This just struck me: people always credit WWII as being the thing that got the US out of the great depression. We’ve all seen the graph (like the one at the top of this paper) where standard of living drops precipitously during the great depression then more than recovers during WWII.
How in the world did that work? Why is it that suddenly pouring huge resources out of the country into a massive utility-sink that didn’t exist until the start of the war rapidly brought up the standard of living? This makes no sense to me.
The only plausible explanation I can think up is that they somehow borrowed from the future using the necessities of war as justification. I feel like that would involve a dip in the growth rate after WWII—and there is one, but it just dips back down to the trend-line not below like I would expect if they genuinely borrowed enough from the future to offset such a large downturn as the great depression. The only other thing seems to be externalities.
However this goes, this seems to be a huge argument in favor of big-government spending (if we get this much utility from the government building things that literally explode themselves without providing non-military utility, then in a time of peace, we should be able to get even more by having the government build things like high-tech infrastructure, places of beauty, peaceful scientific research, large-scale engineering projects, etc.). So should we be spending 20-40% of our GDP on peace-time government mega-projects? It’s either that or this piece of common knowledge is wrong (and we all know how reliable common knowledge is!).
Or I’m wrong, of course. So what is it?
(Bonus question: why didn’t WWI see a similar boost in living standards?)
It didn’t. This is the argument in image form, and you can find similar ones for employment (basically, when you conscript people, unemployment goes down. Shocking!). There are lots of libertarian articles on the subject—this might be an alright introduction—but the basic argument is that standards of living dropped (that’s what happens when food is rationed and metal is used for tanks instead of cars or household appliances) but the government spending on bombs and soldiers made the GDP numbers go up, and then the post-war boost in standards of living was mostly due to deferred spending.
What tgb stated above was factually incorrect—WWII did not increase living standards. While most economists credit WWII with kickstarting GDP growth and cutting unemployment, I don’t know anyone who would actually argue that living standards rose during WWII.
Krugman doesn’t quiiiite come out and say it, but he sure seems to want the reader to infer that living standards rose: http://krugman.blogs.nytimes.com/2011/08/15/oh-what-a-lovely-war/ And in that article, he quotes and quote of Rick Perry’s book saying that the recovery happened because of WW2 (due to forcing FDR to “unleash private enterprise”, oddly).
So maybe no one actually makes that argument, but boy it’s common for people (economists and politicians!) to imply it. (Look at the contortions Perry goes through to not have to refute it!) It’s always nice to notice the confusion a cached thought should have made all along.
I think you’re reading way too much into Krugman’s argument. I don’t read Krugman as trying to imply that living standards rose during WWII. He doesn’t even mention living standards. When economists talk about ending a recession or ending a depression, they mean something technical. Krugman was just talking about increased production and lowered unemployment, etc.
Frankly it seems bizarre to me that anyone would believe that crashing consumer spending + mass shortages = better living standards. It is fair to say that people had a better attitude about their economic deprivation, since it had a patriotic purpose in serving the war effort.
I think it’s clear that you know more about what economists mean than I do, but when the typical person hears that a depression is ending, they imagine people being happier than they were before. I’m not really claiming that anyone thinks that crashing consumer spending + mass shortages = better living standards, just that the average Joe in the US hears about the depression ending and not about those negative things.
Anyway, not sure what point I’m trying to make since I think you already know what I’m saying.
One simple model which seems to fit the “WWII ending the depression” piece of data (and which might have some overlap with the truth) is that it’s relatively difficult to put idle resources into use, and significantly easier to repurpose resources that have been in use for other uses.
During the depression, a bunch of people were unemployed, factories were not running, storefronts were empty, etc. According to this model, under those economic conditions there were significant barriers to taking those idle resources and putting them to productive use.
Then WWII came and forced the country to mobilize and put those resources to use (even if that use was just to make stuff which would be shipped off to Europe and the Pacific to be destroyed). Once the war was over, those resources which had been devoted to war could be repurposed (with relatively little friction) to uses with a much more positive effect on people’s standard of living. So things became good according to meaningful metrics like living standards, not merely according to metrics like unemployment rate or total output which ignore the fact that building a tank to send to war isn’t valuable in the same way as building a car for local consumers.
