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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Re: Was Keynes Right...Once? (A Bleg)
Bear in mind that the federal regulatory mindset changed dramatically in the 1940s.
President Roosevelt, at his December 28, 1943 press conference, summarized the wartime change from his earlier Great Depression economic program as "Dr. New Deal" giving way to "Dr. Win-the-War."
Of course, the president intended his medical allegory as a defense of his policies. My take? Once Roosevelt and his brain trust got out of the business of micro-managing the inner workings of the US economy to win the war, the US economy became noticeably freer--even with massive federal spending, rationing and wage and price controls--and began growing again.
Jun '10
Re: Was Keynes Right...Once? (A Bleg)
Remember, WWII's spending was not mindless spending. It was spending focused on new technologies and better productivity. The idea of Hitler having an atomic bomb before we did did wonderfully concentrate the mind. Obama's stimulus was mindless spending. WWII spending was not.
Nov '11
Re: Was Keynes Right...Once? (A Bleg)
Jan '11
Re: Was Keynes Right...Once? (A Bleg)
Why didn't the US fall back into Depression when the war ended? Many contemporary economists and politicians expected that to happen - how was the economy going to employ all of those returning soldiers?
Many Democrats advocated a post-war New Deal, complete with make-work projects for the "surplus" labor. And the government certainly had the structure in the form of the war boards and councils that had helped to organize the home front.
The fact that the great success story of 1945-48 is almost unknown is shocking, until you realize that Democrats don't like to publicize the successes of the free market and limited government. Instead Americans have been told about "pent-up demand" and of factories which seamlessly switched from military production to manufacturing consumer goods - as if that was the most natural, unremarkable thing in the world.
Airplanes yesterday, refridgerators today. Sure.
And Europe, smoking and in ruins - those folks were eager to buy American products with all the money they had left over from losing the war. You betcha.
There's no way that freedom and a drastically reduced central government could have had anything to do with the economic miracle that occurred.
Edited on April 24, 2012 at 5:17amRe: Was Keynes Right...Once? (A Bleg)
Luckily, we happen to have a world class economist on the podcast this week. We'll ask Russ Roberts to expound on this topic (P.S. starting this week we're on Thursdays for the foreseeable future due to Rob's TV production schedule).
Nov '10
Re: Was Keynes Right...Once? (A Bleg)
I know almost nothing about the issue, but two things come to mind. First, as we see in China, massive economic activity -- even unproductive or unprofitable activity -- increases measures of wealth and GNP significantly while it is sustained. When artificially put in place without market forces, it tends to be unsustainable, however, which is the problem with Keynsianism. It's phantom growth.
Second, there is no denying that a huge amount of economic activity or "production" of a sort goes on while waging a massive war. Subtract the military action, and the enormous shipyards, munitions manufacturing and war machine factories, movement of people and goods across the globe counts for "economic activity" in much the same way as building ghost cities and glitzy airports in China today, and the effect on the GDP per capita curve is as predicted.
Third, such activity inevitably leads to a bubble that must burst. Notice that the peak on your graph comes in early 1944. A slow slide followed by rapid decline somewhat before the end of the war. The bubble had begun to burst, before Fat Boy followed suit. It's a good thing it came to an end when it did.
Oct '10
Re: Was Keynes Right...Once? (A Bleg)
Not that anyone will bother to do this, simply go thru thetext and math of Keynes theory.
Then compare the structure of the situation and the overall economics in 1934 to 2012. The application of Keynes theory in todays world is marginal or non existent at best.
Nothing is set in stone when economics are involved, it is a living evolving thing.
Edited on April 24, 2012 at 5:34amOct '10
Re: Was Keynes Right...Once? (A Bleg)
Neolibertarian: Keynes invented the GDP, didn't he?
The GDP doesn't measure real value.
What do you mean by real value? GDP is just the aggregate amount of what we produce/consume in a year, expressed in dollar terms. It's no better a measure than is price. Of course, there is a fallacy that confuses dollars (or money, in general) with wealth.
May '10
Re: Was Keynes Right...Once? (A Bleg)
Keynes v. Hayek rap battle!
Keynes:
We could have done better, had we only spent more
Too bad that only happens when there's a world war
You can carp all you want about stats and regressions
Do you deny World War II cut short the Depression?
Hayek:
Wow, one data point and you're jumping for joy
The last time I checked, wars only destroy
There was no multiplier, consumption just shrank
as we used scarce resources for every new tank
Pretty perverse to call that "prosperity"
Ration meat, ration butter, a life of austerity
When that war spending ended your friends cried "Disaster!"
Yet the economy thrived and grew faster!
Keynes:
You too see only what you want to see
The spending on war clearly grew GDP
Unemployment was over, almost down to zero
That's why I'm the master, that's why I'm the hero
Hayek:
Edited on April 24, 2012 at 5:47amCreating employment's a straightforward craft
when the nation's at war, and there's a draft
If every worker were staffed in the army and fleet
we'd have full employment, and nothin' to eat!
Jan '12
Re: Was Keynes Right...Once? (A Bleg)
Joe - I need to do a better job of working the quote function so my apologies. In any event, I wouldn't disagree with a whole lot here and I agree than many of those things are the responsibility of the government and I have no issue paying for them. That said, our goal should be to minimize the expense to the extent we can because an aircraft carrier or a bridge, as examples, are limited in the extent they enhance the wealth of the nation. If we need 35 aircraft carriers, the 36th one does not enhance our wealth. A "bridge to nowhere" does not enhance the wealth of citizens. You may argue that certain spending does not enhance wealth, but that is not for you and me to decide. The presumption is that private citizens purchase things that enhance their wealth in their own judgment, otherwise they wouldn't do it.
