No, Paul Krugman, WWII Did Not End The Great Depression

Forbes ^ | 08/25/2011 | Bill Flax

[SeekAndFind]

It’s a recurring fantasy for left wing academics fascinated by central planning that in cyclical downturns government should act decisively on a scale equivalent to war. Nobel Prize recipient Paul Krugman exemplifies this intellectual longing to steer our lives.

Krugman effortlessly slides into a war footing espousing intervention comparable to America’s crusade against Hitler, who, take note, centrally planned an economy himself:

“World War II is the great natural experiment in the effects of large increases in government spending, and as such has always served as an important positive example for those of us who favor an activist approach to a depressed economy.”

After WWII until its glaring failures manifest in the Seventies, Keynesianism inundated economic thought. Paul Samuelson’s textbooks became mainstays across the academy. Samuelson championed mathematical analysis, which transformed macroeconomics into a pseudo science spawning waves of budding planners infatuated with statistics.

From this basis the myth prevails that WWII finally overcame the Great Depression. History has revised Hoover, easily the most meddlesome peacetime president before FDR, into a laissez-faire reactionary. The New Deal – a disastrous example of everything not to do during downturns became beneficial, only it supposedly wasn’t aggressive enough.

[Wayne07]

Smoot Hawley passed the house in May 1929, about a month before the crash. I think the author is saying that the market may have been reacting to the fear of its effects once they saw it pass the house. It wasn’t signed until June 1930.

[dalereed]

FDR negotiated the bombing of Pearl to not only end the depression but to make the public accept our entry into WW2!

[SeekAndFind]

Looks like Truthers existed back in the days of FDR.

[US Navy Vet]

Actually it was the election of Ike who pretty well put an “end” to Hoover, FDR and Truman’s Depression.

[SeekAndFind]

If we had a depression under Truman, how were we able to help Europe with the Marshall Plan?

[count-your-change]

Then finding a country or two to destroy and rebuild should be an excellent way out of our current economic slump, no?

[Palter]

Yes, they have.

[Vermont Lt]

The crash was in October ‘29 . The act just made a bad situation worse.

[BlackElk]

See the late Jude Wanniski’s book, The Way the World Works for the relationship between progres toward passage of Smoot Hawley and the 1929 Crash.

[Wayne07]

There is an article on the Jude Wanniski website on the cause of depression - totally worth reading.

http://www.polyconomics.com/ssu/ssu-010713.htm

[sinanju]

I did read “The Forgotten Man” some years ago.

[okie01]

So, if WW II is to gasoline as the economy is to the engine, how do we get out out of our current economic stagnation if we were to learn from history?

WW II was, in fact, what got us out of the Great Depression.

Recall that the war was going on for over two years before we got involved.

And, from 1939 forward, Britain and France were buying large quantitities of U.S. armaments -- artillery, trucks, tanks, airplanes, etc. Lend-lease was enacted in January, 1941, whereby the U.S. government started buying armaments and "leasing" them to the UK. After Barbarossa and before Pearl Harbor, we were also started shipping large quantities of armaments to the USSR.

The result was hundreds of thousands of manufacturing jobs and millions of support jobs. Real jobs in the private sector. Not the temporary jobs created by the WPA and the CCC.

The thing to takeaway from the history of the post-depression era is that a.) it took somebody else getting involved in a war, which b.) created jobs in our private sector.

It doesn't have to be a war. Anything that stimulates activity in the private sector will serve. Like drilling for oil and gas, offshore and onshore and on public lands. Like opening mines, instead of closing them. Allowing timber to be harvested from public lands. Allowing the auto industry to manufacture automobiles that people want and can be manufactured efficiently.

The list goes on and on. But one thing is clear: if the federal government were to end their regulatory regime and start encouraging business rather than threatening it, the effect would be akin to a world war.

[billflax]

Thanks for posting!

