Keynesian Economics and ‘The Miracle of the 1940s’
Megan McCardle explores “The Political Failure of Keynesian Economics:”
Last August I asked a question: ”What if Keynesian stimulus works, but no one can ever actually afford to do it, short of something like World War II, where the government can tap into a patriotic outpouring of national savings by issuing bonds with negative real yields.”
When people like Paul Krugman say that almost $900 billion in stimulus didn’t work because it wasn’t big enough, you have to wonder if an adequate Keynesian stimulus is even possible.
Hey, as far as Keynesianism that’s “short of something like World War II,” Krugman’s reply would be why stop short? Go for the gusto! Go for “the miracle of the 1940s,” the euphemism for the bloodiest conflict in man’s history that Krugman deployed last year, which would make even Dr. Strangelove blush.*
In response, James Taranto noted at the time:
Former Enron adviser Paul Krugman, writing in the New York Times, steps into the WABAC machine and guides us through some truly improbable history:
Here’s the situation: The U.S. economy has been crippled by a financial crisis. The president’s policies have limited the damage, but they were too cautious, and unemployment remains disastrously high. More action is clearly needed. Yet the public has soured on government activism, and seems poised to deal Democrats a severe defeat in the midterm elections.
The president in question is Franklin Delano Roosevelt; the year is 1938. Within a few years, of course, the Great Depression was over. But it’s both instructive and discouraging to look at the state of America circa 1938–instructive because the nature of the recovery that followed refutes the arguments dominating today’s public debate, discouraging because it’s hard to see anything like the miracle of the 1940s happening again.
What Krugman calls “the miracle of the 1940s” is more commonly known as World War II, a ruinous conflict that cost some 60 million lives, including more than 400,000 American ones, and that entailed the near-extermination of Europe’s Jewish population.
World War II is sometimes called a “good war,” meaning that few dispute American intervention was necessary or that we fought on the right side. But this easy moral clarity is possible only because the Axis actions that started the war were unambiguously evil.
In April 2009 we noted that David Leonhardt, a Krugman colleague at the Times, had praised the economic policies of Germany’s National Socialist Party. Now Krugman calls World War II itself a “miracle.” The Old Gray Lady is in the grips of utter madness.
But this is all academic anyhow, as Jay Carney,the White House’s new press secretary told reporters yesterday that the White House’s stimulus goals “have been met,” as this video at Real Clear Politics, umm, highlights:
White House press secretary Jay Carney says the Recovery Act added several million jobs and lowered the unemployment rate. According to Carney, the “goals” of the stimulus package “have been met.”
A reporter asked Carney why unemployment is at 9% and not 7%, the percentage projected if the stimulus worked. Carney dismissed the question. “We’ve said repeatedly that we don’t want to relitigate the battles of the past,” Carney told the reporter.
If that’s success, I’d hate to see what they would consider failure.
And speaking of failed economics, Jeff Jacoby had a great article in the October issue of Commentary on “What public-sector unions have wrought,” which nicely sets up much of the backstory for the debacle in Wisconsin this week, if you’re hiding out at the Tilted Kilt with a few minutes to spare.
* Genghis Khan would probably OK with the phrase, provided the resulting carnage reduced global warming.
It is often repeated that the government spending of WWII, rationing, and the conscription of soldiers (giving everyone a “job”) somehow produced prosperity. But, what possible mechanism produces prosperity out of war? People can’t eat or enjoy tanks, and shooting people produces nothing of value beyond winning.
It would be correct to say that WWII interrupted FDR’s plans and changed the mood of the American people to reject big government. It was the post-war reaction of the people against FDR’s policies that resulted in good policies and renewed prosperity.
→ FDR’s Policies Prolonged the Depression (and Obama’s policies will too.)
UCLA economists Harold L. Cole and Lee E. Ohanian concluded that New Deal policies prevented economic recovery for seven years. “The Depression dragged on for years, convincing generations of economists and policy-makers that capitalism could not be trusted to recover from depressions. They decided that government intervention was required. Ironically, we show that the recovery would have been very rapid had the government not intervened.”
→ Government Spending Divides, It Does Not Multiply
Robert J. Barro is a Professor of Economics at Harvard. He found that spending in World War II decreased GDP by 20% (a multiplier of 0.8). Government spending killed GDP, even assuming that the spending itself was useful.
Quip: If you think WW2 ended the Great Depression in the U.S., then we can carry out the same enlightened policies without needing a war. Conscript most of the able bodied men and have them build tanks. Then destroy the tanks. Impose rationing for good measure. At the end, everyone is supposed to be rich.
Actually, this isn’t so funny. Keynesian economics recommends to do just that. Borrow and spend, even if you pay only for digging holes and filling them back up. And, Obama and many in congress are Keynesian in their thinking, because they like the recommendation that the government should tax a lot of money and spend it on signs saying “Brought to You by Caring Democrats”.
