Arnold Kling  

More on the Austerity of 1945-1947

The Soviet Experiment... The Soviet Experiment, Continu...

I dug up two interesting articles. In case I am more interested in this than you are, I will put this post below the fold.

1. In 1991, Gary L. Anderson wrote about the effect of the 1946 election on wartime price controls.

The War Production Board (WPB) became America's central planning agency, replacing allocation of resources by the market with allocation by Federal bureaucrats. Instead of offering market prices for military items, the federal government used the WPB to force industry to convert to war production from consumer goods. In this way, the government coerced private industry to accept prices for war goods far lower than the free market would have determined. The War Labor Board regulated wages. The Office of Civilian Supply administered the civilian sector. And the Office of Price Administration (OPA) controlled virtually all prices. These various "war agencies" employed 151,551 people in 1945. In that year, the various bureaucracies that controlled prices and wages alone cost $389.1 million to operate.

Federal price controls weren't restricted to goods directly related to the war effort, like armor plate or chemicals needed for explosives, but were essentially universal. All important consumer goods were price controlled. Rents were especially tightly controlled. All told, about 650 separate price controls were in effect during the war years.

...During the period 1941-1945, the federal government seized under Presidential authority (and, in effect, temporarily nationalized) 73 industrial plants.

...Nothing strikes fear in the hearts of politicians like an election. Price Administrator Chester Bowles, who on November 4 (the day before the election) had called for a halt to price decontrol "until supply and demand came into balance," had a sudden change of heart and approved immediate removal of virtually all remaining controls on November 10 (five days after the election). The day before, President Truman had ordered the immediate removal of all remaining controls. This policy shift must be one of the most abrupt on record.

2. In 2005, Alexander J. Field wrote that the second World War was an adverse supply shock, in terms of productivity. (Believe it or not, many historians had argued that wartime innovations "created the conditions" for subsequent prosperity.)

What interested me was data that pertain to Recalculation. Field tabulates the gains and losses in jobs in various sectors over two time periods: 1941-1943 (the big war buildup); and 1943-48 (from the peak of war production to the complete conversion to a less-militarized economy). He explains the 1943 break point thusly:

By the time of D-Day, the military goods production machine had already begun to wind down.

In the short span of two years, between 1941 and 1943, the US automobile industry shut down and reconverted to defense production. Nondefense construction largely ground to a halt, as military and naval construction soared. People streamed out of farms and wholesale and retail trade into defense factories and the military, and they were joined by hundreds of thousands, indeed millions more from the ranks of the unemployed and not in the labor force. Billions of dollars were spent by the Defense Plant Corporation to build government owned privately operated plants and equip them with machine tools to jump start the airframe and shipbuilding industries, produce aviation fuel and synthetic rubber, and aluminum. Then, before the economy could catch its breath, most of the ordnance was expended, the war was won, and full scale demobilization was underway.

For 1941-1943, the biggest gainers and losers were, in thousands (1941 levels in parentheses):
Other transportation equipment............... 2,596 (675)
Iron and steel and their products, incl. ordnance. 819 (1641)
Machinery, except electrical................. 370 (1087)
Electric and electronic equipment............ 353 (607)
Chemicals and allied products................ 269 (580)
Railroad transportation...................... 249 (1285)

Motor vehicles and equipment................. -330 (655)
Contract Construction.........................-208 (1774)
Wholesale trade.................................. -200 (1952)
Farms.................................................-179 (2201)
Retail trade..................................... -109 (5075)

In addition, the government sector gained, mostly because of more than 7 million entering the military. Overall, according to Field's reading of Commerce Department figures, the economy added over 11.2 million jobs, of which over 7.5 million were in the government sector.

My own thinking (Field does not address this point) is that some of the gains in "other transportation equipment" and some of the losses in "motor vehicles and equipment" involved no physical movement of workers. For example, I picture a plant that stopped making passenger cars and started making military trucks and tanks.

Anyway, the top 1943-1948 gainers and losers were 1943 levels in parentheses):

Retail trade..................................... 1,511 (4,966)
Services......................................... 756 (5,226)
Contract Construction ..................712 (1,566)
Wholesale trade.................................. 676 (1,752)
Motor vehicles and equipment................. 441 (325)
Finance, insurance, and real estate.............. 281 (1,389)
Telephone and telegraph...................... 202 (490)

Other transportation equipment............... -2,800 (3,271)
Iron and steel and their products, incl. ordnance. -588 (2,460)
Chemicals and allied products................ -126 (849)
Electric and electronic equipment............ -73 (960)
Agriculture, Forestry, Fisheries...............-56) (2,121)
Nonferrous metals and their products ...-32 (508)
Railroad transportation...................... -31 (1,534)

The state and local government sector gained 1.1 million jobs (on a base of just 2.8 million,) canceling out a comparable decline in the Federal civilian labor force. A decline in government military employment of 7.5 million meant that overall the government released 7.9 million workers, of which the private sector absorbed 2.4 million, meaning that 5.5 million jobs were lost on net over this peaetime conversion period.

