Was Keynes Right...Once? (A Bleg)
Chatting with John Stossel yesterday--we devoted an episode of Uncommon Knowledge to his new book, No They Can't: Why Government Fails But Individuals Succeed--I mentioned a question in economics that had always puzzled me. It puzzled John Stossel, too.
We conservatives and libertarians agree that government intervention in the economy tends to make matters worse, not better. During the 1930s, for example, the New Deal did almost nothing to improve the economy, except, perhaps, contribute to a second dip--a depression within the depression--around 1938.
But--and here's the question John Stossel and I puzzled over--what about the war years? As the nearby chart indicates, from 1941 to 1945, GDP per capita grew dramatically. What was the government doing? Well, it was spending massively, borrowing at levels without any precedent in American history, imposing wage and price controls, targeting certain industries for investment, and generally behaving as if John Maynard Keynes--or even (shudder at the thought) Paul Krugman--had been made dictator.
During the Second World War, in other words, Keynesian economics...actually worked.
I'm sure that can't be right. For the life of me, though, I can't figure out what I'm missing.
Can you?
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May '10
Re: Was Keynes Right...Once? (A Bleg)
Peter, there is one major equation most modern economists omit. While the United States went massively in debt it did so to its own citizens. By January 3, 1946 more than 85 million Americans — half the population — purchased War Bonds totaling $185.7 billion.
Those billions were returned plus interest. And with their War Bond savings Americans built homes, bought cars, bought into a new gadget called television and raised their families.
With that debt America invested in itself instead of selling our souls to the Chinese.
Edited on April 24, 2012 at 2:10amJan '12
Re: Was Keynes Right...Once? (A Bleg)
There are plenty of arguments/ctritiques to be made but in reality, it is not difficult to increase GDP (a calculation of the amount of production) via government fiat for a period of time. If you believe that government spending "worked" economically during WWII then the only thing you are looking at is GDP. If you actually look at the goods and services citizens had available to consume, the picture is much different as all that production went for war uses and there was a dearth of consumer goods due to rationing (butter, oil, grains, etc.) and large scale manufacturing had been shifted for war production (automobiles, airplanes, etc.)
One may ask why citizens were willing to endure relative privation, but that question is rather easy to answer when you consider that the US population at the time believed that winning the war was paramount (and generally behaved in such a manner).
Overall, this state of affairs is easy to understand (large GDP growth with relatively little consumption by the civilian population) given the circumstances at the time.
This can not be repeated in peacetime since the population wouldn't stand for it in the absence of a grave threat.
Jan '11
Re: Was Keynes Right...Once? (A Bleg)
Peter, there is a big difference between a wartime command economy and prosperity.
Forget GDP - from 1942 to 1945 Americans couldn't buy cars, there were strict wage and price controls, millions worked at slave wages in terrible working conditions (called military service) and consumer goods were virtually non-existent. Does that sound like prosperity to you?
World War II did NOT end the Depression. The American desire for liberty - held in check during the war years - and the end of Democrat rule in Washington in 1946's Congressional elections ended the Depression.
Edited on April 24, 2012 at 4:46amJan '12
Re: Was Keynes Right...Once? (A Bleg)
Joe - I agree that this is an area where people on each side of the aisle tend to talk past one another. However, although tax cuts and government spending look exactly the same in national accounts and therefore both appear to be stimulus (a $ of tax cuts = a $ of additional government spending), equating the two presumes that government "knows" what people want.
The reason a $ of tax cuts is "better" is that the individual chooses what to do with the money and is a better reflection of a free society and, in most instance (but certainly not all), promotes more efficient economic growth.
At the end of the day, I think your argument boils down to a view that we just need better people in government that will make the right choices at the right point in the business cycle when no one individual, or group of "really smart" individuals has nearly the knowledge or the capability of making such decisions.
