Do wars create wealth? aka, How did WWII help to end the Depression?

[Ivan Seeking]

I was just watching the McGlaughlin group, which tends to provide a moderately conservative representation of current events [Pat Buchanan is one lifetime member of the panel]. The biggest complaint about the stimulus package was that it isn't nearly large enough. They even represented this as a primary reason for the negative reaction from Wall Street.

I did have to laugh at Monica Crowley, once again. In regards to Obama's vetting process and his failed nominations, Crowley asked, "What have they been doing for the last three weeks??"

Let's see, I think they just passed the largest spending program in history, in less than thirty days.

 

[turbo]

The Republicans have taken the stance that the bill will not do anything positive, and have rejected it out of hand, though I have seen no detailed refutation of the bill frrom them. It's easy to take a contrarian view, and it costs little or nothing in political capitol to do so, so the Republicans have a strong hand if the economic recovery package fails. If the economy turns around (which it will eventually) they will have nothing to hang their hats on.

 

[mheslep]

In attachment (when it becomes visible), the first vertical line indicates the approximate timing of the New Deal, and the second roughly marks Pearl Harbor. Unemployment rates were down below 10% - from a high of 25% - before the US declared war on Japan.

That first vertical line (1933) also marks the reversal of the disastrous monetary policy in place until then. In '33 FDR effectively took the US off the gold standard, allowing the money supply to increase again, effectively reversing the policy of the Federal Reserve which had until then cut the money supply by ~ %25.
http://en.wikipedia.org/wiki/Executive_Order_6102
Though the causes of the recovery are debated (ala this thread), it is widely agreed that the Federal Reserve in large part started the Great Depression by cutting off the flow of money (via high interest rates.)

Edit: another major accelerator of the Great Depression was the Smoot Hawley trade tariff signed by Hoover, despite pleas not to do so in a letter from http://www.economist.com/finance/displaystory.cfm?story_id=12798595&CFID=36493096&CFTOKEN=16978581".
On a related note, the pending Stimulus bill coming out of conference still contains the 'Buy America' clause for all iron and steel used in construction, though the restriction now only applies to education projects vice everything.
http://appropriations.house.gov/pdf/RecoveryBill01-15-09.pdf

IN GENERAL.—A local educational agency
2 shall not obligate or expend funds received under
3 this section for a project for the modernization, ren-
4 ovation, or repair of a public school facility unless all
5 of the iron and steel used in such project is pro-
6 duced in the United States.

 

[Ivan Seeking]

I hear debate about the cause of the recovery in regards to events, but the point is that even those who claim the New Deal was not successful simply point to an even larger spending program - WWII. So how then can they oppose the recovery package as wasteful spending? There is nothing more wasteful than buidling bombs.

 

[mheslep]

This figure is interesting.

The Great Dep knocked the socks off the federal debt, boosting it from below 20% in 1929 to above 40% in 1933. Oddly, all of FDR's New Deal spending between '33 and '39 didn't affect the debt one bit.

Keep in mind that in absolute terms the New Deal spending did indeed double the federal debt in that period ( $22B-'33 to $45B-'39). The debt looks benign as a percentage of GDP in that period because GDP nearly doubled as well, coming back from a near stand still in '33. That is, before the Depression the federal debt hovered around 15% of GDP, and then it sky rocketed to 40% of GDP as the GDP collapsed; as the GDP recovered the new spending kept the percentage at 40.

 

[Gokul43201]

That first vertical line (1933) also marks the reversal of the disastrous monetary policy in place until then.

Note: I didn't say anything about what part of the fiscal policy enacted in '33 may have had the biggest influence. The only point I was making was that, contrary to the claim that it was WW2 that actually helped unemployment, we have evidence that unemployment was dropping pretty rapidly as early as the mid '30s.

Also, in your subsequent post, you have virtually echoed what I just wrote. Naturally, I was talking about debt fractions rather than absolute values of the debt, which I think are less useful. It was based on the debt fraction of GDP being constant that I estimated the GDP multiplier effect of spending (correctly or not, I don't know, even for a simplistic estimate).

If the debt is at 40% some year, then for the next year's deficit of $X, the GDP needs to grow by $2.5X, so that the new debt = (0.4*GDP1) + X = (0.4*(GDP2-2.5X))+X = 0.4*GDP2 (i.e., is still at 40%). That's how I got the multiplier of 2.5X

 

[Skyhunter]

There is nothing more wasteful than buidling bombs.

