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Did World War II end the Great Depression?
Joseph Cullen and Price Fishback write:
We examine whether local economies that were the centers of federal spending on military mobilization experienced more rapid growth in consumer economic activity than other areas. We have combined information from a wide variety of sources into a data set that allows us to estimate a reduced-form relationship between retail sales per capita growth (1939-1948, 1939-1954, 1939-1958) and federal war spending per capita from 1940 through 1945. The results show that the World War II spending had virtually no effect on the growth rates in consumption that we examined. This contrasts with Fishback, Horrace, and Kantor's (2005) findings of about half a dollar increase in retail sales associated with a dollar of New Deal public works and relief spending. Several factors contributed to this relative lack of impact. World War II spending often required a conversion of plants designed for civilian good production into military factories and back again over the 9 year period. Substantially higher federal tax rates that were paid by the majority of households imposed much stronger fiscal drags on the benefits of the spending. Finally, less of the military spending was earmarked for wages and use of locally produced inputs, which reduced the direct stimulus to the local economy.
Here is the paper, here are non-gated versions. My understanding has long been that wartime orders from Europe, by 1940, provided the decisive turning point for the American economy. So if WWII did end America's Great Depression, it was not through the traditional mechanism of massive domestic fiscal stimulus.
Addendum: Here is James Hamilton on the Great Depression. And Brad DeLong replies to critics, but if we are going to count as monetary policy we must recognize 1937-8 as a disaster which cut off a recovery. And Paul Krugman chips in, see the comment by Robert Waldmann, I am myself skeptical that a liquidity trap was in place.
Second addendum: The authors have another good paper on crime and social spending during the New Deal.
Posted by Tyler Cowen on January 13, 2007 at 05:46 AM in History | Permalink
Comments
The idea that WWII ended the Great Depression is wackonomics.
The classic article dispelling the idea that economic progress in any meaningful sense went up during the war is
Robert Higgs
War Prosperity? A Reassessment of the US Economy in the 1940s
Journal of Economic History 1992, 52(1), March: 41-60.
Naive economics has thought otherwise because of positive change in standard measures: employment, GDP, real private consumption. Higgs dissects the numbers with an understanding that the period was NON-STANDARD, so time series comparisons cannot be made in the standard way. Making reasonable adjustments he concludes that economic well-being in every sense declined during the period. Breaking windows in Berlin and Tokyo didn't bring prosperity. The argument does not include, of course, the benefits of defeating Hitler nor the euphoria of common purpose that a success war brings, but presumably claims that war ended the depression likewise exclude those considerations.
This article is one of Higgs' best, but there is plenty more where it came from. Please see his great recent book:
Depression, War, and Cold War
Studies in Political Economy (Oxford UP, 2006)
The book includes the great 1992 article.
Posted by: Dan Klein at Jan 13, 2007 6:28:31 AM
Everything that I've read indicated that WWII actually put the breaks on the recovery that was beginning. This is a big part of why the pro-businesss Republicans in Congress were opposed to entering WWII until Pearl Harbor (and some even after).
The worst part is that it's become common wisdom that, in general, war improves the economy when it does precisely the opposite,
Posted by: don Hosek at Jan 13, 2007 10:52:42 AM
To all those who are so convinced that the GD in the US
lasted so long because investors were scared, and that
wartime fiscal policy had nothing to do with the recovery,
I have a simple question: how did even scarier to investors
Germany under Hitler get out of its even deeper depression
so much sooner than did the US?
Posted by: Barkley Rosser at Jan 13, 2007 11:52:56 AM
For Keynesians concerned with decreasing unemployment, the draft has a marvelous effect upon young men out of work.
Posted by: CptCrunch at Jan 13, 2007 12:53:38 PM
Hitler's money man was playing fast and loose, with the help of some American financiers, and from what I've read, he was building a house of cards. It was a kind of bubble, but I'll have to look back through a few old books for those details.
But hey, its Saturday, and my schedule is relatively free. . .