Mar '12
Re: Was Keynes Right...Once? (A Bleg)
Burt Folsom had a nice piece on this question in the Wall Street Journal, not long ago. He gives strength to Freesmith's point.
http://online.wsj.com/article/SB10001424052702304024604575173632046893848.html
Oct '10
Re: Was Keynes Right...Once? (A Bleg)
Keynes' advice was taken long before WWII. In macroeconomics there's a dividing line between the short run and the long run. There's more consensus about the long run. The really interesting debates are about the short run. The controversy is driven by disagreement over the "stickiness" of wages & prices and inflation expectations, to name a couple. The four components of GDP are govt, consumption, investment and net exports. So, the govt can boost output for a time, even if some of that is wasted. Also, unemployment finally fell from its chronically high levels in the war. I think another part of what happened was that the deflationary spiral of the two depressions finally came to end, but of course there was high inflation.
Mar '11
Re: Was Keynes Right...Once? (A Bleg)
EJHill: Those billions were returned plus interest. And with their War Bond savings Americans built homes, bought cars, bought into a new gadget called television and raised their families.
With that debt America invested in itself instead of selling our souls to the Chinese. · 1 hour ago
It did not even do that. Adjusted for inflation US citizens were looted. One can argue that such expense was necessary, winning the war was paramount, but under no metric was this a net gain for taxpayers. We built an amazing amount of ships, tanks and guns which were great for winning a war and absolutely useless for anything else.
May '10
Re: Was Keynes Right...Once? (A Bleg)
Not any more than keeping it under the mattress and it did a lot more good. It did provide a nest egg of savings that fueled a lot of growth in the 1950s.
Jun '10
Re: Was Keynes Right...Once? (A Bleg)
If the government is spending money on the same types of things that consumers or businesses would invest in (food, housing, energy, etc.) then I agree. Government "investment" in politically-connected companies like Solyndra will be highly corrupt and inefficient.
However, no individual or business is likely to purchase an aircraft carrier. But, I'm glad our Navy owns several, and I'd even be willing to forgo some $s of tax cuts to make sure we can afford to maintain and replace them.
I'm also comfortable with the government spending money on roads, bridges, dams, canals, light houses, national parks, even NASA. Depending on how libertarian you are, you might disagree with some or all of those. But I think a case can be made that real infrastructure spending provides both a short-term stimulus effect and has longer-term benefits e.g. better roads make trade more efficient.
Oct '10
Re: Was Keynes Right...Once? (A Bleg)
To clarify, boosting GDP doesn't necessarily mean that consumers are wealthier. As I mentioned earlier, there are four components of output (GDP). When govt boosts GDP it also boosts the per capita numbers by definition. I believe real consumption spending didn't recover until after the war though due to rationing.
Mar '11
Re: Was Keynes Right...Once? (A Bleg)
EJHill
Not any more than keeping it under the mattress and it did a lot more good. It did provide a nest egg of savings that fueled a lot of growth in the 1950s. · 10 minutes ago
Did it? Perhaps. We delve into the realm of "what if?". Without such overwhelmingly Federal dominance of the economy what might individuals have done with their savings? As you say, at that point "under the mattress" was truly all that was left to individuals, hardly a recipe for wealth.
War Bonds could be considered a good deal only in the sense that all other options were so much worse.
May '10
Re: Was Keynes Right...Once? (A Bleg)
So, if you save a million dollars in a box in the basement you have not accumulated any wealth?
Mar '12
Re: Was Keynes Right...Once? (A Bleg)
Stability of demand. With a big ugly war to feed, a dependable dream client that would be there for years, Industry had the space to plan and grow and do what it does best, which is innovate and make efficient.
The Keynesian approach suffers from its eternal balancing act. You never know when the rug is going to be pulled out from under you. It strives to make things fair, and suffers for this abstract goal. Wartime economy benefits from its concrete goal, to make things dead.