The glaring open question here is why there might be this asymmetry between putting idle resources to use and repurposing in-use resources. Which is closely related to the question of why recessions/depressions exist at all (as more than momentary blips): once a recession hits and bunch of people become unemployed (and other resources go idle), why doesn’t the market immediately jump in to snap up those idle resources? This article gets into some of the attempts to answer those questions.
(Bonus answer: World War One did not happen during a depression, so mobilizing for war mostly involved repurposing resources which had served other uses in peacetime rather than bringing idle resources into use.)
I like that this explanation gives a good reason for why this kind of spending could only work to fix a depression or similar situation versus always inflating standards of living. Thanks.
I’m not sure how much it influenced the overall picture, but there was quite a brain drain to the US before and during WWII (mostly Jewish refugees) as well as after (Wernher von Braun and the like). Migrating away from the Nazi and Stalinist spheres of influence demonstrates intelligence, and the ability to enter the US despite the complex “national origins quota system” that went into effect in 1929 demonstrates persistence, affluence and/or marketable skills, so I estimate these immigrants gave a significant boost to the US economy.
Also: salt iodization in 1924. Possibly also widespread flour enrichment in the early 1940s due to both Army incentivization and the need for alternate nutrient sources during rationing.
However this goes, this seems to be a huge argument in favor of big-government spending (if we get this much utility from the government building things that literally explode themselves without providing non-military utility, then in a time of peace, we should be able to get even more by having the government build things like high-tech infrastructure, places of beauty, peaceful scientific research, large-scale engineering projects, etc.). So should we be spending 20-40% of our GDP on peace-time government mega-projects? It’s either that or this piece of common knowledge is wrong (and we all know how reliable common knowledge is!).
I’m surprised no one has explained this yet, but this is wrong according to standard economic theory as I understand it.
The United States suffered from terrible monetary policy during the Great Depression.
Due to “animal spirits” and “sticky wages” this caused large scale unemployment and output well below our production possibilities frontier.
World War II caused the government to kickstart production for the war effort.
Living standards actually didn’t rise, although GDP did (GDP per capita is NOT the same as living standards). Consumption was dramatically deferred during the war. People had fewer babies, bought fewer consumer products (and fewer were produced) and shifted toward home production for some necessities.
There was a short recession as the end of the war lowered demand, but pent-up consumer demand quickly re-stabilized the economy.
The point is WWII helped the economy because we were well under our production possibilities frontier during the depression. Peace-time mega projects would only be helpful under recessed/depressed conditions, and fortunately, we now can use monetary policy to produce similar effects.
Anyway, the argument you were making seems pretty common among people who don’t follow economics debates, and in fact is one of the major policy recommendations of the oddball Lyndon LaRouche cult.
Do you know of a typical measure (or component) of living standard that would have been measured for the US across both the great depression and WW2? The standard story I have heard informally is that WWII efforts did actually increase standards of living. I’m not surprised to learn that that’s false, but given the level of consensus in the group-think I’ve encountered, I’d be interested in seeing some hard numbers. Plus, I’m interested in seeing whether there was a drop in living standards.
The labor force of the 1930s was sapped by over-allocation in unproductive industries. Specifically, much of the labor share was occupied in the sitting around feeling depressed and wishing you had a job industry. Economic conditions improved as workers shifted out of that industry and into more productive ones, such as all of them.
Part of it is that deflation in the early 1930s meant that workers were overpaid relative to the value of goods they produced (wages being harder to cut than prices). That caused wasteful amounts of unemployment. WWII triggered inflation, and combined with wage controls caused wages to become low relative to goods, shifting the labor supply and demand to the opposite extreme.
The people who were employed pre-war presumably had their standard of living lowered in the war (after having it increased a good deal during the deflation).
I won’t try to explain here why deflation and inflation happened when they did, or why wages are hard to cut (look for “sticky wages” for info about the latter).
It looks like this has been an unpopular suggestion, but I wouldn’t discount motivation completely. A lot of early 20th century economists thought centrally planned economies were a great idea, based on the evidence of how productive various centrally planned war economies had been. Presumably there’s some explanation for why central planning works better (or doesn’t fail as badly) with war economies compared with peacetime economies, and I’ve always suspected that people’s motivation to help the country in wartime was probably one of the factors.
