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Policymakers today draw what they
consider obvious conclusions from the Good War. The New Deal had been
chipping away at unemployment and the economy was recovering, but then
Japan’s surprise attack provided the political means for allowing the
government to shift gears. Over the next four years the American economy got
a heavy dose of Keynesianism, and the results prove the Keynesian case: GDP
soared and unemployment all but disappeared. Only in 1946 did official GDP
take a beating, though surprisingly, given that the government fired roughly 20% of the labor
force, the unemployment rate rose to only
3.8%. (Five percent is considered normal for a healthy economy.)
Since Keynesianism has been validated under fire in the real world, its
advocates tell us, it is altogether appropriate that government spend and
inflate the economy back to prosperity today or any other time.
This is why Obama in 2009 came charging into office touting a big spending
plan. Mark Zandi, one of the architects of
Obama’s stimulus package (officially, the American Recovery and
Reinvestment Plan of 2009), projected in November, 2008 that “even with the [$300 billion] stimulus [in 2009], some 1.8
million jobs will be lost, with unemployment peaking near 8%.” Without
the stimulus, God forbid, unemployment would reach 8.94% by October, 2009.
What actually happened? By October, 2009, with a $250 billion stimulus (according to the CBO), unemployment reached 10.1%. How did it happen that the cure made matters worse by more than a full point? Always spin-ready, the administration’s
post-facto claim was they had misjudged the degree to which Bush had ruined
the economy. Without the stimulus, you see, unemployment would’ve risen
even further.
They can say this with a straight face because they know big deficits and
inflation did the trick in World War II. They know because they’ve seen
the data. Even conservatives readily agree - “World War II got us out
of the Depression.”
Conscription to the rescue
During the 1930s and up until Pearl Harbor, there were
many deteriorating measures of economic health, but none worse than
unemployment. All the controls and regulations, all the taxes and inflation, all the fireside chats and damnations of the rich, all the
privileges to the unions, all the deficits, were not restoring employment to anything
close to pre-Crash levels.
Then the Japanese finally struck, giving Roosevelt the back door he had been looking for.
Finally, the government was in a position to provide millions of men with a
paying job - conscript them and send them overseas to fight a war.
Government’s pitch was we had tried minding our own business but the
forces of evil spread to our shores - not our shores, exactly, but the
shores of an island some 2,500 miles from the mainland where the U.S. Navy
had been hanging out since the 19th century.
There was a sudden rush to kill a lot of people, and the government would pay
men to do the killing. Low pay, of course,
but nonetheless something. Since government was doing the
“hiring,” the 10 million or so men who were drafted could either
take the job or stay home in the comfort of prison. In a display of patriotic
fervor, most of them took the job. The draftees had no way of knowing their
beloved FDR had set them up by provoking an attack that killed over 2,400 people, including civilians.
Was the economy booming as a result of the war? No. People stateside were
working, but they were building things for the military rather than private
citizens. People were getting paychecks but price ceilings, rationing, and
other government controls made life anything but prosperous.
Let’s ask that question again: Was the economy booming? Absolutely. The
GDP figures tell the story. During the war years, GDP exploded. The
government component of GDP went wild while private investment shrank, but so
what? To most analysts, GDP is GDP.
Ignoring the market’s signals
From the beginning of the depression in 1930, the free market had been
willing to put people to work, but government wouldn’t let it. Allowing
wages to fall along with other prices was deemed cruel and unfair. Almost 12
years later wages did fall for the men sent overseas, over a million of whom came back dead or wounded.
Americans had a choice - the market’s way or the government’s
way. Unfortunately, they let government decide for them.
Politicians know that workers don’t take kindly to seeing their nominal
income decrease, even if other prices are falling, and are likely to register
their displeasure at the polls. But there has to be more to it than political
expediency, so officials announce that if wages fall, workers can’t buy
as much and the economy goes downhill. So they keep wages up to protect the
workers, without whose spending they put themselves out of a job.
Keeping wages from falling did protect them - the ones who managed to
hold onto their jobs. Given the falling prices prior to Roosevelt’s
gold heist, people with jobs found the dollars in their paychecks were buying
more. Predictably, high wages led to high unemployment, but Keynes considered
this evidence of market failure, that Say’s Law no longer worked -
there was a glut of labor but no one was hiring. As Rothbard explains, however,
There is never any genuine unsold surplus, or
"glut," whether specific or general over the whole economy, if
prices are free to fall to clear the market and eliminate the surplus.
Keynes’s recommended policy -
deficit spending and inflation - was far more politically palatable than
leaving wage rates to the market. With above-market wages, especially after
passage of the Wagner Act in 1935, not only were people out of work, but those with jobs frequently
worked reduced work weeks and lived in constant fear of getting fired. By
contrast, if you were stateside during the war you had no trouble at all
finding a military contractor willing to hire you.
Government deficits and inflation didn’t cure unemployment in the
1930s, and they didn’t cure it during the war, either.
When did prosperity return? After Roosevelt died and the war ended, a new
attitude prevailed in Washington that gave investors enough confidence to
begin investing again. Most of the wartime controls were removed, and
consequently private investment soared even though official GDP plummeted.
As Robert Higgs tells us,
A minimum estimate of [economic] growth in 1946 was
30%. There was never a year like that in our history. Ever. Not even
half that good. Ever. Thirty percent in one year. This was real
growth.
What looks like the second-worse year in history
from the standard GDP data was, in reality, the best year ever in year to
year performance of all time. This
was the real peace dividend.
Conclusion
Keynesianism instills the conviction that some combination of deficits and
inflation will set things right again, that when one QE or stimulus package
doesn’t do the job, another will, then another, then another. We need
to remember that it wasn’t more government that restored prosperity in
1946, but rather the release of productive energy made possible by
significantly less government.
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