I would say that much of this job loss was voluntary exit from the labor force, since the unemployment rate in 1948 was only 3.4 percent. About 800,000 GI Joes went to college, and perhaps even more Rosie the Riveters went back to the kitchen, although the longer-term trend was for women to increasingly work outside the home.

Note that using 1943 as the peak may make sense from a war production standpoint. However, as Field points out, 1944 was the peak for military employment, so that the government outflows would look different from 1944-1948.

Overall, I was surprised to see so much of the employment gain from 1943-48 taking place outside of automobiles and construction. (In percentage terms, those two were indeed large gainers.) The two combined accounted for fewer new jobs than retail trade.

Remember my mantra of macroeconomics, that economic activity = PSST: patterns of sustainable specialization and trade. The postwar period created an awful lot of PSST in a very short time. This suggests that the economy back then had the ability to Recalculate rapidly. I wonder if it has that same ability today.

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COMMENTS (7 to date)
Lord writes:

There really isn't any conflict between employing less productive workers during the war and prospering from adaptation and repurposing of technical innovations after the war.

The big difference is little recalculation is needed after a war, only reversion back to a peacetime economy. Financial crises expose what doesn't work but offers no clues as to what can and will work in the future and no backlog of innovation to apply. That makes for a much more difficult problem and is the real uncertainty to be faced.

david writes:

It doesn't, or we would be seeing a lot less unemployment today. Even if state spending patterns are unsustainable in the long term, we should be observing healthy businesses operating on models that are individually sustainable given the ongoing state fiscal regime.

In fact, the postwar economy might not have been that great at calculation either. We are ignoring the gains from the recovery in international trade and the US's then-unique position as undamaged industrial power.

fundamentalist writes:

Of course, it helps if you shoot 200,000 unemployed young men, as happened in WWII.

roversaurus writes:

No, it does not help to shoot 200,000 unemployed men. Breaking windows, or lives, is NEVER "creative". Wealth is NEVER created when you destroy wealth.

Lord writes:

It also helps if you destroy large amounts of capital that then have to be rebuilt.

topgun writes:

(Believe it or not, many historians had argued that wartime innovations "created the conditions" for subsequent prosperity.)

This thinking is not very far-fetched at all. The aviation sector in particular benefited greatly from war-time innovations like improved aerodynamics, more powerful engines, jet engines, radar and so on. It also laid the foundations for rocketry, telecom satellites and nuclear power. The military GP vehicle was transformed into the civilian Jeep. I'm sure there are many more such examples.

rwb writes:

Why all the talk about austerity? There is a theme in the media reminiscent of the notion that social security could not be afforded. This theme suggests that people have to accept less but work more. I heard someone being interviewed from a conservative think tank insisting that the stimulus package was bad because it would drive up wages and saying that people should take two jobs and accept a lower rate of pay. Is this based on the theory that risk and burden must roll down hill? Is it based on the idea that people in the developed world will come down to the wage of the developing world and a surplus receiver will pocket the difference? Market failure is not the issue its the basic sense of fraud or injustice that in inherent in capitalism over one person doing the work but another taking the gain.

If society actually exists for the benefit of society why isn’t there more emphasis on true employee ownership and fee for service not for profits.

Shares in a company would only be available to non-management employees and founders.

The board would be wholly employee selected.

An automatic purchase of shares in the company would make up a percentage of the employee’s compensation for retirement and at least a portion would be cashed out at retirement.

The founder or founders of a company would sell shares to employees for a percentage of ownership. Dividends would be optional.

Financing would come from employee stock purchases, bond issuance and private/public loans (especially from other such businesses.)

A portion of a patent royalty would be paid to the party responsible vice solely to the corporation.

Firms would not be able to patent public research, (complementary idea)

Firms not adhering to this structure would absorb a tax penalty designed to put them at a competitive disadvantage. Business done complying firms would incur a tax benefit.

Instead of talk of austerity, why isn’t there more emphasis of restoring political representation? Sponsorship based media platforms make lobbying possible and yet there is a real opening with this because of search engines obviate the need for demand-based advertising. Nicholas Car pointed out efficient search does not actually need ad revenue because it need not be resource intensive.

A simple subscription could provide private, ad free, unlimited anytime anywhere access to all: applications, services, content (print/video/audio/game,) ISP, basic PC functionality, wireless or otherwise… Such subscription services would quickly become massively redundant and sometimes offered as a public service.

The definition of functional government is practically: shifts the financial risk and burden to those at the top. Wouldn’t it have to be this way for stability and simply because those at the top are best situated? Wouldn’t any other arrangement amount to oppression? Citizenship amounts to a share of the power and with it comes a voice. With each member having a share of the real power they can vote to have a share of the wealth, each should get back from society at least as much as they contribute there is a return on citizenship.

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