This just struck me: people always credit WWII as being the thing that got the US out of the great depression. We’ve all seen the graph (like the one at the top of this paper) where standard of living drops precipitously during the great depression then more than recovers during WWII.
How in the world did that work? Why is it that suddenly pouring huge resources out of the country into a massive utility-sink that didn’t exist until the start of the war rapidly brought up the standard of living? This makes no sense to me.
The only plausible explanation I can think up is that they somehow borrowed from the future using the necessities of war as justification. I feel like that would involve a dip in the growth rate after WWII—and there is one, but it just dips back down to the trend-line not below like I would expect if they genuinely borrowed enough from the future to offset such a large downturn as the great depression. The only other thing seems to be externalities.
However this goes, this seems to be a huge argument in favor of big-government spending (if we get this much utility from the government building things that literally explode themselves without providing non-military utility, then in a time of peace, we should be able to get even more by having the government build things like high-tech infrastructure, places of beauty, peaceful scientific research, large-scale engineering projects, etc.). So should we be spending 20-40% of our GDP on peace-time government mega-projects? It’s either that or this piece of common knowledge is wrong (and we all know how reliable common knowledge is!).
Or I’m wrong, of course. So what is it?
(Bonus question: why didn’t WWI see a similar boost in living standards?)
It didn’t. This is the argument in image form, and you can find similar ones for employment (basically, when you conscript people, unemployment goes down. Shocking!). There are lots of libertarian articles on the subject—this might be an alright introduction—but the basic argument is that standards of living dropped (that’s what happens when food is rationed and metal is used for tanks instead of cars or household appliances) but the government spending on bombs and soldiers made the GDP numbers go up, and then the post-war boost in standards of living was mostly due to deferred spending.
Note: as the article implies, the above viewpoint is not representative of mainstream economic consensus.
What tgb stated above was factually incorrect—WWII did not increase living standards. While most economists credit WWII with kickstarting GDP growth and cutting unemployment, I don’t know anyone who would actually argue that living standards rose during WWII.
Krugman doesn’t quiiiite come out and say it, but he sure seems to want the reader to infer that living standards rose: http://krugman.blogs.nytimes.com/2011/08/15/oh-what-a-lovely-war/ And in that article, he quotes and quote of Rick Perry’s book saying that the recovery happened because of WW2 (due to forcing FDR to “unleash private enterprise”, oddly).
So maybe no one actually makes that argument, but boy it’s common for people (economists and politicians!) to imply it. (Look at the contortions Perry goes through to not have to refute it!) It’s always nice to notice the confusion a cached thought should have made all along.
I think you’re reading way too much into Krugman’s argument. I don’t read Krugman as trying to imply that living standards rose during WWII. He doesn’t even mention living standards. When economists talk about ending a recession or ending a depression, they mean something technical. Krugman was just talking about increased production and lowered unemployment, etc.
Frankly it seems bizarre to me that anyone would believe that crashing consumer spending + mass shortages = better living standards. It is fair to say that people had a better attitude about their economic deprivation, since it had a patriotic purpose in serving the war effort.
I think it’s clear that you know more about what economists mean than I do, but when the typical person hears that a depression is ending, they imagine people being happier than they were before. I’m not really claiming that anyone thinks that crashing consumer spending + mass shortages = better living standards, just that the average Joe in the US hears about the depression ending and not about those negative things.
Anyway, not sure what point I’m trying to make since I think you already know what I’m saying.
One simple model which seems to fit the “WWII ending the depression” piece of data (and which might have some overlap with the truth) is that it’s relatively difficult to put idle resources into use, and significantly easier to repurpose resources that have been in use for other uses.
During the depression, a bunch of people were unemployed, factories were not running, storefronts were empty, etc. According to this model, under those economic conditions there were significant barriers to taking those idle resources and putting them to productive use.
Then WWII came and forced the country to mobilize and put those resources to use (even if that use was just to make stuff which would be shipped off to Europe and the Pacific to be destroyed). Once the war was over, those resources which had been devoted to war could be repurposed (with relatively little friction) to uses with a much more positive effect on people’s standard of living. So things became good according to meaningful metrics like living standards, not merely according to metrics like unemployment rate or total output which ignore the fact that building a tank to send to war isn’t valuable in the same way as building a car for local consumers.