→ Spending did not end the Great Depression
Reduced spending and lowered tax rates did it.
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[edited] What happened in 1945 at the end of WWII? FDR was convinced the only way to employ the 12 million returning soldiers was another New Deal program, but he died before he could impose his plan. The new President Truman proposed it, along with national healthcare.
Both the Congress and Senate had Democratic majorities. They said “No” to the whole New Deal revival: no federal program for health care, no full-employment act, only limited federal housing, and no increase in minimum wage or Social Security benefits.
Instead, Congress reduced taxes across the board. Top marginal corporate tax rates effectively went from 90% to 38% after 1945.
By the late 1940s, a revived economy was generating more annual federal revenue than the U.S. had received during the higher tax rates of the war years. Price controls ended by the end of 1946. The U.S. began running budget surpluses.
Unemployment had remained double-digit throughout the whole New Deal. One year after the end of New Deal policies and the return of economic freedom, it was under 4% despite the return of a huge number of soldiers.
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It is amazing that government economics is summed up by the South Park Underpants Gnomes:
(1) Collect underpants. (2) ??? (3) Enjoy huge profits.
(See the video starting from 17:40. Sorry for the 30 second commercial.)
Actually, we have in living memory a policy of Keynesian spending that produced economic recovery:
Ronald Reagan’s defense buildup.
What people miss in defense spending is just how labor intensive it really is. Build a new bridge, or even Hoover Dam, in the 1930′s (let alone today) and you have a small city for few years. But build new aircraft carriers and whole new air fleets, you employ millions. This does two vitally important things.
1. It immediately soaks up nearly all unemployment. Reagan created about 4.5 million new jobs in 1984 guaranteeing his re-election with the creation of a 700 ship navy. Because shipyards were filled with US workers, who in turn needed to be supplied by millions of other workers, creating cables, steel panels, electronics, you name it.
2. It jump starts industrial capacity by providing customer-financing (the US government military contracts) to rapidly and massively increase production, creating in effect “paid for” factories that can be later repurposed for other things, along with of course subsidizing basic R&D that otherwise is unsustainable.
Now, like everything else in life, you can’t do this forever. Massive military spending is sort of like steroids, a little at the right time is good, the wrong kind and too much can kill you or lead to serious side effects. But Reagan proved you could massively increase military, not social spending, and create jobs, while not sustaining half a million war dead from the US either.
The “bonus” of a big navy/air force is that they provide intimidation to unhealthy regimes/enemies short of war. Had say, FDR built 20 aircraft carriers and had ten of them cruising off Germany in 1938, Hitler would have stopped. Oddly enough, few picked fights with Arnold Schwarzenneger on the beach. Being strong and being seen to be strong, without provoking fights, is the only proven way to deter attacks.
To whisky,
Prosperity is consumer goods and services. It doesn’t matter how many jobs are created for whatever purpose if it does not result in more things to enjoy. A job is a cost; what is produced is a benefit. A person’s work all day is a cost (he might rather play tennis). The toasters he produces are the benefit that he works to create.
Building a navy is a cost, with the hoped-for benefit of keeping us safe. There is no consumer benefit other than the enjoyment of touring an old ship, or reducing the losses from piracy.
The cost of building a navy is exactly the consumer items which the builders work for, what we pay them. Consumer production supports building the navy; building the navy does not add to consumption and enjoyment.
Reagan saw the navy buildup as a necessary cost in a dangerous world. That cost did not bring prosperity. Lower tax rates and a friendly business climate allowed greater production of goods and services that people wanted.
Full employment is meaningless if that employment does not produce (or support the production of) what people need to support their lives.
As I pointed out above, Keynesianism says that building tanks and destroying them will “jump-start” the economy. But, you have to pay the tank-builders with food, clothing, and shelter provided by others who are taxed to deliver those goods. Everyone eats by forcing the farmers to work harder for nothing in exchange. That is not a path to a prosperous life.
Also, the economy isn’t an auto engine. There is no way to jump-start it. Bad policy suppresses cooperation and production. Good policy is enough to promote prosperity.
Let’s see to duplicate the “miracle of the 1940s,” we need a decade of massive productivity growth (41% in the 1930s), a large unemployed population (to prevent massive inflation due to competition for labor), and, oh yeah, a directive to produce with no thought to cost or excess quantity. For the war, it was speed and as many as can be produced with no consideration of the cost. Now, to prevent the massive production from sparking a recession or a depression, you need something that will consume those massive quantities of goods. What better that blowing s*** up? It’s fun and afterward, you need new stuff.
So we may get out of this in another “miracle of the 1940s.” We just need another 8 or 9 years of high unemployment with hopefully productivity increases in the creation of goods, then we need an event that will consume as many goods as we can produce as fast as we can produce them. So let’s check back in 2025 or so and see where we are.