By JR on Wednesday, August 24, 2011
As evidenced by the fact that the big rise in output for private consumption occurred AFTER the war
World War II increased GDP, but more than 100% of the increase was devoted to munitions, building the Pentagon, employing teams of bureaucrats to control prices and government activity generally, much of it misguided. Gross Private Product decreased from $921 billion in 2005 dollars in 1940 to $427 billion in 1944, well below 1932’s level, showing that the private economy was badly squeezed. Then in 1946, while GDP decreased by 11%, GPP more than doubled to $1,309 billion. Readjustment was inflationary and disruptive, but it saw an astonishing increase in output and living standards.
The Keynesian thesis can be further demolished by looking at 1946 compared to 1938-40. At the tail end of the Great Depression, in November 1938, there was a massive turnover in the U.S. Congress, similar to the Tea Party revolt of 2010, in which the Republicans gained six Senate seats and an astonishing 72 House seats (9 more than in 2010). Although this did not give them a majority, it stopped dead the New Deal policies of heavy state spending and economic experimentation. GDP increased by 8% per annum between 1938 and 1940 and GPP increased even more rapidly, by 9.2% per annum.
This pulled the U.S. out of the Great Depression, with 1940 GPP 10% above that of 1929, but left the economy far below capacity. If you apply the average 1929-2000 growth rate of 3.43% per annum to 1929’s GPP, you get a 1940 full employment GPP estimate of $1,203 billion in 2005 dollars, 31% above the actual figure. That suggests that without the war the 1938-40 boom would naturally have continued, perhaps slowing somewhat, until it ran up against resource constraints. Apply 1938-40’s actual growth rate to the next six years and you get a 1946 GPP of $1,558 billion, 19% above actual 1946 GPP. Applying the 1929-2000 growth rate to 1929 GPP gives you $1,473 billion in 1946, 13% above the actual level. 1947 and 1948 showed further GPP increases, but reduced actual GPP’s gap below full employment GPP only to 11%.
Bottom line: without the war, GPP would have continued recovering at a rapid rate after 1940, probably giving a higher GPP by 1946. Second bottom line: a combination of the Great Depression and the war, probably mostly the latter, depressed 1946’s GPP by around 10%-12% below the level it would naturally have reached in a free peaceful market.
Intuitively this makes sense. As policy was stabilized after 1938, the U.S. economy began recovering rapidly to its natural full-employment level. World War II depressed the private economy to a low level, but its effect was mostly temporary, with an astonishing bounce-back as peace returned. However, a combination of the Great Depression and the damage caused by the war caused the United States to lose about 10%-12% of its full-employment output by 1946-48 (catching up which long-term may have resulted in the exceptionally good economic performance of 1948-66.) The Keynesian story of World War II’s economic boost makes no sense; this one does.