One of the Great Fallacies Smashed

Bob Murphy revisits the “World War II was an awesome boost for the economy” argument, and smashes it with an argument I’d never heard before. I cover the subject in my 33 Questions About American History You’re Not Supposed to Ask, by the way.)

An excerpt:

Even on the Keynesians’ own terms, private GDP—the share of the economy devoted to civilian purposes—was lower during the height of the war than during 1933, the very worst year of the Great Depression. When we take into account the increase in population during the decade in between, the impact on the homefront is even more astounding.

Let us suppose, then, that the government today did exactly what Paul Krugman recommends, and engaged in massive government purchases comparable to those during World War II. Yet rather than build tanks and bombers, instead the government today buys socially useful things (in Krugman’s vision) such as roads, bridges, parks, the services of additional police and firefighters, etc. If things turned out today the way they did during the war years, would Americans be happy with the result?

I suggest they would not; they would reject the bargain, even on Krugman’s own terms. Suppose people took today as equivalent to 1941, and then the country proceeded to have similar government spending and economic performance as the official statistics show happened during World War II. That means private economic output would fall a total of 55 percent between now and 2015, or at an annualized rate of about 24 percent per year. Does the average American household right now want to suffer a 24 percent annual drop in their private standard of living, for three years in a row? This would put their standard of living back to around 1984 levels (and again, I’m not even accounting for population changes). Would the average household’s answer be affected if we told them about how many potholes would be filled, and how many new schools would be built during those three years?

But wait, it gets worse. It’s not merely that there would be a 3-year period of extreme penury (in terms of private goods and services), in exchange for those things the government provides. After this burst of Keynesianism—again using World War II as the model, now by comparing 1941 to 1946—the federal government’s gross debt held by the public would have grown by a factor of five. Since the federal debt held by the public right now is about $10 trillion, that means mimicking the World War II experience would yield a federal debt of $50 trillion by 2017. This new fact is on top of the reversion to 1984 levels of private GDP. Again I ask: Is there any amount of new schoolteachers and bridges that would compensate for these two trends?

Read all of “The Myth of Wartime Prosperity” by Bob Murphy.

edward

Thanks for linking to this Tom.
Bill A

The argument about increasing the total debt by a factor of five seems weak to me. We have a much larger backlog of debt today than was the case in 1941. Maybe instead consider something involving debt to GDP ratios? Or project a corresponding increase in deficit spending over the period, and use the sum of that increase over the time period for comparison? Though, they probably can find some way to add $40 trillion dollars of debt in the next 5 years, absurd as the prospect seems.
http://www.facebook.com/wallstreet.atheist Austen Michael Samyn

Spending exorbitant amounts money on bombs to destroy human beings, sure is great for the private sector, right? lol
Anonymous

Ron Paul’s Audit the Fed bill passed 326-99 !! One step closer!
http://TheInterventionistParadox.wordpress.com/ Bharat

Interesting debate going on at his blog. Kuehn is arguing that Keynesianism is a theory of output, not of living standards. Blackadder points out “The issue isn’t whether Keynesianism is refuted but whether it is relevant.” If Keynesianism says we can increase GDP but everyone’s living standards goes poopoo, do we really care about Keynesianism at all?

consultingbyrpm.com/blog/2012/07/the-myth-of-wartime-prosperity.html
WDavidC

Spain might onetime discover this great lesson. But until then I will enjoy driving on the best roads I have ever been on. Maybe they haven’t worked out that they are part of the reason why most of the lights are out and they need their second bailout in a month. The deeper their problems get the easier the driving gets. lol. Too much sun to their brains I think
http://www.facebook.com/profile.php?id=787217111 Joshua A. Schaeffer

What would be the point of schools then, just to teach people how to build roads and schools?
Luke Sunderland

*sarcasm on*

Fact, Tom Woods and Bob Murphy think it was bad for the U.S. to get involved in World War II. Fact, that means they think we should have just let the Nazis kill all the minorities of the world. Therefore, Woods and Murphy are racists!

