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World War 2 Did Not Lead America Out Of Depression

21 July 2010 3 Comments

Fascinating insight from Peter Schiff on the one of many economic fallacies that he seeks to shed light on.  Up today is the idea that war is good for an economy – he touches on the idea that is so commonly accepted today which is that World War 2 fixed America and brought us out of Depression.  Let’s see what Schiff has to say:

There is overwhelming agreement among economists that the Second World War was responsible for decisively ending the Great Depression. When asked why the wars in Iraq and Afghanistan are failing to make the same impact today, they often claim that the current conflicts are simply too small to be economically significant.

There is, of course, much irony here. No one argues that World War II, with its genocide, tens of millions of combatant casualties, and wholesale destruction of cities and regions, was good for humanity. But the improved American economy of the late 1940s seems to illustrate the benefits of large-scale government stimulus. This conundrum may be causing some to wonder how we could capture the good without the bad.

If one believes that government spending can create economic growth, then the answer should be simple: let’s have a huge pretend war that rivals the Second World War in size. However, this time, let’s not kill anyone.

Great question.  If WW2 was great for the economy, why isn’t the war in Iraq & Afghanistan having the same result?  Great way to set the stage for this discussion…

He continues…

Most economists believe that massive federal government spending on tanks, uniforms, bullets, and battleships used in World War II, as well the jobs created to actually wage the War, finally put to an end the paralyzing “deflationary trap” that had existed since the Crash of 1929. Many further argue that war spending succeeded where the much smaller New Deal programs of the 1930s had fallen short.

The numbers were indeed staggering. From 1940 to 1944, federal spending shot up more than six times from just $9.5 billion to $72 billion. This increase led to a corresponding $75 billion expansion of US nominal GDP, from $101 billion in 1940 to $175 billion by 1944. In other words, the war effort caused US GDP to increase close to 75% in just four years!

So, obviously the answer is more war, right? Well, if that’s the case, the Schiff goes on to say exactly what we should do next:

So, why 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.

Compelling suggestion, no? So, it’s a no-brainer right? Well, yes, until we come to the hard part. Paying for it. Why does paying for something always get in the way! Dangit. Schiff compares paying for such a war today with paying for WW2 years ago:

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.

So, what is the solution? Well, unfortunately, war isn’t it. Schiff ties all of it together with the following statements:

The goal of an economy is to raise living standards. During the War, as productive output was diverted to the front, consumer goods were rationed back home and living standards fell. While it’s easy to see the numerical results of wartime spending, it is much harder to see the civilian cutbacks that enabled it.

The truth is that we cannot spend our way out of our current crisis, no matter how great a spectacle we create. Even if we spent on infrastructure rather than war, we would still have no means to fund it, and there would still be no guarantee that the economy would grow as a result.

What we need is more savings, more free enterprise, more production, and a return of American competitiveness in the global economy. Yes, we need Rosie the Riveter – but this time she has to work in the private sector making things that don’t explode. To do this, we need less government spending, not more.

Interesting analysis right? Do you find something wrong with this? Do you find it troubling that the exact opposite is taught in basically every school across America? That government spending and entering world war two saved the economy?

Instead of expanding the war effort, we should decrease it. We currently have troops in over 100 countries around the world. Did you know that? Most politicians don’t talk about it (other than Ron Paul). We spend more on defense than the rest of the world combined! How absurd is that? There’s only one way to continue the unsustainable course that we’re on and that is by devaluing the currency. You better own some gold.

3 Comments »

  • Zazn said:

    We use to be a productive (industrial) economy. In fact, during the World War II, the US could outproduce ALL the other major world powers – COMBINED!!! Because of this, we were able to provide resources and products to our nation as well as many other nations. Since World War II, our nation has turned to a service oriented nation – that is, the production plants are gone. Most of the world's products now come from China, Taiwan, etc. Even if we go to war now (such as with Iraq), we will not be making our own weapons, we will be purchasing them. Another factor to note is the expansion on military spending between the time of World War II and the current time of Iraq. The defense sector and/or military sector has come to take 80 percent of the national budget. Simply put, a war today won't work because our economy is not the same, we are not going to produce our weapons, we will buy them (materials) from other countries or contract them out. Also, warefare is different today.

  • Zazn said:

    I'm not saying that government spending should be raised, in fact, there are major areas where you can cut such as MILITARY! But government should be there to help regulate the free market and stop overzealous prviatization. Would YOU want your neighborhood police to be run by a company or run by the government? The company will emphasize profit instead of safety most likely. Plus, if their officers do not do their job and protect people, they are not subject to rules like the government is. And if you are saying that they should be punished for such action… well then you are asking the government to intervene. It would be more expensive for the government to privatize security and regulate it at the same time than just doing it themselves.

    What we need is a BALANCE between competetive free market and government spendings, or else, either side will overwhelm the society.