Arnold Kling  

The Austerity of 1946

Simpler Frank Knight... Supply, Demand, and Outcomes...

John Cochrane writes,

I ran across a fascinating article, "A Post-Mortem on Transition Predictions of National Product," in the 1946 Journal of Political Economy, by Lawrence Klein. Klein, who would go on to create the main macroeconomic forecasting models and a Nobel Prize, was confronting one of the first great failures of Keynesian economics:

We all recall clearly the headlines in last Autumn's press, declaring that "Government economists predict 8 million unemployed by 1946." ...We now find ourselves in the first half of 1946 with about three million unemployed and facing one of the greatest inflationary pressures that we have ever experienced. The economists who were warning us of a deflationary danger during the early months of the postwar transition period should have been stressing precisely opposite economic policy

As I have pointed out, 1946 is a striking instance of the predictions of Keynesian economics being way off. Recall David Henderson on what Paul Samuelson predicted.

[UPDATE: Russ Roberts unearths an even more damning article, from the 1947 JPE, by W.S. Woytinksy.]

Comments and Sharing

COMMENTS (4 to date)
wd40 writes:

During WW2, there was forced saving (war bonds) and investment went into the war effort. Hence, the robust economy of 1946 when consumers could draw drawn their savings and consume items that were not not available during the war. Naive regressions did not sufficiently account for this pent up demand. So 1946 is not a counter-example to Keynesian theory, just an example of poor econometric forecasting.

GlibFighter writes:

This event is well known to students of economics, and as John Cochrane noted, laid the foundation for the permanent income & life-cycle theories of consumption.

Gary Rogers writes:

This also fits the pattern after WWI when Harding and Coolidge cut spending and it led to the inflationary period of the twenties. If government borrowing is deflationary, is it any surprise that the Fed has to resort to QE to keep things going?

Charlie writes:

Isn't the post-war period really hard for the PSST theory too? The economy was in a huge transition, according to the theory it should have been fairly difficult for entrepreneurs to find the correct patterns to employ new workers to create new goods.

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