Monday, April 7, 2014

Myth: WWII brought the United States out of the Great Depression

This is a very popular belief and one which is borne out by most measures of economic growth. And to be completely honest, as the economy is conventionally measured, WWII did result in a rapidly expanding economy. However, the reason why economic growth is important is because it raises the standard of living of the lot of all men and women. This certainly was not the case during the war. Instead of producing capital or consumer goods that improved people's lives, the bulk of the economic growth during the war came from government purchases which funded the manufacturing of tanks, uniforms, bombs, bullets, etc. According to the economic historian Dr. Robert Higgs:
"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 .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." [1]
As Dr. Higgs notes, no intellectually honest person would believe that the war was good for the American people, nor the people in countries affected by the war. Indeed, the American people suffered the rationing of basic goods and services as if they lived in a communist command economy. Austrian economist Steve Horwitz and his colleague Michael J. McPhillips published a study in 'The Independent Review' which states: 
"Whatever the war’s effects on seemingly booming conventional macroeconomic aggregates, it entailed a retrogression in the average American’s living standards, and that disconnect should alert us to those aggregates’ limitations...The notion that World War II is responsible for ending the Great Depression has met growing skepticism among economic historians. Although the wartime economy saw increases in conventional measures of macroeconomic performance, the letters, journals, and newspapers of the era indicate years of continued material deprivation and hardship, rather than rising living standards for the average American." [2]
Thus, while Gross Domestic Product is a useful tool in measuring the size of the economy, any sort of production, even if such production is socially harmful (like production of war materials which crowds out private production) is considered a net gain. 

Additionally, Economist Robert Barro has done research on the multiplier effect of government spending during WWII and concluded that the defense spending multiplier was 0.8 and the non-defense spending multiplier was close to zero [3]. This suggests that while government spending on defense stimulated production, it also crowded out private sector investment. His results indicate that the "benefits" of government spending did not outweigh the costs of crowded out private sector investment. Thus, even by conventional measurement of the economy, WWII wasn't exactly a net gain. 
During the war, Keynesian economists warned that an end to the excessive defense spending would lead to an economic downturn. Leading Keynesian Alvin Hansen stated, "the government cannot just disband the Army, close down munitions factories, stop building ships, and remove all economic controls.” [4] Contra Hansen's advice, after the war the government "Government canceled war contracts, and its spending fell from $84 billion in 1945 to under   $30 billion in 1946. By 1947, the government was paying back its massive wartime debts by running a budget surplus of close to 6 percent of GDP"[4]. As a result conventional measurements of the macroeconomy (GDP), suggest that there was a severe depression in 1946, the year after the war. However, this economic downturn is almost never spoken of simply because it was a return to normalcy from the economic sugar high of WWII. In fact, no one living during the post-war years would think that they were living in a depression. There was no evidence of diminished consumption after the war and the unemployment rate was 3.9% in 1946, indicating a strong economy. Of course, this unemployment rate was higher than the 1.2% unemployment rate of 1944 because millions of soldiers who volunteered or were drafted into the military returned home [5]. As historian Thomas Woods has suggested, the miracle of employment during the war could easily be achieved at any time if the government decided to simply kill off the unemployed, but that  is both perverse and insane [6]. Woods' comments are meant to highlight the fact that low unemployment due to mass military conscription is nothing to be proud of. 
After the war, the US economy shrank from decreased production of war materials, however, after the initial "depression" the economy (especially the private sector) expanded rapidly, creating a post war economic boom which continues to be studied today. In the end, we should be wary of the claim that WWII ended the Depression simply because producing an abundance of weaponry for war does nothing to further the standard of living for the lot of all men and women. Socially useful production is determined subjectively by individuals engaging in voluntary exchange en mass, government allocation of resources may grow the economy by conventional macroeconomic measurements, but if no one values what is produced than that production was a waste of scarce resources. And that is exactly what World War II was, a necessary waste of scarce resources and human life, nothing more. Hopefully the world will never have to experience such a "miracle of production" again.

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