Posted by: Ray G at Jan 13, 2007 12:59:52 PM
In WW II extremely large portions of the economy were being run as a command and control economy with rationing, price controls and virtual forced savings. Something on the order of a quarter to a third of output was essentially being produced to be destroyed in war rather than into either consumption or investment. Given these conditions he certainly has a valid argument that such normal concepts as gdp and personal income did not mean the same thing during WW II as in other periods.
Posted by: spencer at Jan 13, 2007 3:10:32 PM
I agree with Tyler that some (Krugman) vastly overrate the idea of a liquidity trap during the depression. If that was the case, why were the Fed's brief open market operations of mid 1932 so effective? It is simply a tragedy that this effort was cut short.
On the Fed's 1932 actions, see Friedman and Schwartz's Monetary History, Meltzer's History of the Fed, and Christina Romer "Was the Federal Reserve Constrained by the Gold Standard During the Great Depression? Evidence from the 1932 Open Market Purchase Program, with Chang-Tai Hsieh, Journal of Economic History, March 2006.
Posted by: Jim at Jan 13, 2007 5:22:03 PM
Rationing and war bond drives were specifically intended to keep down consumer retail spending during WWII, so I don't understand how this is a proper test of the theory.
Posted by: Steve Sailer at Jan 13, 2007 5:28:24 PM
Any argument that any war helps the economy is absurd, especially for young men who are forcibly handed the instruments of war and told to kill or be killed. Even for a utiitarian, the loss of their utility alone outweighs all other considerations. For a dynamist, the loss of their creativity is monumental. How many people are still dying today of diseases whose cure creator died on a World War II battlefield?
Posted by: Tom Kelly at Jan 13, 2007 6:13:25 PM
Ask anyone who lived through the Great Depression and they will tell you that it was not over until
World War II.
Posted by: publia at Jan 14, 2007 8:52:56 AM
For my father it was over when he got a job in 1939.
It's a recession if your neighbor loses his job and a depression if you lose your job.
Posted by: spencer at Jan 15, 2007 11:22:44 AM
Both sides of this argument are very profound, but only one side
deals with reality, and the other deals with what if. I tend to lean
on the side of what if, what if 10 million soldiers didn't die in
the trenches of WW1 but they did. What if 35 million people didin't die
in the continuation of that War coined WWll, just think of what could of
been, I like to do that, all that human talent, the huge economic base lost.
But the reality of it, is the way it went down. They say, would of
could of should of, but WWll did bring the whole world out of depression,
who was responsible for this, we all know who the front men are,
thier names are household words to this day. Treaty of Versailles
was a big reason Hitler came to power, but why does money back people
like this? The great depression lasted more years than mere mortals could
stand, something had to change fast and war does that, changes things fast.
Just ask any grunt on the front how fast and often things can change,
it is true on the front and is true in economics, war changes things
dramatically fast. Would the economy of come back with out War, sure
it would of and mans future would be better for it, but how long
would it of taken, one more day to the people living thru it was too long,
ie "The grapes of wrath". What kind of changes does War bring about, just
look around you for your answer.
The world we live in, reality, is a harsh world where the
flow of money is important, big money thrives on War because it makes
Big money Bigger, the soldiers/civilians flesh and future is not
important for the so called greater good. Those who benifit from
War are few and those who suffer from War are many. Then you may ask, why
doesn't big Money invest in peace projects, for the people, it is true that
big money would become bigger if this was done, but why isn't this done?
The truth is, no one can answer that question, no one mortal that is. God
knows the answer and sent himself as a representitive for mankind to be
reconsiled with Gods world. Man was kicked out of the garden for a reason,
and war reminds us all of that reason every generation, this will not
change untill mankind is taken into heaven, where there is no War. Why?
Because hatred, vice, lie, greed, etc,ie SIN, will be no more, in this
world that will never change, and that is why War will always be a Money
Maker. Untill Mankind is reunited with god.
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