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.