[SeekAndFind]

Here is the writer’s own view of what got us out of the depression:

On the surface, wartime spending finally propelled America from the Depression’s pits. As war production expanded from roughly 2% of GDP to almost 40%, statistically, America rebounded. In 1940 dollars, GDP shot from $101.4 billion to $120.7 billion in 1941 up to $174.8 billion by 1945 while unemployment fell below 2%.

America didn’t officially enter the fray until December 1941. FDR had by then rescinded most New Deal regulations, scuttled the WPA and similar agencies and ceased his incessant public bickering with private business. Some surmise he stopped attacking industry recognizing he needed their help attacking fascism.

The pre Pearl Harbor boost stems from three factors: wartime spending by others, which does not reflect stimulus on Washington’s part; Lend-Lease, but giving away munitions abroad promotes no prosperity here, and the demise of the New Deal.

After netting out federal spending, GDP surged 17% from $91.9 billion in 1940 to $107.7 billion in 1941. Once engaged, our non-federal output trickled down to $101.4 billion by WWII’s conclusion in 1945.

The private economy reflected little improvement, partly because private consumption was curbed. Living standards didn’t regain 1929 levels until America restored a market based economy in the aftermath of victory.

The president proposed a “Bill of Economic Rights” predicated on aggregate demand maintenance. Congress thankfully repudiated it. Tax rates were slashed while war time rationing, price controls and regulations receded.

America was one of few industrial nations with its productive infrastructure intact. Despite federal spending falling from $93 billion in 1945 to under $30 billion by 1948 (in 1945 dollars), unemployment stabilized around 4% as Americans, free of New Deal shackles, launched an economic boom.

How does blowing up Germany boost American living standards? How is making men sleep in frigid fox holes under enemy fire enriching? How did rationing everything from the enjoyment of luxuries to our clothing and diets lift anyone’s material standing?

The military doesn’t jumpstart the economy, it protects producers. This represents patriotic sacrifice, not prosperity.

Production is the progenitor of wealth, but making things unvalued by markets doesn’t improve life. Neither does working harder to achieve the same result. Repairing damage caused by war or natural calamity through debt encumbrance does nothing to support sustainable growth. Once said project completes, we’re back where we started with debts to boot.

[Always Independent]

So is this clown saying that we should double the defense budget? Unless he referring to BO’s war on the United States.

[SeekAndFind]

RE: So is this clown saying that we should double the defense budget?

If we take Krugman’s argument to its logical conclusion, then we ought to have another World War to get us out of this funk.

[okie01]

The pre Pearl Harbor boost stems from three factors: wartime spending by others, which does not reflect stimulus on Washington’s part; Lend-Lease, but giving away munitions abroad promotes no prosperity here, and the demise of the New Deal.

Well, two out of three ain't bad. I overlooked "the demise of the New Deal" -- but incorporated deregulation in the prescription for ending our economic woes today.

[RexBeach]

When WW2 began, America had the 16th largest army in the world.

Not true with an all volunteer force.

We had to grow rapidly in 1941, and it did have a great impact on the economy.

Thanks for the post.

[Wayne07]

If putting people in the Army helped the economy, then you it would make sense now for the government to employ all the unemployed. Let's say we took 10 million unemployed people and put them in the army, or dig then fill ditches, and paid them $20k a year. We'd have to collect an additional 200 billion dollars in taxes from the people in the private sector. Every government employee, whether it is a bureaucrat in washington, a soldier, or an FDA inspector is a drain on the economy. Money that otherwise might have gone to producing something, is instead allocated by the government which is inherently inefficient.

btw, I am not an anarchist or a libertarian; I support strong armed forces, but recognize the cost to the economy.

[Cainkinison]

I am much more of a moderate then most people who post on here, but i do have a few thoughts. First i think that deregulating to much would have disastrous effects long term. Giving corporations to much power could be just as disasterous as giving government to much power. Second, all this talk bout FDR making things alot worse begs a very interesting question. If the FED did absolutely nothing, and let things develop without any interference, what would of happened if things had gotten proggressively worse? Keep in mind everyone that part of the depressions cause was zero accountability by large financial institutions. Yet we are seeing the same problem today. Far to much power in the hands of far to few people will always end in disaster!