The glaring open question here is why there might be this asymmetry between putting idle resources to use and repurposing in-use resources. Which is closely related to the question of why recessions/depressions exist at all (as more than momentary blips): once a recession hits and bunch of people become unemployed (and other resources go idle), why doesn’t the market immediately jump in to snap up those idle resources? This article gets into some of the attempts to answer those questions.
(Bonus answer: World War One did not happen during a depression, so mobilizing for war mostly involved repurposing resources which had served other uses in peacetime rather than bringing idle resources into use.)
I like that this explanation gives a good reason for why this kind of spending could only work to fix a depression or similar situation versus always inflating standards of living. Thanks.
I’m not sure how much it influenced the overall picture, but there was quite a brain drain to the US before and during WWII (mostly Jewish refugees) as well as after (Wernher von Braun and the like). Migrating away from the Nazi and Stalinist spheres of influence demonstrates intelligence, and the ability to enter the US despite the complex “national origins quota system” that went into effect in 1929 demonstrates persistence, affluence and/or marketable skills, so I estimate these immigrants gave a significant boost to the US economy.
Also: salt iodization in 1924. Possibly also widespread flour enrichment in the early 1940s due to both Army incentivization and the need for alternate nutrient sources during rationing.
I’m surprised no one has explained this yet, but this is wrong according to standard economic theory as I understand it.
The United States suffered from terrible monetary policy during the Great Depression.
Due to “animal spirits” and “sticky wages” this caused large scale unemployment and output well below our production possibilities frontier.
World War II caused the government to kickstart production for the war effort.
Living standards actually didn’t rise, although GDP did (GDP per capita is NOT the same as living standards). Consumption was dramatically deferred during the war. People had fewer babies, bought fewer consumer products (and fewer were produced) and shifted toward home production for some necessities.
There was a short recession as the end of the war lowered demand, but pent-up consumer demand quickly re-stabilized the economy.
The point is WWII helped the economy because we were well under our production possibilities frontier during the depression. Peace-time mega projects would only be helpful under recessed/depressed conditions, and fortunately, we now can use monetary policy to produce similar effects.
Anyway, the argument you were making seems pretty common among people who don’t follow economics debates, and in fact is one of the major policy recommendations of the oddball Lyndon LaRouche cult.
Do you know of a typical measure (or component) of living standard that would have been measured for the US across both the great depression and WW2? The standard story I have heard informally is that WWII efforts did actually increase standards of living. I’m not surprised to learn that that’s false, but given the level of consensus in the group-think I’ve encountered, I’d be interested in seeing some hard numbers. Plus, I’m interested in seeing whether there was a drop in living standards.
The labor force of the 1930s was sapped by over-allocation in unproductive industries. Specifically, much of the labor share was occupied in the sitting around feeling depressed and wishing you had a job industry. Economic conditions improved as workers shifted out of that industry and into more productive ones, such as all of them.
ADB I’m not sure what your intended connotations are, but I’d guess I’d OC.
Part of it is that deflation in the early 1930s meant that workers were overpaid relative to the value of goods they produced (wages being harder to cut than prices). That caused wasteful amounts of unemployment. WWII triggered inflation, and combined with wage controls caused wages to become low relative to goods, shifting the labor supply and demand to the opposite extreme.
The people who were employed pre-war presumably had their standard of living lowered in the war (after having it increased a good deal during the deflation).
I won’t try to explain here why deflation and inflation happened when they did, or why wages are hard to cut (look for “sticky wages” for info about the latter).
I assumed it was because it motivated people into becoming much more productive.
It looks like this has been an unpopular suggestion, but I wouldn’t discount motivation completely. A lot of early 20th century economists thought centrally planned economies were a great idea, based on the evidence of how productive various centrally planned war economies had been. Presumably there’s some explanation for why central planning works better (or doesn’t fail as badly) with war economies compared with peacetime economies, and I’ve always suspected that people’s motivation to help the country in wartime was probably one of the factors.