any
event it would be very illegal for them to personally skim from tax funds.
Rather, the way these officials can personally profit from their powerful
positions is to steer sweetheart deals to particular companies, which then give
plush “consultant” or “advisory” roles to these officials once they return to
the private sector. So we can’t even say that the defense procurement officers
value the new tanks as much as they would value $1 million of new cars if they
had had that much money to personally spend.
Thus we see that there is no reason to suppose that the large military
spending (which was the lion’s share of the “Government” purchases in the early
1940s) of World War II was comparable to the same amount of “Private” output.
Therefore, the total GDP figures—as represented by the cumulative height in the
figure above—are very misleading.
Yet the Keynesian case is weaker still. Suppose we accept, for the sake
of argument, that $1 million of government spending is just as economically
significant as $1 million of private investment or private consumer spending.
Even so, the World War II era stilldoesn’t
present a model for dealing with an economic depression.
Look again at the figure above. 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
percentannual 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. Again I ask: Is there any amount
of new schoolteachers and bridges that would compensate for these two trends?
In conclusion, let me be fair and point out that Paul Krugman et al.
think that private living standards dropped during World War II because of rationing, not because of a bug in
Keynesian pump-priming. Maybe, maybe not. My modest point in this article is
that taking the government’s own
statistics at face value, the vast majority of Americans would not want
a Keynesian “solution” to our current economic depression, the way World War II
allegedly “solved” the last Depression.
As with the Obama stimulus package, so too with wartime “prosperity”:
Keynesians can’t point to what actually
happened as
evidence of their policies’ effectiveness, but instead contrast what happened
with what their models show would have
been the alternative. In any absolute sense, Americans during the
war years experienced a serious drop in living standards, as both the official
statistics and the new research by Horwitz and McPhillips show.
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