World War II Spending Did Not End the Great Depression

Conveniently for most politicians, a popular doctrine holds that
government spending is good for the economy. According to this
doctrine, when the economy needs to recover from a recession or
even a slowdown, an increase in government spending is
indispensable—even if huge budget deficits and a growing national
debt result. Keep spending! is the battle cry. This is one reason
why there is widespread opposition to “sequestration,” the
scheduled across-the-board reductions in the rate of
growth in government spending. (For the most part,
absolute reductions in spending are not on the table.) The advocates of spending think they have a killer piece of
evidence for their position that economic vitality requires larger
government budgets: World War II. The standard story has it that
despite Franklin D. Roosevelt’s best efforts, the New Deal did not
quite end the Great Depression. What did? According to this story,
it was the massive spending behind U.S. participation in the wars
in Europe and the Pacific. The vigorous economic growth of the late
1940s and 1950s is touted as evidence for the blessings of big
government spending.This version of events is routinely conveyed by Keynesian
economists, including at least one Nobel laureate with a prominent
newspaper column, and the pundits who parrot their doctrine. Hardly
a day goes by that a cable-TV commentator doesn’t credit World War
II with “getting us out of the Depression.” This belief has
prompted members of the intelligentsia to lament that perhaps
nothing short of a big war can cure a sick economy. The political
will for major domestic spending is lacking, they say, but a
national emergency (perhaps rumor of an alien invasion) would unite
the country and dispel fears of deficits and debt.The underlying theory is that economies slow down because
aggregate demand is insufficient to keep things humming. If we
consumers aren’t buying enough, and various efforts to stimulate
private consumption don’t do the trick, there is no alternative to
government stepping up its own spending. This surge in demand, so
the theory goes, will put people and capital to work, and by the
miracle of the “multiplier effect,” the bang will be far bigger
than the buck. All will be well—as long as we have the political
will to spend and spend, which requires losing our Puritan fear of
deficits and borrowing.It shouldn’t take much deliberation, however, to see the flaw in
this doctrine and the associated belief that World War II ended the
Depression. We have to start by asking: What does “end the
depression” mean? The technical definition of a recession is a
specified period of shrinking gross domestic product (GDP). (We may
think of a depression as a severe and prolonged recession). The
focus on GDP seems to suggest that a recession ends when GDP stops
shrinking and starts growing.  But there’s a problem: There’s less to GDP than meets the eye.
It’s a statistical aggregate that includes government spending, but
in itself, it tells us nothing about what’s happening with living
standards.In human terms, a depression isn’t a shrinking GDP or some other
changed statistical construct. It’s a decline in real people’s
living standards. Therefore, ending a depression requires not a
change in sign from minus to plus in a statistical measure, but a
rise in prosperity. You can tell a depression has ended by the fact
that people live better than they did previously.When we apply this standard to life during World War II in
America, it’s clear that the war did not end the depression in any
meaningful sense. Economic historian Robert
Higgs has debunked the statistics that purport to show
that the depression ended during the war. Take unemployment.
Unemployment of course was historically high throughout the 1930s,
and the rate plummeted once the U.S. government entered the war.
But this was no sign of returning prosperity. The government
drafted 10 million men into the armed forces and others enlisted to
avoid conscription. Those men were not producing prosperity by
making consumer goods. They were fighting a war. Moreover,
statistics showing that industrial production picked up steam in
the 1940s are no indication of prosperity because those plants
weren’t making consumer goods; they were making war materiel. In
fact, those plants diverted scarce resources
from the production of consumer goods. The few consumer goods
that were produced were rationed. People could buy
only a fixed and small quantity of foods, gasoline, and other
previously taken-for-granted products. Many things weren’t
available at all.  Thus the aggregate statistics fail to capture essential details
of life. A million dollars spent making automobiles and a million
dollars spent making tanks look the same in the GDP tables. But the
difference is vast in terms of consumer welfare.  As Higgs has
written:
Yes, national output as conventionally measured did grow hugely
during the war… [G]ross domestic product (in constant 1987
prices) increased by 84 percent between 1940 and 1944. What the
orthodox account neglects, however, is that this “miracle of
production” consisted entirely (and then some) of increased
government spending, nearly all of it for war materials and
equipment and military personnel. The private component of GDP
(consumption plus investment) actually fell after 1941,
and while the war lasted, private output never recovered to its
pre-Pearl Harbor level. In 1943, real private GDP was 14 percent
lower than it had been in 1941. If a nation produces an abundance
of guns and ammunition, it does not thereby achieve genuine
prosperity.
Those who lived through the war … forget the scarcity of
decent housing, the hassles in commuting to work, and the severe
rationing or complete absence of basic consumer goods…
Because of the many other ways that the well-being of consumers
deteriorated during the war, which the official data fail to
capture, actual wartime conditions were even worse than [the]
figures suggest.
Note that this argument has nothing to do with whether the U.S.
government should have entered the war. That’s a
different subject altogether. What we’re dealing with here is
whether war spending brought a return to prosperity. It
emphatically did not. Deprivation worsened, even if people felt
differently about it.  Higgs’s thesis has recently been extended and strengthened by
economist Steven Horwitz of St. Lawrence University and a former
student of his, Michael J. McPhillips, in “The
Reality of the Wartime Economy: More Historical Evidence on Whether
World War II Ended the Great Depression” (Independent
Review, Winter 2013). Horwitz and McPhillips emphasize the
deterioration in daily living that occurred during the war because
of the diversion of scarce resources to war production. The trend
toward the division of labor was actually reversed as people had to
spend time making or repairing things they previously had relied on
the marketplace for. Horwitz and McPhillips write:

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World War II Spending Did Not End the Great Depression

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