Posted on 04/21/2009 5:27:29 PM PDT by Conservative Coulter Fan
WW2 triggered a recovery in teh USA for exactly one reason: exports.
Starting in 1938/1939, the rest of the world was destroying its cities, its factories, its homes and farmfields, its production capacity and its most productive people - a catastrophe that lasted for 7 years. During those 7 years, the US was lending to its allies, so that those allies could use that money to buy military equipment and supplies manufactured in US factories. Every country in the world - in Europe, Russia, China, Japan, etc - ended up in a catastrophically reduced economic and financial position, except for a small handful... those like the US whose domestic infrastructure was spared and who became net lenders and net exporters.
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“unemployment rate in 1940, immediately before the enactment of the draft, was substantially below what it was in 1933, when Roosevelt took office”
I don’t have the inclination to explore all the numbers right now, but I suggest looking at two things:
1. Unemployment trends starting in the second-depression of 1937, through the escalation of US military exports in the late 30s, through the implementation of lend-lease in early 41.
2. The parallels between Weimer Germany and the US during 1930-1933, since the timing in the 2 countries were very close for the downturn in output and employment and prices, the timing of elections in Q4 1932, the bottom of output in 1932 and in prices and employment in early Q1 1933... just before the new adminstration’s policies were implemented. See a pair of interesting charts at http://www.imf.org/external/pubs/ft/weo/2009/01/c3/Box3_1_1.pdf
I have to get some slumber mode time here in preparation for a jog up to Billings later on today, but here’s some things I’d like people to think about:
1. The rate of unemployment that we hear so much about today during the Depression (ie, the peak unemployment of 25%) was based on a VERY different statistical basis than how the BLS computes unemployment today. First, there was no BLS computation of unemployment during the Depression. The final accounting of unemployment during the 30’s was done by one man, Stanley Lebergott, in the early 1960’s. From his work, we get the figure of 25% unemployment in 1933.
Lebergott’s methodology was different than how we would count unemployment today, much of which is based on “is the person looking for a job and/or are they collecting unemployment?”
Lebergott considered men who were employable as his starting point - and this included men who were in the military and in prison, as well as teenagers as young as 14. Today, we don’t count teenagers below 16, and people in the military or prison are considered “institutionalized” and out of the employment pool as a result.
Lebergott also didn’t consider the temporary make-work jobs form FDR’s programs as employment.
So in the following paper, we see some 1970’s re-appraisal of the Depression-era unemployment:
http://fraser.stlouisfed.org/docs/MeltzerPDFs/maremp93.pdf
2. While “panics” in the stock market prior to 1929 were over within two years, debt deflations were not. I know I keep harping on this, but there just is no getting around it. Debt deflations have happened multiple times in our nation’s history, and they’ve always been ugly. The one prior to 1929-1940 started in October 1873, and the US economy didn’t really start recovery until about 1879. The cause of that debt deflation was too much money injected into railroad real estate by a) the US government and b) foreign investors, especially Germany, who was plowing war reparations from France (as a result of the Franco-Prussian war) into the seemingly “can’t lose” deal of the time, US railroads. The intermediaries of the time were banks issuing railroad bonds, with goofy prospects of repayment but glowing promises (sound familiar yet) and then one day in October, 1873, a railroad missed a payment on a bond and within a couple weeks, banks would no longer transact each others’ checks and drafts (sound familiar again?)
3. Hoover, as the author points out, was not a hands-off sort of guy. Matter of fact, he was every bit the hands-on meddler in the economy from the get-go. Calvin Coolidge said of Hoover that “That man has offered me unsolicited advice for six years, all of it bad.” That was true.
During Hoover’s time as Commerce Secretary, he meddled more in the economy than perhaps any Commerce Secretary before - and few since. He had a “Own Your Own Home” program (sound familiar?) as well as all manner of meddling in trade. I can go into that more if people ping me late tomorrow.
4. Remember that FDR took us off the gold standard, in effect inflating the currency.
5. People who look closely at what happened during the Depression and try to sort out a useful history for today need to remember there are TWO histories playing out during a debt deflation: the one playing out in the economy, and the other one playing out in the financial/banking sector.
Everyone knows something about the economic history of the Depression. Most people have either ignored or know not where to look for history of the banking/financial sector during that time.
Let’s cut to the chase: the banking sector imploded during the debt deflation of the 30’s, just as it is collapsing now. The government effectively became the lender of first (and sometimes only) resort. The beast we know today as “Fannie Mae” was created during this time to open up a secondary market for mortgages, money was scattered hither and yon in various capital spending projects and companies. The private sector financial companies did not really recover to a proper functional state until about 1947. So to bottom-line this particular point, WWII handled the employment problem in the economy - it did NOT rectify the problems in the finance sector.
This is an excellent point that people should understand MUCH more fully:
One of the characteristics of debt deflations is that the easy debt leading up to the crash fuels an expansion of production capacity that cannot be supported without ever-increasing private sector debt. At some point, the “tower of debt” totters over, and suddenly we’re left with a huge excess of capacity.
Example for all to observe: world-wide auto production capacity, much of it aimed at selling cars to US consumers, who were in hock up to their earlobes to constantly buy a new car. The US car market used to be about 16+ million units per year - going forward, perhaps only 10 million units are sustainable without people getting into absurd levels of consumer debt again. So what is going to happen to all that excess capacity? We can see that playing out with GM/Chrysler right now. Toyota is handling it by shutting in plants and stopping production until someone else dies.
