Tag Archives: Inflation

Did World War II lift us out of the Great Depression?

We are constantly told that the economy was lifted out of its Great Depression because of World War II. While it is certainly true that the economic production recovered thanks to war production, I do not believe that the economy actually “recovered” during the war. Of course, it all depends on how you define an economic recovery. The statistical method of doing so is to look at Gross Domestic Product (GDP) or industrial production. However, looking at those figures, even adjusting for inflation, ignores things such as changes in population and demographics.

When World War II began, millions joined or were drafted into the armed forces. Their production was lost as they fought overseas. To make up for that loss, women entered the workforce and men worked longer hours. Yes, economic production rose, but the number of hours worked rose even more so. Americans were forced to work instead of spending their time in leisure or raising their families. This was of course good for the many who had previously been unemployed, but bad for those who had already had jobs, housewives who were caring for their children, the elderly who held off on retirement, and the young who skipped college to enter the army.

While hours worked were up, most of the increase in production went to war manufacturing. The United States churned out planes, ships, tanks, guns, and bullets. Japan and Germany had a ten-year head start in military production, but the United States quickly caught up once its economic wheels moved forward. Furthermore, much of the food, clothing, and other staples required for day-to-day living were shipped to troops overseas instead of staying within the country’s borders. The domestic economy of the United States was dominated by rations and shortages. This was not your typical economic recovery with new products available to consumers and increasing wealth. Instead, it was economic production designed to destroy (though for a good cause) instead of create. The billions of dollars spent on bombs, downed planes, sunk ships, shattered tanks, and bullets was capital forever lost to mankind.

With longer work hours, families separated for years, hundreds of thousands of killed soldiers, and production devoted to the military instead of consumers, the standard of living of the average American was no better during World War II than it was during the Great Depression and worse than it was in the 1920s.

But what about unemployment which went from 25% down to 1%? Gene Smiley writes, “The number of unemployed workers declined by 7,050,000 between 1940 and 1943, but the number in military service rose by 8,590,000. The reduction in unemployment can be explained by the draft, not by the economic recovery.” He continues, “Most estimates show declines in real consumption spending, which means that consumers were worse off during the war. Business investment fell during the war. Government spending on the war effort exceeded the expansion in real GNP.” Smiley does admit that economic measurement during this time was exceedingly difficult, asking “How can we establish a consistent price index when government mandates eliminated the production of most consumer durable goods?” Smiley concludes, “For consumers, the recovery came with the war’s end, when they could again buy products that were unavailable during the war and unaffordable during the 1930s.”

* All this says nothing about the need to enter the war against the Japanese and Germans. However, the idea that a war could lift an economy out of depression is tenuous. The economic recovery following World War II was the result of the newfound economic freedom in the United States but even more so overseas where countries such as Germany, Italy, and Japan experienced true freedom for the first time in many years.

UPDATED: Germany and Italy also “boosted” their economies with military production and conscription. Few would argue that their “economic recoveries” were sustainable or good.

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Big government is producing high unemployment and stagnant wages.

Marketwatch reports Salaries and wages are rising, but not by much. Even that subdued headline is upbeat when you read some of the details:

Want some more bad news? Average wages today are lower than a decade ago when adjusted for inflation, according to an analysis earlier this year by the Economic Policy Institute.

For high school graduates, median inflation-adjusted wages were $626 per week in 2009, compared with $629 in 2000. If you assume a worker gets paid for a full year that totals $32,552 in 2009, down from $32,708 in 2000.

For college graduates, weekly wages were $1,025 in 2009, compared with $1,030 in 2000, according to EPI. Over one year, that works out to $53,300 last year, down from $53,560 in 2000.

Additionally, the official unemployment rate was just 4.0% back in 2000. Today, it stands at 9.5%. So not only are working Americans earning less, many more are unemployed and earning nothing.

The American dream is dying. But why? I again return to this chart, first posted here.

As is clearly evident in that chart, the government’s intrusion in our economy is at historically high levels. In this recent recession, government spending has hit all new unforeseen levels. But even prior to that, the 90s and 2000s, a period under both Republican and Democratic Presidents and Congresses, saw government spending excluding defense bouncing around the 30% level. Even that much-lauded decline in government spending under President Bill Clinton and the Republican Congress, only saw non-defense government spending decline from 31.87% in 1991 to 28.95% in 2000, a 2.92% decline. By comparison, non-defense government spending rose a 4.86% in 2009 alone. A supposedly major accomplishment that took ten years to achieve was obliterated in less than a year.

While non-defense government spending at 28.95% may look appealing now that the figure is about nine percentage point higher, non-defense government spending had never exceeded that level prior to 1982. While many talk about the small government days of Bill Clinton and the Republican Revolution of 1994, remember that FDR, LBJ, and Jimmy Carter all spent less excluding defense (which is wildly volatile depending largely on external affairs) than the U.S.’s recent best.

Our experiment with government intervention in society is failing. Government control over a third of the economy has produced high unemployment and stagnant wages. For decades, the United States enjoyed small government and prospered as a results. It is no coincidence that our recent weakness is the result of an overly large and burdensome government.