My friend and colleague, David Gagnon, over at Antagoniste.net (in french) posts a comment of Paul Krugman who asserted that «the Great Depression in the United States was brought to an end by a massive deficit-financed public works program, known as World War II». David answers by wondering if the Bush-era wars in Afghanistan and Iraq led to increased GDP growth. This reply – albeit snappy – does not convey the problems with the Krugman assertion.
Let met clear one thing first: I am not a Krugman-bashing conservative. I personally am fond of several of his scientific contributions especially with regards to economic geography. In fact, some of the tenants of my defence of unilateral free trade versus bilateral trade negotiations (or even multilateral) stem from his work.
However, his World War II assertion is a good occasion for me to vent a frustration I have with regards to the economic effect of wartime spending. Let me go at it in point form
- Last time I checked, wars only destroy;
- Wartime production creates demand for new product by government. As a result, consumption shrank as scarce resources are used for every new tank, plane, gun or cannon. Economic historian Robert Higgs documented this when he looked at statistics with regards to consumption during World War II in the United States. He did note a drop in consumption which was hard to evaluate precisely. However, we do not really need statistics to understand that ration tickets must have meant that ressources were scarcer for the general. I have also posted statistics with regards to calorie intake in Germany and we can see how food consumption in fact dropped. There are also stories of “butterless cakes” or “milkless cakes” which also point in that direction. Even neutral countries were not exempted. Sweden took steps to arm itself up in order to make itself as hard to swallow as it could in order to deter Germany. It never did join the war, yet it was noted that calorie intake overall dropped 10 percent and that several nutrients’ share of diets diminished (Time Magazine’s series on World War II – see “The Neutrals” book);
- I have a hard time considering munitions, tanks and planes as “valuable production” which ought to be included in our GDP calculations. What value was there to US munitions whose only consumers were either German, Italian or Japanese soldiers? American workers and consumers were not made any richer with such production, they may have been made safer from totalitarian rulers, but not richer. This is something that Higgs also discussed in his 1992 paper in Journal of Economic History;
- Investments made in war have to be discarded afterwards. Why keep 50 tank divisions in peacetime? There is little utility for such an army, hence ressources have to be spend to discard excess planes, tanks, munitions etc.
- I also have a hard time considering the accounting value of military production. There were no competition for goods like these, the government just took a contract and paid for it at the price it fixed. Hence, the price system was immensely disturbed by wartime production.
Wartime prosperity is most likely a myth and its hard to see how increased government spending in World War II (or any war for that matter) might have made populations any richer.
Vincent Geloso 
I have to confess I have not read the article by Krugman that you mention and I would like to check other sources too. But my first reaction is to agree with Krugman.
In the US in 1930s unemployment was still very high, and there was lack of demand on the part of consumers and outside world, partly due to the trade wars of the 1930s. Most of the European countries had extremely high tariffs in the interwar period, because of the remnants of the deficient Gold Standard. WWII created a market for US goods (whatever they were – tanks or potatoes, does not matter in this case) and therefore reduced unemployment, boosted production and created opportunities for investment, which dramatically increased GDP (though I am not entirely sure about the living standards, which certainly eventually did rise too). The ration cards do not immediately imply that the living standards fell, they might have been introduced because the government became responsible for a larger part of the economy and it was easier to regulate it that way. For instance, in Britain in WWII all food was rationed, but the average consumption per person rose, because it made it egalitarian.
It is not a very plausible argument to compare US with Germany, because there was no war destruction on US territory and much smaller part of the economy was mobilised. This implies that consumer production suffered much less than in European economies during WWII. Though I have to admit I would like to consult my EconHistory notes and provide some statistics.
Wartime prosperity IS a myth. War (a.k.a. institutionalized murder and destruction) is always waged at a net lost for all participants. All wars are financed by deficit spending and/or inflation of currency and thus their costs are offset to future generation.
Anyone arguing otherwise is either ignorant or evil.
Sorry… I said all participants, but it does make a few privileged weaponry and war supply entrepreneurs richer. A few people win, but globally war is a negative sum game, even for the “winning” nations.
Dear Luba,
I would tend to agree that Germany and the US are harder to compare, but there is evidence that calorie intake did drop in the United States as well (not as much as in Germany, but by a figure similar to that of Sweden – a neutral country). However, as itself, this argument is indeed tenuous, it is linked with the “value of production”. How can we evaluate the worth of munitions (whose sole consumers would be enemy soldiers?) or tanks? When we look at the GNP index corrected by Kuznets to make a “peacetime” concept of GNP, we see a stagnation during the war. When Higgs (Journal of Economic History, 1992) excluded gross war construction and durable munitions, we actually see a decline in GNP.
A good illustration of that is how the “wartime” figure (with no Kuznets or Higgs correction) drops (significantly) once the war ends (by 30 points in the index). As for the peacetime figure, GNP increases after the end of the war because the government liberated an important amount of ressources into the private sector. To assert that the “spending boost” of the war was a stimulus (in a closed economy) is to believe that the government made “valuable” use of the ressources it mobilized. Regardless of how much ressources were mobilized to kill, maim and destroy the enemies of the US, we cannot assert that these ressources made the US any richer in the longer term. In fact, the war made Americans poorer.
Cheers,
Vincent
Dear Vincent,
I read Krugman’s article and I think that Krugman is not talking about living standards during the war and it is quite irrelevant for the point he is trying to make.
This is something I failed to articulate properly in my previous post, but from what i understand he means to say, that by borrowing the government doubtless managed to create enormous economic growth (if we include the rearmament, of course) and in this sense WWII ended the Depression. He does not contend that the living standards were higher during the war (at least he does not say so in the article that I found). It is undeniable that during WWII the US experienced economic growth (any of the figures in Higgs support this), although certainly distribution of the proceeds was not in favour of consumers, but this is beside the point. The possibility of creating economic growth through borrowing is the main argument here. And of course it has implications for the current policy debate.
Yes, in the end living standards are all that matters, but Krugman does not say that war is good or that borrowing regardless of how it is spent will raise the living standards. Or if he does I would be grateful if you could send to me the article.
You said that: ‘Regardless of how much resources were mobilized, we cannot assert that these resources made the US any richer in the longer term.’ The statistics in Higgs’s in my opinion illustrates quite the opposite in terms of long term prosperity. As you pointed out the overall GDP decreased after the war because of the reorganisation of production etc, but nevertheless GDP in 1946 was by 50% higher than in 1939, which is equivalent to 6% growth per year – this is not bad at all. Also as you mentioned yourself consumption increased by 20% as soon as the war was over and as soon as distribution was reversed towards consumer needs. Overall consumption rose by at least 26% compared to 1939 (Higgs, Table 4, column 3 – I am using the lowest figures). So in the long term the war seems to have contributed to the prosperity of American people and this is exactly the point Krugman makes: “Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity.”
What is arguable is whether the US economy was still underperforming before the war and whether it was in fact WWII and not monetary expansion preceding the war that ended the Depression. For instance, Cristina Romer argues just that in ‘What Ended the Great Depression?’ Journal of Economic History 52 (December, 1992): 757-84. Nevertheless to me it seems that deficit spending during WWII contributed to the economic growth and improvement of living standards once the war ended, but certainly it did not make American people poorer in the long term.