David R. Henderson  

The U.S. Postwar Miracle

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In the Encyclopedia, I wrote about the German economic miracle. In this piece, "The U.S. Postwar Miracle," just released by Mercatus, I write about the miracle that was right under our noses or, more exactly, right under our parents' and grandparents' noses. On this, I wrote:

According to official government data, the U.S. economy suffered its worst one-year recession in history in 1946. The official data show a 12-percent decline in real GNP after the war. A 12-percent decline in one year would fit anyone's idea of not just a recession, but an outright depression. So, is the story about a postwar boom pure myth?
If you ask most people who were young adults in those years (a steadily diminishing number of people, so talk to them soon) about economic conditions after the war, they will talk about "the postwar boom." They saw it as a time of prosperity.

It's a pretty astounding story in which federal government spending on goods and services fell, in a period of two to three years, by over one third of GDP. That's right: not by one third but by one third of GDP.

Here's what Paul Samuelson anticipated in 1943:

Nor will the technical necessity for reconversion necessarily generate much investment outlay in the critical period under discussion whatever its later potentialities. The final conclusion to be drawn from our experience at the end of the last war is inescapable--were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties--then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced. [italics in original]

To be sure, the war didn't end in the next 6 months: it took closer to 2 years. I also cite Gunnar Myrdal's pessimistic predictions about what he and I both saw as a dramatic transition from a planned economy to a relatively free one.

I write further:

Although Samuelson held out hope for a smooth postwar transition, his hope was based on the idea that the U.S. government would "retain direct controls," "taper off war production gradually," and "undertake income maintenance in the form of dismissal pay for soldiers, unemployment compensation, direct and work relief expenditure." As we shall see, the U.S. government did not retain direct controls after 1946, did not taper off war production gradually, and did not provide much work relief. The only item from Samuelson's list that it did was provide unemployment compensation for out-of-work World War II veterans, and only a small percent of these veterans took advantage of this program. Moreover, the economy did not move from "astronomical deficits" to "the large deficits of the thirties," but actually moved to surpluses, which, in Samuelson's view, should have made the problem even worse.

Towards the end I deal with the standard arguments that are made today for why the demobilization and reconversion did not cause a recession: (1) Rosie the Riveter returning to the home, (2) the GI Bill putting many veterans in college, and (3) the pent-up demand for goods that people finally got to express by running down the savings they had accumulated during the war.


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CATEGORIES: Fiscal Policy



COMMENTS (9 to date)
Tracy W writes:

This is great. (Though I'm a biased reader).

Keith Eubanks writes:

As government spending declined at the end of WWII private investment grew. There was almost a dollar for dollar shift between the decline in government borrowing and private investment (BEA tables 5.1 and 3.1).

Why is there a mystery here? Income is generated by the successful exchange of goods and services produced. Income can be spent by the creator or transfered to someone else through gifts, taxes or loans. The receiver can then spend the income. Who spends doesn't change the total.

Economic growth is driven by what income is spent on, not who spends. Capital spending (investment) expands the means to produce goods and services. Consumption spending does not.

Decrease government based consumption spending and expand private investment spending and the economy will grow. What's the mystery?

Blackadder writes:

David,

My understanding is that Great Britain a) ended up following Samuelson's prescriptions more closely, and b) had a worse recovery. Do you have any idea if that is accurate?

Hyena writes:

I'm not sure "cutting spending" has the same impact now as it did then or at the end of the Cold War.

The amount of misallocation would seem important. Military spending is probably almost 100% misallocated; cut the military and you get richer dollar-for-dollar and capture efficiency gains.

I think you should have left the last paragraph off altogether. Your final proposals would send mixed signals: moratoriums increase tail risk, repeals would increase the value of liquidity in the near term.

Hyena writes:

Keith,

If I spend on consumption, I necessarily spend on investment. Everything is made from something else and so every dollar of consumption will always invest in some production.

David R. Henderson writes:

@Keith Eubanks,
I don't think there's a mystery.
@Hyena,
I don't see how moratoriums on regulations increase tail risk. Could you explain?

Bob Murphy writes:

Great stuff! This really helps dispel the myth that "World War II got us out of the Depression."

I just gave a talk showing the decomposition of the GDP figures, and how private GDP was lower in 1943/44 than under Hoover.

Hyena writes:

Prof. Henderson,

Regulations are constantly being passed in response to changing circumstances. Every day there is new regulatory activity.

A moratorium holds the number and nature of regulations constant even as circumstances change. At the end of the moratorium, the regulatory environment will be under immense pressure to shift quickly, thus tail risk.

Steve Roth writes:

You're in good company here. Tyler also failed to consider one crucial factor in constructing his view of the '38-'48 time frame.

Private savings:

http://www.asymptosis.com/tyler-cowen-10-trillion-in-stimulus-would-have-no-effect.html

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