World War II Was Not the Quintessential Keynesian Miracle

Someone must have imagined that my hopes for improved economic understanding might be excessively optimistic and thus needed to be curbed to restore my normal emotional balance, because that person undertook to smash any such hopes to dust by e-mailing me a link to a Huffington Post article by Paul Abrams, “Economically, World War II Was Stimulus on Steroids.” This screed turns out to be an ostensible macroeconomics lesson composed in equal measure of economic foolishness, historical ignorance, and ideological tendentiousness — the veritable epitome of a worse-than-worthless contribution to public enlightenment.

The opening paragraphs indicate the direction of Abrams’s argument:

The next time someone argues that the New Deal failed, and only the Second World War ended the Depression, as ‘proof’ that government spending does not work, one can respond with the details of economic growth and unemployment reduction up to 1940, or one can ignore the claim and thank them for making your case for massive government spending in a deep, broad recession.

Right wing politicians are loathe to credit the New Deal with any success in hoisting the United States out of the Great Depression, but credit World War II for that achievement, believing that that somehow disproves Keynesian economic theory.

That claim, however, undermines their entire premise.

Abrams concludes that “massive government spending at a time of severe economic downturn and dislocation can indeed get an economy humming again,” as World War II shows; the New Deal was merely too timid. He seems unaware that his argument merely restates the fallacy-ridden hodge-podge of conventional wisdom about how World War II “got the economy out of the Depression” that has dominated the thinking of economists, historians, and the public ever since the war itself.

When I began to teach U.S. economic history at the University of Washington in the late 1960s, I quickly realized that this tale of the wartime “Keynesian miracle” could not withstand critical scrutiny once one went beyond the barest account of it in terms of the elementary Keynesian model and the standard government macro measures, such as GDP, the consumer price index, and the rate of civilian unemployment.

Almost immediately I saw that unemployment had disappeared during the war not because of the beautiful workings of a Keynesian multiplier, but entirely because about 20 percent of the labor force was forced, directly or indirectly, into the armed forces and a comparable number of employees set to work in factories, shipyards, and other facilities turning out war-related “goods” the government purchased only after forcing the public to pay for them sooner (via wartime taxes and inflation) or later (via repayment of wartime borrowing).

Thus, the great wartime “boom” consisted entirely of (1) some people’s mass engagement in wreaking death and destruction and (2) other people’s employment in producing supplies for these warriors after the government’s military labor drain, turning out “goods” never valued by consumers or private producers in voluntary transactions, but rather ordered by government functionaries and priced completely arbitrarily in a command-and-control economy. In no sense was the alleged “wartime prosperity” comparable to real, normal prosperity. The pervasive regimentation, rationing, price controls, direct government resource allocations, and forbidden forms of production (e.g., civilian automobiles) should have served as a tip-off.

After teaching my own students along these lines for many years, I eventually began to write articles and books pulling together my various studies. The most coherent of these books is my Depression, War, and Cold War, published originally by Oxford University Press in 2006. For all of the good I’ve done in correcting people’s understanding of what happened to the U.S. economy during World War and what lessons one might justifiably draw from that experience about, say, the scientific validity of the Keynesian model or its related fiscal-policy implications, I might just as well have held my breath and turned blue. Here we are in June 2011, and millions of Americans are being presented with the purest potion of economic misinformation one can imagine, an account in no way superior to those the young Keynesians were peddling so confidently in 1944, when I was born. Perhaps my mother ought to have strangled me in my crib, to spare me the bitter disappointment of seeing the research and writing I’ve carried out over more than forty years prove to have been completely in vain.

For the Paul Abrams’s of this world, of course, none of this makes the slightest difference. They are at pains not to understand how the economy actually works or to endorse policies that promote its greater productivity, but only to concoct a plausible rationale for the government’s taxing “the rich” more heavily and spending oodles of money on a laundry list of leftist idols — government “infrastructure,” green energy-conservation programs, high-speed rail, and the rest of the wasteful and economically foolish purposes that progressive politicians espouse to feather their own nests and enrich their cronies and political dependents at public expense. If they haven’t learned any sound economics by this time, chances are slim to none that they will ever learn any, but I cannot believe that they care about such learning, in any event. Politics is the name, plunder’s the game.

There’s a lesson here, besides the obvious one that public discourse consists overwhelmingly of ideological sound and fury, signifying nothing solidly connected to reality. For me, the main lesson is: mommas, don’t let your babies grow up to become economic historians. If you do, you only put them in line to have their hearts broken.