07
Sep
10

Did WWII “fix” the Great Depression?

No. No.

But suppose, as a counterfactual, that it really did.  Let’s take that thought to its logical conclusion: in order to “rescue” the economy from its present recession, shouldn’t the ultra-Keynesians be arguing for another world war?  Peter Schiff explores the notion:

[W]hy not have the United States declare a fake war on Russia (a grudge match that is, after all, long overdue)? Both countries could immediately order full employment and revitalize their respective manufacturing sectors. Instead of live munitions, we could build all varieties of paint guns, water balloons, and stink bombs.

Once new armies have been drafted and properly outfitted with harmless weaponry, our two countries could stage exciting war games. Perhaps the US could mount an amphibious invasion of Kamchatka (just like in Risk!). As far as the destruction goes, let’s just bring in Pixar and James Cameron. With limitless funds from Washington, these Hollywood magicians could surely produce simulated mayhem more spectacular than Pearl Harbor or D-Day. The spectacle could be televised- with advertising revenue going straight to the government.

Well, there are a few long-term effects from WWII that had a substantial impact on the postwar American economy: millions of dead workers soldiers, mostly from other countries, and the destruction of massive amounts of factories and infrastructure in heavily-industrialized nations that don’t happen to be North American.  Those are tough to replicate with paintball guns and water balloons.  But suppose you believe that it was the massive influx of money that did all the heavy lifting, rather than (say) the fact that the US finished up WWII with a dominant industrial position among western countries.  Schiff continues:

But to repeat the impact of World War II today would require a truly massive effort. Replicating the six-fold increase in the federal budget that was seen in the early 1940s would result in a nearly $20 trillion budget today. That equates to $67,000 for every man, woman, and child in the country. Surely, the tremendous GDP growth created by such spending would make short work of the so-called Great Recession.

The big question is how to pay for it. To a degree that will surprise many, the US funded its World War II effort largely by raising taxes and tapping into Americans’ personal savings. Both of those avenues are nowhere near as promising today as they were in 1941.

Current tax burdens are now much higher than they were before the War, so raising taxes today would be much more difficult. The “Victory Tax” of 1942 sharply raised income tax rates and allowed, for the first time in our nation’s history, taxes to be withheld directly from paychecks. The hikes were originally intended to be temporary but have, of course, far outlasted their purpose. It would be unlikely that Americans would accept higher taxes today to fund a real war, let alone a pretend one.

That leaves savings, which was the War’s primary source of funding. During the War, Americans purchased approximately $186 billion worth of war bonds, accounting for nearly three quarters of total federal spending from 1941-1945. Today, we don’t have the savings to pay for our current spending, let alone any significant expansions. Even if we could convince the Chinese to loan us a large chunk of the $20 trillion (on top of the $1 trillion we already owe them), how could we ever pay them back?

If all of this seems absurd, that’s because it is. War is a great way to destroy things, but it’s a terrible way to grow an economy.

Quite.

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1 Response to “Did WWII “fix” the Great Depression?”


  1. December 27, 2013 at 21:17

    It’s going to be end of mine day, except before finish
    I am reading this enormous article to improve my experience.


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