War and Stimulus
I had an argument about the (economic) stimulative effect of war the other night. As usual, I was not entirely happy with how I argued my point in real time (which is why I blog). Here is an attempt at an improved, brief answer:
One of the reasons that people often believe that war "improves" the economy is that they are looking at the wrong metrics. They look at unemployment and observe that it falls. They look at capacity utilization and observe that it rises. They look at GDP and see that it rises.
But these are the wrong metrics. What we care about is if people are better off: Can they buy the things they want? Are they wealthier?
These outcomes are hard to measure, so we use unemployment and GDP and capacity utilization as proxies for people's economic well-being. And in most times, these metrics are reasonably correlated with well-being. That is because in a free economy individuals and their choices guide the flow of resources, which are dedicated to improving what people consider to be their own well-being. More resources, more well-being.
But in war time, all this gets changed. Government intervenes with a very heavy hand to shift a vast amount of the resources from satisfying people's well-being to blowing other people up. Now, I need to take an aside on well-being in this context. Certainly it is possible that I am better off poor in a world with no Nazis than rich in one dominated by Nazis. But I am going to leave war aims out of the concept of well-being. This is appropriate, because when people argue that war stimulates the economy, they are talking purely about economic activity and benefits, and so will I.
What we find is that in war time, unemployment is down, but in part because young people have been drafted (a form of servitude) to fight and die. Are they better off so employed? Those who are left find themselves with jobs in factories with admittedly high capacity utilization, but building things that make no one better off (and many people worse off). GDP skyrockets as government goes deeply in debt to pay for bombs and rockets and tanks. This debt builds nothing for the future -- future generations are left with debt and no wealth to show for it, like taking out a mortgage to buy a house and then having the house burn down uninsured. This is no more economically useful than borrowing money and then burning it. In fact, burning it would have been better, economically, as each dollar we borrowed in WWII had a "multiplier" effect in that it destroyed another dollar of European or Asian civilian infrastructure.
Sure, during WWII, everyone in the US had a job, but with war-time restrictions and rationing, these employed people couldn't buy anything. Forget the metrics - in their daily lives Americans lived poorer, giving up driving and even basic staples. This was the same condition Soviet citizens found themselves facing in the 1970s -- they all had jobs, but they could not find anything to buy. Do we consider them to have been well off?
There is one way to prosper from war, but it is a terrible zero-sum game -- making money from other people's wars. The US prospered in 1915 and later 1941 as Britain and France sunk into bankruptcy and despair, sending us the last of their wealth in exchange for material that might help them hang on to their existence. Ditto in 1946, when having bombed Japanese and German infrastructure into the stone age. we provided many of the goods to help rebuild them. But is this really the way we want to prosper? And is this sort of vulture-like prosperity even possible with our inter-woven global supply chains? For example, I can't see a China-Japan war being particularly stimulative for anybody nowadays.
Bingo
Came sooner than otherwise...that is highly debatable.
You seem to argue that certain "technologies" require government because they are better at marshaling the resources and focusing their use to develop them. We need to understand what are the characteristics of the technologies that qualify here - please explain.
For your contention to hold, it would seem that the communist countries in the 1900s would be the best example of centralization of resources vs those of the primarily capitalist countries of the same period. Care to take a whack at explaining why we see such opposite results to what your contention would predict?
You missed the point of the article, Warren points out that a country would be no better off economically than if they borrowed the money and literally burned it, counter cyclical or not. That is future productive capacity that is wasted - the broken window fallacy.
Warren goes further to say that the scenarios that folks point to as "proof" is really a zero-sum, "last man standing" game. The US only came out of WWII with a "boom" because productive capacity almost every where else in the world was destroyed. The US was the only one with a critical mass of capacity available. In almost all other countries that were at the front lines, they ended up with massive poverty resulting from their destroyed capacity and resources.
The world ended up net negative economically. It is arguable that the US was also net negative over the course of the war given the resources destroyed or damaged (e.g. 1.1M military were killed or injured - Wiki). The US gained thereafter by the luck of not being at the front line for much of the war, not because the war spending was stimulative or somehow better directed at technologies (an "affirming the consequent" fallacy).
bigmaq1980: You seem to argue that certain "technologies" require government because they are better at marshaling the resources and focusing their use to develop them. We need to understand what are the characteristics of the technologies that qualify here - please explain.
We provided an example, nuclear power, which depended on the Manhattan Project, then the government's desire to maintain a nuclear infrastructure, so leading into nuclear generation of electricity. Another example is rocket technology and microelectronics.
bigmaq1980: For your contention to hold, it would seem that the communist countries in the 1900s would be the best example of centralization of resources vs those of the primarily capitalist countries of the same period.
