No, World War II Did Not End the Great Depression — Why Paul Krugman’s Love of GDP Is Wrong, Part Four
This is Part Four of my continuing series on GDP, or, Why Paul Krugman Is Wrong About Almost Everything.
The lessons learned from the Great Depression continue to influence the way we manage the economy today. Understanding why it ended, therefore, is of paramount importance even today — because it affects how we manage crises such as the bursting of the housing bubble. Historians used to argue that FDR ended the Great Depression with the New Deal; they are now starting to concede that this argument is not only wrong but ridiculous: the New Deal both intensified and prolonged the economic slump during the 1930s.
But it’s only within the last year that I learned that the historians’ fallback argument is also totally wrong. They claim World War II ended the Great Depression. It did not.
I will now turn over the microphone to Tom Woods, who does a tremendous job of explaining why this claim is patently absurd — and does so in about 7 minutes.
If you don’t have time to watch the video, let me summarize Woods’s main points, and add a few thoughts of my own.
It’s true that unemployment plummeted during World War II. If you wanted a job, you could have a job. But does that represent a normal healthy business expansion? Not hardly. Ten million people were drafted, and many others volunteered, for patriotic reasons (and to stay out of the infantry, which is a pretty rotten assignment if you like staying alive). A mere reduction in unemployment numbers does not tell the whole story, if you don’t explain how you got there. After all, as Woods notes, you could simply execute ten million jobless people, and that would reduce unemployment too. So, sure: when the government drafts people by force, and threatens them with prison if they do not comply, unemployment goes down. But as Robert Higgs dryly notes: “that’s not how we normally reduce unemployment in this country.”
The claim that the wartime itself was a prosperous time — with government rationing, price controls, and other forms of austerity, is laughable. (What’s more, the price controls distort the data regarding true purchasing power.) There were no new cars, and virtually no consumer appliances that required metal, which was gobbled up by the government to manufacture war equipment. Food, clothing, gasoline, and other basic items were sharply rationed, and living space was cramped and overcrowded. The war was a time of deprivation, which the populace viewed as a necessary sacrifice, to be sure — but sacrifice does not equate to prosperity.
Nor does it make sense that sending the most skilled sector of the labor force off to fight, leaving a workforce with much less work experience and skill (women and elderly men) would logically lead to giant growth rates of 13% a year. Something must be wrong with this measure.
And the problem is . . . using GDP as our measure. Woods also notes that World War II was a time of supposed prosperity because GDP shot up during the war. But if you fall for the idea that GDP is the only meaningful measure of prosperity, then you will be forced to conclude that 1946 was a depression year. Seriously. 1946.
This page provides GDP growth numbers per year since 1930, and lists the best and worst years. The best years for GDP were, admittedly, during the war. And the second worst year for GDP in the last 84 years was 1946, a year in which GDP shrunk by almost 11%. 1946 is second only to 1932 in having a dismal GDP — and 1932 was the absolute depth of the Great Depression.
And yet —
And yet, do you remember the Great Depression of 1946? The stories of people starving in the streets? The reason you don’t isn’t because you’re young. It’s because 1946 was a boom time for the United States. As Tom DiLorenzo explains:
Far from creating a depression, prying all of that money from the hands of politicians and bureaucrats and returning it to its owners – working Americans – created the largest increase in private sector economic growth in all of American history in 1946. According to statistics found in the 1995 Annual Report of the U.S. Council of Economic Advisors, based on Commerce Department data, real inflation-adjusted private sector GDP increased by 29.5 percent in that year. In no other year has the U.S. economy ever grown even half that fast. Private investment skyrocketed and stock prices soared, in complete and total contradiction of what every Keynesian economist in the world had been predicting.
So, 1946 was the best year ever for the U.S economy — and yet the GDP numbers would suggest that 1946 was a year of depression.
So what’s going on here? If you have been following my series on GDP all week, you already know the answer.
In Part One of the series, I noted that GDP takes into account government spending. GDP represents the prices of finished goods. But the only meaningful prices in our society are prices that are determined through voluntary exchanges in the free market. By contrast, government spending is often inflated and bears no relationship to satisfying consumer preferences. This was especially true during the war, when much of the economy consisted of government purchases from firms manufacturing war materiel.
In Part Two, I noted how GDP does not fully take account of capital spending. During the war, government spending went up for production of war-related goods, but private investment cratered for consumer goods. But the freefall in capital investment gets masked by GDP’s failure to fully account for capital spending.
In Part Three, I noted how GDP is boosted by activity even if it does not contribute to consumer well-being. Almost no economic activity during the war benefited consumers. Woods notes that fully 40% of the labor force was employed in some form or fashion in the armed forces, and were thus not producing consumer goods. Consumers don’t buy tanks, so while those goods might have been necessary for the war effort, they were a waste from the consumer’s point of view. So, if the government was spending a ton of money on tanks, and nothing on consumer goods, this hurt consumers — but it was great for GDP.
The Paul Krugmans of the world argue, not just that the war provided the economy with a shot in the arm, but that the war itself was a time of great prosperity. Hopefully this post has caused you to rethink that silly assertion. Makers of tanks do well in wartime. As Robert Higgs has noted, the undertaker does well. But most people are miserable in war. Perhaps nobody has put it better than Austrian economist Ludwig von Mises, who said: “War prosperity is like the prosperity that an earthquake or a plague brings.”
So what did get us out of the Great Depression? I don’t mean to sound flip, but I think that the end of the Great Depression had a lot to do with the fact that Franklin Delano Roosevelt had finally died. He had mounted a war on business for 13 years, and thrown businessmen into a state of complete uncertainty about their future. In a future post, reviewing a book about the Great Depression, I will detail some of FDR’s atrocities, but suffice it to say that businessmen never knew what was coming next. The end of American’s war against Japan and Germany mattered — but to businessmen, it mattered almost as much that FDR had ended his war on them.