You are entirely correct as to the "Solyndras" of the world but that is exactly what you will get with "stimulus".
Jan '12
Re: Was Keynes Right...Once? (A Bleg)
bereket kelile
Neolibertarian: Keynes invented the GDP, didn't he?
The GDP doesn't measure real value.
What do you mean by real value? GDP is just the aggregate amount of what we produce/consume in a year, expressed in dollar terms. It's no better a measure than is price. Of course, there is a fallacy that confuses dollars (or money, in general) with wealth. · 15 minutes ago
One minor nit, GDP does not measure what we consume, it measures what we produce. The starting point for the calculation generally is consumption
but our trade balance (imports - exports) is subtracted when determining GDP.
Also, it includes government purchases so the government could pay a bunch of people to dig holes and fill them back in (to use an old and tired expample), this would show up in GDP accounts, but nothing of value has been created.
Apr '12
Re: Was Keynes Right...Once? (A Bleg)
bereket kelile
What do you mean by real value? GDP is just the aggregate amount of what we produce/consume in a year, expressed in dollar terms. It's no better a measure than is price. Of course, there is a fallacy that confuses dollars (or money, in general) with wealth. · 19 minutes ago
Exactly!
A dollar is a measurement of wealth. It's not the wealth, itself.
They say about 70% of lottery winners are back to being broke within 5 years. This seems to be because you can transfer money, but you can't transfer wealth.
Just as money isn't always a good measurement of wealth, neither is GDP a good measurement of aggregate wealth.
Of course, what I meant by "real value" is both objective and subjective value/worth of goods and services.
The Ghost Cities in China might have subjective worth, but probably not even that. In the end, they are a gargantuan waste of resources.
A counterfeit dollar, as it were.
If you print enough dollars, you're a millionaire. You might even add to the GDP.
But you haven't created anything of value. You haven't created wealth.
Oct '10
Re: Was Keynes Right...Once? (A Bleg)
But GDP does tell us something about real goods and services produced/consumed (using real terms of course) and that's what economics is concerned with. I still don't know what you mean when you say that GDP doesn't measure real value. Our expectations for what it can do may be unreasonable high but I don't think we can say it doesn't measure "real" value, depending of course on what you mean.
Jun '10
Re: Was Keynes Right...Once? (A Bleg)
Mr. Robinson, talk to Russ Roberts at Hoover. (Also his EconTalk is absolutely fantastic.)
In short, GDP is a measure of all the stuff (good and services) created in the country every year. But it doesn't matter what those things are made for, what happens to them, who gets them, or how they affect the average person.
So all the wartime production during WWII counts towards GDP. But there was rationing. Sure, everybody was employed, and everybody had money. But there weren't a lot of things to spend it on. So GDP continued to increase, but that doesn't mean the average American consumer got the benefit of that.
Put it another way. Let's pay people to dig ditches and fill them. Spend $1 trillion for wages, materials, and so on. Let's ignore multipliers for now; GDP has increased by $1T. But does anyone really think that that increase means anything in terms of the quality of life for anyone? (With multipliers, it's hard to say, because you'll also likely have inflation.)
Aggregates are a measure, and can be a useful one. But they're not in and of themselves a measure of prosperity.
Oct '10
Re: Was Keynes Right...Once? (A Bleg)
Neolibertarian
Just as money isn't always a good measurement of wealth, neither is GDP a good measurement of aggregate wealth.
Of course, what I meant by "real value" is both objective and subjective value/worth of goods and services.
But you haven't created anything of value. You haven't created wealth. · 17 minutes ago
I have no argument about how good a measure it is for wealth but that doesn't mean it doesn't measure anything of value beyond that. That's why economists are more concerned about real goods and services, the actual stuff that you can acquire. GDP does measure that, however accurately, so it's a bit much to say it doesn't measure anything of value. It just looks like the baby went out with the bath water.
Jan '12
Re: Was Keynes Right...Once? (A Bleg)
bereket kelile
But GDP does tell us something about real goods and services produced/consumed (using real terms of course) and that's what economics is concerned with. I still don't know what you mean when you say that GDP doesn't measure real value. Our expectations for what it can do may be unreasonable high but I don't think we can say it doesn't measure "real" value, depending of course on what you mean. · 8 minutes ago
It certainly tells us something about the goods we produce and generally is a good measure of what we consume. As for the problems it has with measuring "real" value, I mentioned that in my second paragraph that you didn't quote.
May '10
Re: Was Keynes Right...Once? (A Bleg)
Russ Roberts this week? Awesome. My two favorite podcasts, together at last.
Oct '10
Re: Was Keynes Right...Once? (A Bleg)
As I said in a previous post, it definitely has its shortcomings but it's unreasonable to say it doesn't measure real value at all.
Jun '10
Re: Was Keynes Right...Once? (A Bleg)
I swear, I made that earlier comment before I saw that Russ Roberts would be on the podcast. Now I feel like a doofus.
But Russ Roberts! Squeeeeeee!
May '10
Re: Was Keynes Right...Once? (A Bleg)
Maybe the answer is buried in a comment, above, but I don't really understand the question being asked. Yes, income went up during the war; during the depression, it continued to rise from a low point beginning in 1932. Are you asking why increased government spending on war salaries increased income--until it stopped?
Isn't the question whether government spending can "prime" the economy so that it can grow on its own? The graph shows the opposite during the war years--no priming since income fell after war spending ended.
And in the years 1932 to 1941? Income rose; government spending was likely too small to help or hurt things--kind of like Porkulous.
Edited on April 24, 2012 at 1:14pm