Military Keynesianism Can’t Work … Because WWII Was Different from Current Wars

World War II Was Different

“Military Keynesians” – people who think that war is good for the economy – base their theory on the idea that World War 2 pulled us out of the Great Depression.

I have exhaustively demonstrated that this is a myth: war is not good for the economy.

But even if WWII were good for the economy, things are completely different today.

World War II Employed Armies … Not Drones

Wikipedia points out:

Some critics, and even some supporters, contend that in the modern world, these policies are no longer viable for developed countries because military strength is now built on high-technology professional armies, and the military is thus no longer viable as a source of employment of last resort for uneducated young people.

Given that America fights its current wars with drones and smart bombs, it “employs” far fewer men then during WWII. It is a different world.

The Marshall Plan, Special Trade Provisions and Other Unique Circumstances Made WWII Different

Steven Hill noted yesterday:

Krugman has written, “Deficit spending created an economic boom – and the boom laid the foundation for long-run prosperity.”

But this viewpoint ignores a fairly obvious counterpoint. The United States emerged from World War II as the world’s conqueror, with virtually every economic competitor destroyed. Suddenly, America was the big boy on the block, leader of the Pax Americana, and our industries enjoyed numerous competitive advantages over international rivals. The dollar, suddenly, was the dominant global currency, and that granted Americans cheap money and influence that spurred unprecedented economic growth.

In addition, we then launched the ambitious Marshall Plan, which not only rebuilt our former adversaries, but also created international markets for US producers. One of the Marshall Plan’s conditions was that nations receiving funding were required to give American exporters preferred access to their emerging markets. The years of the Marshall Plan, from 1948 to 1952, saw one of the fastest periods of growth in European history, with industrial production increasing by 35 percent and agricultural production substantially surpassing prewar levels. American businesses, especially those specializing in manufactured goods and raw materials, benefited greatly from these fast-emerging markets. Any massive stimulus plan today would not benefit from those same advantages.

Krugman has rejected this critique, writing, “Trade was a minor factor in the American economy both before and immediately after the war, with imports and exports a much smaller share of gross domestic product than they are now.” Krugman admits that there was an increase in trade for a few years in the late 1940s due to the effects of the Marshall Plan, which allowed ruined economies to buy more from the United States, but it’s impact “was temporary,” he says.

But Krugman’s response is unconvincing. Here is a simple thought experiment to illustrate why. Imagine if America had lost World War II and not emerged as the dominant power. Does anyone seriously believe that all of that wartime stimulus money would have resulted in anywhere near the post-war boom that the United States experienced? Krugman is underestimating the impact of being the world’s conqueror, and the financial, economic and psychological advantages that conveys.

Certainly, a large dose of fiscal stimulus right now would spur an increase in aggregate demand, but without a surging export sector, that would probably result in more government jobs (and perhaps more than a few “bridges to nowhere”) than private-sector jobs. There’s no guarantee it would boost private-sector growth, since America’s struggling export and manufacturing base still would face stiff competition from many upstart international rivals, with none of the advantages enjoyed by US exporters in the aftermath of World War II. The world today, and America’s position in it, are far, far different from what they were in 1945.

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In short, the world is decidedly multipolar now, and even if it was possible to pass a massive stimulus plan through the US Congress, there’s simply no guarantee that it would have an equivalent positive impact without the favorable conditions that existed after the Second World War.

Optimism – More Than Keynesian Stimulus – Got Us Out of the Depression

Economist Robert Higgs – who has studied the effect of World War II on the economy in great detail – argues that it was optimism, rather than stimulus spending, which got us out of the depression:

Which brings us to what may be the most important factor of all: the performance of the war economy, despite its command-and-control character, broke the back of the pessimistic expectations almost everybody had come to hold during the seemingly endless Depression. In the long decade of the 1930s, especially its latter half, many people had come to believe that the economic machine was irreparably broken. The frenetic activity of war production—never mind that it was just a lot of guns and ammunition—dispelled the hopelessness. People began to think: if we can produce all these planes, ships, and bombs, we can also turn out prodigious quantities of cars and refrigerators.

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To sum up, World War II got the economy out of the Great Depression, but not in the manner described by the orthodox story. The war itself did not get the economy out of the Depression. The economy produced neither a “carnival of consumption” nor an investment boom, however successfully it overwhelmed the nation’s enemies with bombs, shells, and bullets. But certain events of the war years—the buildup of financial wealth and especially the transformation of expectations—justify an interpretation that views the war as an event that recreated the possibility of genuine economic recovery. As the war ended, real prosperity returned.

America’s performance in World War 2 made the U.S. a superpower. The fact that we defeated the Nazis, Mussolini and imperial Japan made us proud.

But now we’ve been a superpower for more than half a century. Indeed, we’ve been the sole superpower for more than 20 years … since the fall of the Soviet Union.

There is no way that Americans can be proud that we’ve become a superpower for the first time. Indeed, Americans are now terrified of losing our superpower status to China and coalitions of nations.

So a war today cannot have the same effect of creating optimism that WWII did.*

We’ve Got Much More Debt Now Than at the Beginning of WWII

U.S. debt at the beginning of World War 2 was actually much lower than it is today on a debt-to-gdp basis … even after all of Roosevelt’s New Deal programs. Here is a chart taken from Office of Management and Budget data (via Talking Points Memo):

While people can debate how much debt the U.S. economy can handle, the fact is that there was a lot more breathing room before WWII than today.  Put another way, the stimulus of WWII had more of an effect, because it was acting on a lower debt load to start with.

If This Was Like WWII, It Would Have Worked By Now

I noted last year:

We’ve been in Iraq for years longer than WWII. We’ve been involved in 7 or 8 wars in the last decade. And yet we’re still in a depression. (And see this).

If [things were the same as in WWII], don’t you think things would have improved by now?

Indeed, the Iraq war alone could end up costing more than World War II. And given the other wars we’ve been involved in this decade, I believe that the total price tag for the so-called “War on Terror” will definitely support that of the “Greatest War”.

In fact, it is well known that the longer wars last, the worse they are for the economy.    The 11 years we’ve been fighting in Afghanistan are almost 3 times longer than the the 4 years we spent fighting  WWII.   And leaked reports say that we’re not very close to victory in Afghanistan.   Therefore, the entire “war on terror” (or whatever we’re calling it these days) is much worse for our economy than the much shorter engagement of WWII.

* In addition, most Americans think that the Iraq war was a mistake and the Afghan war is “not worth it” anymore, whereas virtually all Americans thought that WWII had to be fought and won.  As such, there is much less of a boost from pride and optimism about our future.