I must disagree here. It is far more wasteful to use those bombs to blow up cities.

 

[wasteofo2]

If you take unemployed young men and send them overseas to die, unemployment isn't quite as big a problem anymore.

 

[Gokul43201]

If you take unemployed young men and send them overseas to die, unemployment isn't quite as big a problem anymore.

Hmmm...never thought about that. But irrespective of whether they die or not, they are still employed by the DoD, at least temporarily.

 

[mheslep]

Note: I didn't say anything about what part of the fiscal policy enacted in '33 may have had the biggest influence. ...

Yes, and I recognize that you've been consistent about that.

 

[Proton Soup]

There is a popular claim that the New Deal didn't end the Great Depression; that it only ended because of WWII.

1). How did WWII help to end the depression?
2). Generally speaking, do wars create wealth, and if so, how?

If your answer to number 1 is government "government spending", then how is this different from any spending package that creates short-term or long-term jobs?

regarding 1)., my memory of history from that era is that the mood here in the US was one of isolationism when the war broke out in europe. but that didn't mean we weren't involved. nations like britain were severely hampered in their production capacity, and I'm not even sure they had the resources as an island nation. so we started programs like Lend-Lease and started shipping them supplies on credit. so, already we are seeing an improvement to our economy. and quite a bit of damage was done to the european economy before we even got drawn into the war with Pearl Harbor. by the war's end, we have decimated the japanese economy and infrastructure, and the europeans have decimated each other. being geographically isolated, our production capacity was relatively unscathed. this gave us a huge headstart to become a world superpower. other nations owed us money, and still had a long way to go before they could even compete. japan started some manufacturing, but in its early days they were known for cheap junk. they were the china of their day. also, with so many men killed in the war, that left a bit more wealth for the survivors.

regarding 2)., i think war is a technology driver, and almost always has been. development of new technology leads to increased wealth.

 

[Ivan Seeking]

regarding 1)., my memory of history from that era is that the mood here in the US was one of isolationism when the war broke out in europe. but that didn't mean we weren't involved. nations like britain were severely hampered in their production capacity, and I'm not even sure they had the resources as an island nation. so we started programs like Lend-Lease and started shipping them supplies on credit. so, already we are seeing an improvement to our economy. and quite a bit of damage was done to the european economy before we even got drawn into the war with Pearl Harbor. by the war's end, we have decimated the japanese economy and infrastructure, and the europeans have decimated each other. being geographically isolated, our production capacity was relatively unscathed. this gave us a huge headstart to become a world superpower. other nations owed us money, and still had a long way to go before they could even compete. japan started some manufacturing, but in its early days they were known for cheap junk. they were the china of their day. also, with so many men killed in the war, that left a bit more wealth for the survivors.

Yet we emeged from the war with a national debt of 120% of GDP.

regarding 2)., i think war is a technology driver, and almost always has been. development of new technology leads to increased wealth.

The follow-up question was, "how is this different from any spending program?" I can see how wars spur growth through spending, but it also seems apparent that any spending program that invests in US industry could have the same result. If so, then how can the Republicans cite the war as the solution to the Depression but oppose the spending program? History suggests that we should spend much more in order to get out of this crisis - a level of spending on par with WWII, but aimed at growth industries and jobs creation.

I now understand why Obama says this is an oppotunity. We are being forced to invest in America as we did in the 30s and 40s.

 

[Proton Soup]

Yet we emeged from the war with a national debt of 120% of GDP.

so? we still had to spend a lot of money on the war effort, and we were supporting our allies war efforts on credit.

The follow-up question was, "how is this different from any spending program?" I can see how wars spur growth through spending, but it also seems apparent that any spending program that invests in US industry could have the same result. If so, then how can the Republicans cite the war as the solution to the Depression but oppose the spending program? History suggests that we should spend much more in order to get out of this crisis - a level of spending on par with WWII, but aimed at growth industries and jobs creation.

I now understand why Obama says this is an oppotunity. We are being forced to invest in America as we did in the 30s and 40s.

i don't know. i don't have a party affiliation, and i don't agree with spending alone as being what got us out of the depression. the depression as i remember was world-wide. and as i stated previously, though maybe not explicitly enough, i don't think it was simply spending that got us out of the funk. it was mostly a happy circumstance (luck, grace of G-d, whatever your view here) that the rest of the industrialized world suffered much more catastrophe than did we. coming out of the war, we were the least damaged. we had a big freaking head-start, and unfortunately, it seems that we may be willing to squander that now. furthermore, if we get out of the current financial crisis without too much pain, it may simply be that we suffered less in this crash than did others. wouldn't want to be iceland at the moment, would you? unless fish becomes the next petroleum, that is.