Another example: housing. We have more housing in the US that we know what to do with. Same deal for office space.
In WWII, a HUGE amount of worldwide production capacity was destroyed, leaving the US as the only viable manufacturing nation ready to crank out consumer goods after WWII while other countries were busy rebuilding their economic base. It was party-hearty time in the US in the 50’s, simply due to our being able to export like crazy to everyone else we bombed into rubble, and at prices WE chose. We were no longer in a beggar-our-neighbor deflationary environment - ie, our producers had pricing power.
I would also add that Kondratieff mentions this in his theory of long-wave cycles - that the debt deflations that mark the end of the super-cycle often end up culminating in war to destroy excess capacity. But let’s not worry about that right now... with the Kenyan at the helm, that’s a grim prospect to contemplate.
I disagree with Higgs's model. It's absurd to say in essence that war goods aren't really "goods" just because they aren't consumer goods. In fact, during a war, the ONLY goods that count are "war goods," and hence, it is true that WW II did "get us out of the depression." A large part of that, however, was not just spending (as Keynesians say) but forced savings (supply side) through war bonds. But in a short time, the savings was unleashed. So, yes, WW II did get us out of the Great Depression.
Sorry. They were producing EXACTLY the “goods” we needed, namely planes and tanks to keep from being invaded. Case closed.
I’m not confusing anything. It was real wealth, as attested to by the fact that as soon as you could spend it (1946) the biggest boom in history took place. It was precisely what economists call “demand,” sparked by savings. Higgs is badly off on this, and there is no other economist I can think of who thinks his goofy theory is even remotely close.
“What next, that McCarthy was right and American government was chock full of actual commies?”
LOL!
And that they were respected members of society?
And they raised their kids to be commies?
And then, in turn, the grandkids became commies? And one - even became POTUS?
To get your equation you'd never stop building for war. Want full production build more tanks or bullets or guns. Who cares if we need, want or use them.
Can you see the absurdity of it?
Furthermore all government spending has one end source - taxpayers. Government may incur debt, which is simply future taxation (which can come as inflation instead of directly increasing taxes).
If you state that WW2 got us out of the GD, then why not always spend at that level so we'd be just a bit higher all the time?
You are approaching war as necessary in a historical context. We had to fight the Nazis, therefore WW2 was necessary therefore all WW2 spending was necessary. You can see the difference in this right?
It only works in hindsight. War impoverished America in an economic sense. As history I am not only glad we fought, but that we won.
Of course, a Nazi would feel the opposite. Don't let your context cloud the issue.
Great and thanks for the insights. Please ping me as you continue.
Very good, but often overlooked. Many want us back in those glory days. To do so would mean plunging millions into poverty and misery, just for America’s sake.
BUMP to help expose FDR’s liberalism = socialism.
And they most certainly do cease becoming a "consumer item" when you judge yourself safe. That's why you don't keep building more. But you always have some.
And, no, we didn't have to fight the Nazis, we had to fight the Japanese who actually attacked us (forget that?) and who were ALLIED with the Nazis.
War did not "impoverish" America, because it prevented massive death and damage, any more than a Trident sub that was never used "impoverished" America if it prevented the Soviets from launching an attack that would kill me.
How many tanks do you own?
But in the past, when we have had to rely on local and private militias, individuals and companies HAVE owned cannons.
Don’t get hot. Let’s discuss it and reason it out. Obviously, you are very intelligent and this concept is a bit counter-intuitive.
Who consumes national defense? How do you find equilibrium?
The debate has always been, what is the level at which the "consumer" element is buried beneath the extravagent or unnecessary. For example, is NASA necessary to national defenese? No. We see the private sector doing that better now, because there are obvious peacetime benefits. But a tank as you point out has no peacetime benefit other than as a deterrent. However, the investment is necessary because the lead time of an airplane is 10 years, and it takes about 12 years to even build a carrier. So you can't wait until it is a genuine consumer "need," or the consumers will be dead.
Of course there is an optimal peacetime military size and budget. I don't know what it is. And we can debate about whether preemptive strikes/forward deployment is preferable to getting hit (the economic cost of 9/11, BTW, was about 3% of GNP, or five times Katrina and 3/5s that of the Smoot-Hawley Tariff that triggered the Great Depression).
So I'm not for building weapons willy-nilly, although I error on the side of more rather than fewer. But it is impossible for me to see an "exit strategy" from the Great Depression without WW II saving/spending.
I think the issue of military spending is one of probabilities in general. It is like buying insurance and clearly you can be over-insured, but it is ridiculous to say - “Look, no flooding occurred over the last policy period so I through my money away.”
So the argument is not between whether the fort and its canon prevented our port from being sacked by pirates, but how much value did the fort and canon add to our “wealth”.
You'd admit that government takes money from the productive economy, right?
So you have a non-market mechanism that takes efficiency out of the efficient side of the equation - clearly it has to have a net negative effect. If not, then you are arguing that you can hop in a bucket and pull yourself up by the handle.
That is the argument of many liberals. Otherwise you'd always want a war economy, just for the production/unemployment effects (which you are arguing are net positive).
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