David R. Henderson  

Summers Way Off on FDR and 1941

Paul Romer on Institutional Re... Kipper- Und Wipperzeit Update...
But for Hitler and the military buildup up he caused, FDR would have left office in early 1941 a failure, with American unemployment above 15 percent.
This is from Lawrence Summers, "More Stimulus Needed For Jobs Crisis," in the Huffington Post, June 13, 2011. This article is Larry's attempt to justify large increases in government spending to increase employment. There is a huge factual problem with Larry's statement.

Larry is assuming that there was a big military build-up in 1940. 1941 doesn't count because the election that, by his hypothesis, would have driven FDR from office was in November 1940. But there was no big military build-up in 1940. Alexander Field, in his book, A Great Leap Forward, points out that even with a broad measure of military spending that includes Lend-Lease and the government's Defense Plan Corporation, a subsidiary of the Reconstruction Finance Corporation, spending in 1940 and 1941 was only 5 percent of the cumulative defense spending that occurred between 1940 and 1945. And certainly 1941 spending wasn't below 1940 spending. Which means that military spending in 1940 was less than 2.5 percent of overall military spending between 1940 and 1945.

Update: In response to Alex Godofsky's comment below, the military build-up was unexpected. Remember that FDR ran on a policy--he told a Boston audience in October 1940 that he had said it before but he would say it "again and again and again"--of not getting American boys into any foreign war. Majority opinion in the United States ran strongly against getting into the war. Critics of FDR, after he had won a 4th term in 1944, referred to him as the president who was re-elected "again and again and again." :-)

In response to AJ below, here's my blog post and here is the Mercatus study I did on same.

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CATEGORIES: Fiscal Policy

COMMENTS (9 to date)
david writes:

A table. Military spending in 1940 was about 1/5 that in 1941, so it was 1% of total spending between 1940 and 1945.

Despite that, it was twice that of 1939. We can draw a lot of epicycles regarding rational expectations of future expenditure here, of course. Or we could argue that the cash/carry program allowing Britain etc. to purchase armaments from the US's private sector was the key factor - so it's someone's government spending, just not the US's!

The US began drafting soldiers in September 1940, but its own spending only increased after the election and a new Budget (Dec 1940).

Regardless, it seems wrong to claim that Roosevelt's re-election would have been in doubt (unemployment was still high, but voters still blamed big business for the unemployment). Breaking the two-term barrier and being possibly pro-war were probably the bigger issues. On the other hand, it is pretty clear that US unemployment did drop very steeply as military spending was ramped up - even more than the peacetime ND did.

AJ writes:

... And then there is the matter of the largest macroeconomic anti-stimulus in the last 100 years in 1945-46: a 55% reduction in federal spending. The private economy grew just fine after that. [David, I believe you had an excellent post about this 1-2 years ago. It was one of the best econblogs ever.]

Keynsianism is an emperor without clothes. Or perhaps we should even say that macroeconomics is an emperor without clothes.

Larry Summers is very very smart and articulate, but has never been a good economist. I know, I've argued with him late nights in old M.I.T. days from 1970's.


JPIrving writes:

Lets say Summers was right about the chain of causality around 1941. Even if Keynesian fiscal stimulus works, it works by raising nominal spending...which can be done without raising public debt or hunting around for "shovel ready projects" simple by printing money. As Sumner and Mankiw and others keep saying, money printing is always a better alternative to fiscal stimulus. If Summers were serious and instead not looking for an excuse to empower government he would be calling for a price or GDP level target.

Alex Godofsky writes:

This critique may not be right, depending on certain facts. As Sumner is fond of pointing out, current AD is strongly affected by expected future AD. Just because the fiscal stimulus was in the future doesn't mean that it didn't have a stimulative effect immediately.

The empirical question is, then, was a large military buildup expected? Presumably the answer is yes.

David R. Henderson writes:

Thanks for the table.
Thanks for the compliment. I'll link in an update above to the blog post you mentioned.
@Alex Godofsky,
The military build-up was not expected. See my update above.

Tom Chambers writes:

In one respect the military buildup began even prior to 1940. Instigated by the Japanese renunciaton of the Washington/London naval limitations treaties, and then by the outbreak of war in Europe, Carl Vinson pushed through a successon of major naval shipbuilding acts in 1936, 1938, and 1940. The Iowa-class battleships and Essex-class carriers made famous by WWII were authorized under the 1938 and 1940 acts.

david writes:

FDR also ran against the accusation that he was leaving America undefended (by selling all those armaments away!), so it wasn't just about getting into the war...

Jim Glass writes:

Here's another way of looking at this:

Romer says the recovery from the Depression as occurred in the last half of the 1930s (pretty strong but for the 1937 mess up) was driven by 10% annual increase in the money supply -- fiscal policy had basically zilch, nothing to do with it.

And she says the driver of the money supply increase was an inflow of gold from Europe in anticipation of the war that was coming.

(FDR's only policy on the money supply was a passive one, not to block the gold inflow. The Fed's attitude we can see in the notorious tightening of 1937.)

THUS, but for Hitler bringing the prospect of war to Europe, even the partial recovery we had in the later 1930s wouldn't have happened ... FDR would have been out of office after 1940 (no war to give him a third term) ... and he'd have left behind much *worse*, higher unemployment than the bad-enough real 15% of 1940.

So Summers may have been a lot more right than he thought he was.

Randall Parker writes:

How big of a stimulus was British war purchases in 1939 and 1940? They were buying as much as they could afford to buy. How much was that?

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