 

[mheslep]

There is a popular claim that the New Deal didn't end the Great Depression; that it only ended because of WWII.

1). How did WWII help to end the depression?
2). Generally speaking, do wars create wealth, and if so, how?

If your answer to number 1 is government "government spending", then how is this different from any spending package that creates short-term or long-term jobs?

...The follow-up question was, "how is this different from any spending program?" I can see how wars spur growth through spending, but it also seems apparent that any spending program that invests in US industry could have the same result. If so, then how can the Republicans cite the war as the solution to the Depression but oppose the spending program? History suggests that we should spend much more in order to get out of this crisis - a level of spending on par with WWII, but aimed at growth industries and jobs creation.

I'd address these questions by changing the premises:
1. All spending is not equal, in either its effectiveness, or under the economic conditions under which it is done.
2. The economic effects of both the New Deal and WWII can not reduced down to just spending, thus its hard to equate the two in that way.
3. The classic definition of wealth creation (not just sloshing it about) comes from Adam Smith as productivity increases brought about through the division of labor and specialization.
4. WWII did not necessarily cure the depression. There's scholarly debate on the topic. What 'Republicans' say it did?

Here's a quick textbook, macro 101, rehash of the analysis on the raising of economic output through government spending: the government spends $X. The person receiving $X will in turn spend some part of it and save part of it, in some ratio b. The next person down the line does the same, and so on, yielding a geometric series:
$$\sum_{k=0}^\infty b^k = \frac{1}{1-b}$$,
The ratio b is the marginal propensity to consume (MPC). So if the MPC is 2/3, then the multiplier for the spending is 3.
The complete textbook 101 equation includes tax rate and import effects. Borrowed from wiki: $$\frac{1}{1 - b_C(1 - b_T) + b_M}$$
where:
b_C=propensity to consume,
b_T=tax rate,
b_M=propensity to import
This is a simple version of the standard Keynesian Multiplier.

The multiplier's reliance on the MPC immediately highlights why all spending is not the same. High MPC's come about when people have long term confidence in their income. Thus a good solid construction job, say building roads, tends to lead to a better MPC (go buy that house, car) than a simple transfer payment in the form of a short term unemployment benefit (hunker down) or Pell grant. These transfer payments may be desirable for other reasons (safety net), but they're not as an effective stimulus as a job. Furthermore, for the series to hold, at least the first few transfers need to be effective and not make-work or waste. For example, Japan has for years been trying to spend their way out of slow growth. One result of the quick spending was a boondoggle airport that is all but abandoned. In that case, after the construction was complete, the multiplier effect was broken in part because there were no follow on operational jobs at the airport.

Other problems with Keynesian multiplier theory are generally called 'Crowding Out' problems can in theory reduce the multiplier to zero. They also illustrate that even if we assume government spending is the right kind to be effective, it certainly has to be done under the right conditions. The derivation above is based on the IS/LM model Y = C(Y-T) + I(r) +G, (Y=output or GDP, C=consumption, T=taxes, I=investment, G=govt. spending, r=interest rates). Now that $X of increased G has to come from somewhere, and this gets to Russ's comment "It is simple math that running up the debt sucks money out of the gdp." Yes and no. To achieve stimulus the government wants to get the new G from borrowing, not taxes. The naive growth/spending analysis above assumes that investment elsewhere in the economy is unchanged. In a recession, investment is down because demand is down so there is idle money laying around, or excess liquidity. As long as that holds, the government should be able to borrow money without 'crowding out' the rest of the investment market and driving up rates. But of course it does not hold forever. Demand goes back up, in this case probably starting late '09. This is why stimulative spending, it it works at all, certainly doesn't work in a full demand economy. This is why we can't just spend ourselves into affluence, and this is why a large part of the current stimulus bill won't stimulate as it is not 'shovel ready' (CBO says ~2/3 spending 2010 and after) - it can not be done fast enough to catch this down cycle.

So does defense spending create wealth? In the short term it looks like it creates high MPC jobs, so somebody like Martin Feldstein has http://online.wsj.com/article/SB123008280526532053.html"

 

[Ivan Seeking]

1. All spending is not equal, in either its effectiveness, or under the economic conditions under which it is done.

...But I don't think defense spending gives us the necessary long term productivity gains we want, not to mention the pressure to use all that new capability occasionally, or sell it to somebody else who will.http://en.wikipedia.org/wiki/Keynesian_multiplier"

So then you agree that if indeed WWII is what cured the depression, any spending must be good because we get no net benefit from building bombs and weapons. And you would also agree that anyone claiming that the depression was cured by WWII, but who opposes a large spending package, esp one aimed at growth, is inconsistent in their logic.