Russia industrialized rather quickly, but markets are far better at allocating most resources, so Russian development stumbled as it matured.
bigmaq1980: That is future productive capacity that is wasted
Wealth. Future production can actually be higher if the stimulus puts idle resources to work.
bigmaq1980: - the broken window fallacy.
Remember, you're trading wealth for economic activity. There is no fallacy.
bigmaq1980: - The US only came out of WWII with a "boom" because productive capacity almost every where else in the world was destroyed.
And again, from 1929-WWII, the on-and-off stimulus tracked closely to on-and-off GDP growth.
1929-1932 Hoover idles, GDP collapses
1933-1936 New Deal, GDP expands rapidly
1937 Balancing the Budget, GDP contracts
1938-1940 New Deal Again, GDP expands
1941-1945 Great Stimulus of WWII, GDP explodes
bigmaq1980: In almost all other countries that were at the front lines, they ended up with massive poverty resulting from their destroyed capacity and resources.
Which is why the U.S. embarked on a massivie program of relief, which stimulated Europe, Japan and the U.S. Most analysist consider the program successful economically, and also crucial to creating conditions conducive to long term peace.
bigmaq1980: The world ended up net negative economically.
Of course it did. That doesn't change the point that a stimulus trades wealth for economic activity.
Real GDP, accounting for inflation, rose rapidly during the 1960s.
marque2: I wonder why all those scholars thought the depression didn't end until we started the war?
Because GDP fell so precipitously during the Hoover Administration, it didn't recover until much later, with consequently high unemployment.
Same old folly.
One can measure the GDP output rather nicely, but how was this all a benefit to the consumers under a system of higher taxes, and heavy rationing (as massive resources were diverted to war consumption)? What is the cost of the hardship on all these people?
Pointing to select "technologies" and arguing that this is good without putting the context around it is a false argument (affirming the consequent). What are the characteristics that allows one to pick what will be a "winner" technology? If they were developed "earlier", when would they have been developed otherwise, and how does that make it more beneficial over alternative use of wealth (future prosperity, productive capacity, etc)?
You even admit that the world ended up a net negative, so your premise is the "last man standing", where the US would still be around to benefit from these new "technologies" and rebuilding the "losers" through massive stimulus. Irrationally dangerous idea to operate from.
If the spending wealth for economic activity is such a good idea, why have a war? Why not fake a war where nobody gets killed and things (e.g. factories) don't get blown up for real? Surely that would be better.
Or, we could pick something non war like, such as colonize Mars in five years. How about a possible never ending one...cold fusion, cure for cancer, ending aging? The sky is the limit.
Bottom line: It is really a back door argument for Keynesian government spending, with government officials getting to pick economic "winners over losers" via some kind of "industrial policy" vs letting the markets allocate resources more efficiently (which you seem to admit is the case).
We are doing that right now in a massive way, and it is not working. Worse, the outlook of this approach appears to be perilously close to catastrophic.
War is something to be avoided. What got the US into WWII was an existential problem.
There is a need, in this world, to spend on defensive strength with the ability to go to war, but this is more an "insurance policy". This is similar in rationale to having a "State Department", as diplomacy is "cheaper" than war itself. This is a far cry from using war to justify Keynesian stimulative spending, or to state the other side of that same coin that war has provided a net benefit.
bigmaq1980: One can measure the GDP output rather nicely, but how was this all a benefit to the consumers under a system of higher taxes, and heavy rationing (as massive resources were diverted to war consumption)? What is the cost of the hardship on all these people?
Yes, all that. That wasn't the question though. The question is whether spending wealth can generate economic activity when there is excess capacity, and it is clear that it can.
bigmaq1980: Pointing to select "technologies" and arguing that this is good without putting the context around it is a false argument (affirming the consequent).
Try to focus. The question is whether technologies can be developed sooner by a concentrated national effort. It's clear that they can.
bigmaq1980: You even admit that the world ended up a net negative
Of course the war was bad for people. Tens of millions died. Entire countries were reduced to rubble.
bigmaq1980: If the spending wealth for economic activity is such a good idea, why have a war? Why not fake a war where nobody gets killed and things (e.g. factorys) don't get blown up for real? Surely that would be better.
You seem to be very confused on countercyclical policy. Stimulus makes sense when the economy has stalled at an equilibrium below capacity. When spending a stimulus, prudent investment makes sense.