Jun '10
Re: Was Keynes Right...Once? (A Bleg)
World War II created a technology boom, just as the Space Race created one twenty years later. Out of those inventions, new industries and new productivity tools sprung up, all with American patents. Add to that, a GI Bill that brought higher education to the common man, and a broken Europe that needed rebuilding. You've got the perfect storm for wealth creation in America. So the moral of the story is, if you're going to spend tons of government money, spend it on engineering research and higher education.
Apr '12
Re: Was Keynes Right...Once? (A Bleg)
War spending is the broken windows fallacy writ large. Everyone is busy making armaments or using them to destroy. It looks like prosperity in the national accounts, but not in our standard of living. We don't see all the consumer goods that we could have produced with all that effort. After the war, that changed.
That said, all that war production bought something priceless.
Jan '11
Re: Was Keynes Right...Once? (A Bleg)
The fact is, my friends, in a command economy like wartime GDP is pure BUNK.
How do you calculate value minus PRICES? As Kevin Williamson pointed out in the Politically Incorrect Guide to Socialism, the chicken egg which was worth 10 cents yesterday at the market suddenly is worth $1.00 when the Wartime Price Council decrees eggs to be essential to the military effort (payable in scrip, of course). But, Wallah! A ten-fold jump in egg GDP occurs like magic.
Bunk.
Socialism is wrong; Keynes was a Socialist: Therefore Keynes was wrong.
Edited on April 24, 2012 at 4:43amOct '11
Re: Was Keynes Right...Once? (A Bleg)
Good question, and one that we self-respecting conservatives should be ready to answer. I couldn't answer it off the cuff, but the comments here focus the mind wonderfully.
1) Keynesian policy may appear to work for a short time, until its inherent wastefulness overtakes primary spending. Debt-driven spending can't continue unless there's actually a return someday.
2) It didn't really work all that well even during the war. The nation endured significant austerity and privation.
3) What FDR practiced in the 30's and what Obama, Krugman, & Co. call for today would never have been countenanced by Keynes. These socialist thieves give him a worse name than he deserves.
4) This is the big one. In the 30's, FDR ensured that most of the effort the nation could put forth was wasted. The pressure of the war forced us to focus on the productive. Even though we sent material overseas, there were significant associated effects. Digging holes and filling them in didn't work in the Depression years and wouldn't have improved the economy during the war years either.
Oct '10
Re: Was Keynes Right...Once? (A Bleg)
War spending is different than peacetime spending. In a healthy democracy, a war will align the societal incentives of everyone involved. For the period of the war, human nature essentially ceases to exist--patriotism drives everyone to do their share, to work together, and win the war. This is more difficult to pull off in totalitarian societies which, as I understand it, is why democracies tend to win wars against them.
The effect does not last into peacetime. You can also make the argument that wars are not Keynesian--they do not create private demand, they create public supply, and consumption is strictly rationed anyway.
Oct '10
Re: Was Keynes Right...Once? (A Bleg)
I find the need to create an ideological foe in Keynes endlessly tiring. There are multiple Keynesian camps, for one, and not all of them believe in the power of government spending, or that saving is a bad thing.
If Keynes were alive today, I wouldn't be surprised if he diagnosed our problems as an excess of domestic demand, not a lack of it.
Apr '12
Re: Was Keynes Right...Once? (A Bleg)
Keynes invented the GDP, didn't he?
Consumption + Investment + Government Expenditures + Exports − Imports = GDP.
The GDP doesn't measure real value.
It measures what it measures. A kind of the shadow of supply and demand, but not real supply and demand. You can make all sorts of neat animals with a shadow. Even the profile of President Lincoln if you're dextrous enough.
Spending and producing and destroying thousands of tanks and ships and airplanes can cast a shadow on the wall that LOOKS like growing value...
But the economy doesn't really care what the GDP is or isn't. US GDP growth resumed back in 2009, and has continued to grow since. Yet why do so many believe we're still in a recession?
It seems to be because the GDP doesn't measure real value.
In this way, for instance, China's GDP continues to grow by leaps and bounds year after year--even when it has absolutely no reason to:
http://tinyurl.com/3w65pad