“But one of the good things about reading history is you learn a good deal. And, we know for sure that the big spending programs of the New Deal did not work. In 1940, unemployment was still 15%. And, it’s widely agreed among economists, that what got us out of the doldrums that we were in during the Depression was the beginning of World War II.”

Senate minority leader Mitch McConnell
http://yglesias.thinkprogress.org/a...ell_spending_cant_work_except_when_it_can.php

Never mind that the GDP was climbing and unemployment had already fallen by 10% before WWII started.

 

[Proton Soup]

who are you trying to win an argument with, Ivan?

 

[mheslep]

So then you agree that if indeed WWII is what cured the depression, any spending must be good because we get no net benefit from building bombs and weapons.

Well I don't know that WWII did fix the depression.

And you would also agree that anyone claiming that the depression was cured by WWII, but who opposes a large spending package, esp one aimed at growth, is inconsistent in their logic.

No, that would require the WWII fix proponent to go further and say the WWII fix was due only to generic government spending. As I said above, a) economically WWII was a lot more than just government spending, b)there are different types of spending, some more effective than others, and c) the economic conditions at the time matter.

 

[Supercritical]

I would wager that there's a law of "conservation of money," i.e. government spending in either infrastructure or defense puts money in the pockets of workers and corporations which, in turn, provides a local tax base for schools, roads, etc.

In any spending, the government is shoring up the finances of a segment of the population. The difference is whether the money spent produces durable goods/services.

I think this is where Ivan asserts that the money might as well go toward something that lasts, and will keep "giving back" well into the future, as opposed to consumables like bombs and bullets.

But the end-use is only part of the equation. At a certain level, the government is saying what kind of workers the US needs. Is the US a country of construction workers, automakers and financiers? The stimulus/bailouts are decisive votes in that decision.

It's really not a money issue. It's an issue of whether the government determines that labor specialties are useful and deserving of continuation when market forces threaten them.

So, to answer the question: yes, wartime spending can end a "depression." But should the government decide which workers get bailed out, and which don't? Or should we have faith that the market is correctly nudging the economy to realign in different specialties?

 

[mheslep]

I think this is where Ivan asserts that the money might as well go toward something that lasts, and will keep "giving back" well into the future, ...

Appropriations to support projects designed to last well into the future take time and care. That is not what happened here with this 1054 page rush job bill which nobody read, because we'd have a 'catastrophe' if we don't 'act now'.
"The time for talk is over, the time for action is now." - Feb 5th Presidential speech
BTW, with all of this pending 'catastrophe' Obama has still has not found time to sign the bill which passed Friday.

 

[Skyhunter]

Unemployment declined steadily until Roosevelt, responding to pressure from the right began scaling back the New Deal. He reversed this policy in 1938 because unemployment began to rise again.

Converting from a peacetime economy to a wartime economy is not fixing but instead radically modifying the economy.

 

[Skyhunter]

Appropriations to support projects designed to last well into the future take time and care. That is not what happened here with this 1054 page rush job bill which nobody read, because we'd have a 'catastrophe' if we don't 'act now'.
"The time for talk is over, the time for action is now." - Feb 5th Presidential speech
BTW, with all of this pending 'catastrophe' Obama has still has not found time to sign the bill which passed Friday.

He is still preparing his signing statements.

 

[mheslep]

He is still preparing his signing statements.

 

[mheslep]

Krugman in today's column says WW II ended the Great Depression.
http://www.nytimes.com/2009/02/16/opinion/16krugman.html?_r=1&partner=rssnyt&emc=rss

If you want to see what it really takes to boot the economy out of a debt trap, look at the large public works program, otherwise known as World War II, that ended the Great Depression. The war didn’t just lead to full employment. It also led to rapidly rising incomes and substantial inflation, all with virtually no borrowing by the private sector. By 1945 the government’s debt had soared, but the ratio of private-sector debt to G.D.P. was only half what it had been in 1940. And this low level of private debt helped set the stage for the great postwar boom.