*sarcasm off*
Steven Tate

It seems Murphy forgot one component to refute the WWII spending myths. ( Or I just missed it in the article) Government borrowing skyrocketed during WWII so a lot of that “growth” was simply borrowed money giving a bump to the GDP which would later have to have a similar negative impact on GDP.

Just as my personal spending would sky-rocket in the year take out a home loan. I would be no more productive that year, but my PP(personal product) would present a huge spike for that year, and for the following 20-30 years it would present a depressed number. If you tallied the negative impact in my PP over these years it would be greater than the initial bump in my one year PP due to the time value of money/interest.
I hope that makes sense.
Mike

Lol, yeah. That;s usually the kind of stupidity I receive when I agree with them. Yeah, right…a “libertarian Nazi”. LOL!

I’m sorry but this is why I can only ridicule these people. I mean come on…”libertarian Nazi”? Are they serious? Do they even know what a libertarian is?

The problem with the US being involved in WWII is that it’s become some kind of holy, sanctified event. The “holiest of holies” that should not be questioned. Never mind that Hitler was simply replaced with an even worse tyrant…Stalin. But of course Hitler was a racist. It’s apparently ok to murder 20 million people like Stalin did as long as he’s an “equal opportunity killer.” Geez, Stalin even murdered everyone who got him into power.

There is also this silliness that Hitler would have conquered the whole world without US involvement. Man, how narcissistic and arrogant is that?

Anyway, Bob Murphy did a great job. I’ll never understand the Keynesian reasoning on this.
Bodhi Densmore

Americans of my parents’ generation remember the early 40s
fondly. They were poorer but the poorest
were included in society. They had a
great sense of purpose and connectedness.
For this, they were willing to give up two thirds of their income. They gladly traded worrying about themselves
for worrying about 400K American deaths in battle and at least as many
maimings. Humans will sacrifice
everything for a sense of meaning in their lives.

Now America has been at war for nearly 11 years. We are tired of it. We see how insufferably pointless it has been;
how destructive of honest attempts to help the less fortunate. I’m sorry that Ron Paul did not use our
search for meaning and connectedness by pointing out that that yearning _is_ the
yearning to be free; to be free of the murderous, counterfeiting, thieving,
lying state!
Anonymous

Thanks for posting this, Tom. There’s also some great commentary on his blog where he posted this as well.

This really should be the end of Krugman. There’s nowhere he can go with this. It’s the ultimate smackdown illustrating Krugman’s complete disconnect with reality, and not of the common sense variety (ie nobody *desires* war or alien invasions), but from a fundamental economic and humane standpoint using Paul’s own argument against him. Bob paints Paul into a corner by showing him that although aggregate output and spending were higher, the actual welfare and living standards of individuals was made worse, in some cases worse than the height of the Depression.

So, your move Krugs. If Keynesian stimulus is meant to raise output and employment at the expense of individual welfare and living standards, then what is its ultimate goal? The insinuation here is that if the well-being of individuals is sacrificed in order to maximize some abstract aggregate statistic, then this is a defensible and even desirable outcome. Is the ultimate goal of Keynesian stimulus to actually *improve* people’s lives? And if so, what historical or empirical evidence illustrates this?

I strongly suggest reading thru the comments section at Murphy’s blog http://consultingbyrpm.com/blog/2012/07/the-myth-of-wartime-prosperity.html as well and look at how Daniel Kuehn is trying to actually *defend* the Keynesian position. It’s quite revealing.

Murphy’s take down should be spread wide and far.
BrunoT

C’mon guys, it’s simple! It’s all ball bearings, er…I mean what we need is obviously a global destructive war and 50 million or so dead to boost our economy, right?
Libertymike

What was the “great sense of purpose and connectedness” you claim your parents had?
Was it to be part of something “bigger than themselves” or some other collectivist claptrap?
Alex

Also, consider that massive government hiring breeds democratic voters … who will vote for more government to breed more democrats and so on until the host dies.