That last reflects the huge pent up demand set free at the end of the war w/ all the rationing and disposable income that went to buying war bonds instead of disposables, not to mention the mind set of 12m returning GIs determined to do some real living after managing to survive. Not sure how one goes about creating similar circumstances absent a world war.

IIRC, I've also seen Krugman say recently that economists don't really know why the depression did not come back after the war.

 

[mheslep]

Unemployment declined steadily until Roosevelt, responding to pressure from the right began scaling back the New Deal. He reversed this policy in 1938 because unemployment began to rise again.

You are suggesting causality between the New Deal and unemployment declines without evidence. Prove it. And Roosevelt decided to balance the '37 budget in part because some of his own people advised it, not 'the right'.

 

[Skyhunter]

You are suggesting causality between the New Deal and unemployment declines without evidence. Prove it. And Roosevelt decided to balance the '37 budget in part because some of his own people advised it, not 'the right'.

The pressure originated with his opposition, the right, not his own advisers. And he reversed the policy when it became clear that they were leading to higher unemployment. I don't know of a better example of correlation.

 

[Skyhunter]

You are suggesting causality between the New Deal and unemployment declines without evidence. Prove it

Not without evidence. There is direct evidence since the New Deal policies actually employed people. And second order evidence that those working people spent money for goods and services provided by others, thereby creating more opportunity for employment.

Is this proof?

No. But then proof here is subjective.

There is ongoing debate among economic historians on how to interpret the depression statistics. And there probably always will be.

 

[mheslep]

Not without evidence. There is direct evidence since the New Deal policies actually employed people. And second order evidence that those working people spent money for goods and services provided by others, thereby creating more opportunity for employment.

Yes, no doubt. The question is how many other jobs did the New Deal stifle or kill off.

 

[Skyhunter]

Yes, no doubt. The question is how many other jobs did the New Deal stifle or kill off.

I give up. How many?

 

[WhoWee]

That all sounds to me more like a transfer of wealth; not a creation of wealth.

While your point is well taken, I am most interested in the notion that wars fought by the US boost the US economy.

I don't have my numbers to back this up Ivan, so I'll ask a question. Didn't Reagan's defense build-up help pull us out of Carter's recession?

 

[WhoWee]

No. But involvement in terms of war spending did not see any significant increase (long) before Pearl Harbor. And during that time, it is not true that high levels of unemployment were persisting. Furthermore, unemployment is a lagging indicator of the economy.

http://www.usgovernmentspending.com...&stack=1&size=m&title=Total Spending&state=US

You can assume anything you wish. I did not say anything of that kind.

Didn't we benefit from providing supplies to OTHER countries BEFORE Pearl Harbor.

 

[mheslep]

I give up. How many?

I meant that rhetorically, in that its a question that's difficult to answer, but not to be overlooked when considering government deficit spending to create jobs.

 

[WhoWee]

Right now [Feb 2009] our debt as a percentage of GDP is about 71%.
http://upload.wikimedia.org/wikipedia/en/3/3b/USDebt.png
http://en.wikipedia.org/wiki/United_States_public_debt

After WWII we hit a peak of about 122%. To be on par with this level of spending we could add another ~ 7 trillion to our debt.

Obviously nobody would loan us $7 trillion...I wonder how long it would take to print $7trillion worth of $20 bills?

 

[WhoWee]

I was just watching the McGlaughlin group, which tends to provide a moderately conservative representation of current events [Pat Buchanan is one lifetime member of the panel]. The biggest complaint about the stimulus package was that it isn't nearly large enough. They even represented this as a primary reason for the negative reaction from Wall Street.

I did have to laugh at Monica Crowley, once again. In regards to Obama's vetting process and his failed nominations, Crowley asked, "What have they been doing for the last three weeks??"

Let's see, I think they just passed the largest spending program in history, in less than thirty days.

Didn't (President hopeful) Pelosi say she'd been working on the package for a long time?

 

[WhoWee]

I hear debate about the cause of the recovery in regards to events, but the point is that even those who claim the New Deal was not successful simply point to an even larger spending program - WWII. So how then can they oppose the recovery package as wasteful spending? There is nothing more wasteful than buidling bombs.

Oh I don't know...BLOWING THEM UP seems more wasteful to me (in many ways).

 

[WhoWee]

Let's also not forget 1 major difference for us...instead of re-building bombed out cities and searching for food/shelter/medical supplies, our GI's came home and participated in our post war housing boom.

An argument can be made that they MOMENTUM of winning the war took us completely out of the depression.

BTW, did they count the job losses of women who gave up factory jobs after WWII in the unemployment stats?