Re-read it all. Sorry, not confused at all at the core issue...counter cyclical stimulus policy is Keynesian economic philosophy.
Fundamentally, it is a rationale for more government involvement in the economy. Keynesians assume an "objective", "all knowing/prudent", "benevolent" group of humans at the decision making core. Once we go down that path, we quickly find ourselves into an ever growing government, as the incentives to abuse that power are too great. As we have seen through many cycles, there has rarely been the call for pulling back on stimulus - always a reason can be had for more. One need only look at our record of deficits vs surpluses, at Federal, State and local levels.
It goes hand in hand with socialism...thus, I refer you to Warren's write-up refuting socialism - first link on Past Favorites.
You seem to forget the malaise of the late 60's and most of the 70's even leading the leftist President candidate to promise cuts in spending. Carter won on that but the Dems immediately turned on him and for the most part refused to play ball - except for a few things like airline deregulation.
It can take a few years for the insidious effects to take effect.
bigmaq1980: Keynesians assume an "objective", "all knowing/prudent", "benevolent" group of humans at the decision making core.
Obvious strawman. Keynesians assume no such thing.
bigmaq1980: thus, I refer you to Warren's write-up refuting socialism
Another strawman. Countercyclical policy is a market-based approach.
bigmaq1980: One need only look at our record of deficits vs surpluses, at Federal, State and local levels.
It was just a bit more than a decade ago that the U.S. was running a balanced budget with structural cash surpluses. A prudent course would have been to continue to pay down the debt. Instead, the U.S. chose a different path, one that left it vulnerable to financial crisis, one that enveloped the global economy.
marque2: You seem to forget the malaise of the late 60's and most of the 70's even leading the leftist President candidate to promise cuts in spending.
Facts are facts. Average real GDP growth during the 1960s was 4% per year, the highest in the post-WWII period. The 1970s also saw real GDP grow more than 3% per year on average.
Counter-cyclical policy is a theoretical construct that gets used by people who think they know "better" than others how everyone else's money ought to be used.
Its models all have as the underlying assumption that these people in the decision making role don't have a personal stake in the outcome, nor are influenced by special interests (disinterest/benevolence/objective), and have superior knowledge (near perfect information that the market itself does not possess, and the correct prescriptive action). If it were not so, then one would have to wonder how this notion would make any sense.
The problem is that these assumptions don't hold up to human reality. Worse, they give credibility to people who wish to expand government involvement and provide cover for people and interest groups that don't have the wider society's interests in mind.
You cannot selectively pick one point in time as proof against the history I speak of. It is easy to google this, my friend:
http://www.davemanuel.com/history-of-deficits-and-surpluses-in-the-united-states.php
Nice rhetorical trick to say it is not socialism, nor leads to socialism. The deficit spending history speaks to the reality of how this plays out. Since Keynes came up with his theory, government spending has grown from 10% of GDP to a whopping 40% of GDP today. Government may not own ALL the means to production, but it clearly claims a huge stake in it all.
Frankly, "from each according to his ability, to each according to his needs" would be a perfect theory, until we find out there needs to be someone who gets to decide the allocations. Then we find some who somehow become "more equal" than others, and we get surprised that the theory does not hold to reality whatsoever. In the meantime, there goes a century of lives vastly wasted to prove a theory.
Today, we have a government he!! bent on proving that Keynesian theory works, racking up $T deficits, creating mountainous debt loads (on top of unfunded liabilities). It is an economic catastrophe waiting to happen.
Minor correction: Canada, Australia, NZ, and others were also not impacted by the conflict on their own soil.
These Commonwealth countries lost substantial resources (soldiers + material), but also saw massive new investments in industry. For example, Canada ended WWII with the 3rd largest navy (behind US and Great Britain).
That said, I doubt anyone seriously wants a war for economic effects. You can have a war without any benefits, in industry or anything else. Think of the Iran-Iraqi wars. A less than zero-sum result.
When there are positive advances, I suspect they are from advances in knowledge, based on guided research. There is a new, artificial, marketplace, which works to reward projects that advance the cause. There is competition, within a country for research projects, and externally, when the research is applied in battle. The war serves as substitute for market competition.
There are many examples
- German WWI development of nitrogen fixing, to obtain fertilizer+explosives, after the UK blockage cut off supplies of natural nitrogen.
- radar, and ways to avoid it, developed very quickly. Any improvement gave an immediate result, and then counter-response. Radar sets were miniaturized, to fit into airplanes (night fighters).
-the US space program, an extension of ballistic missile research, as part of the Cold War, and as successor of the German V2 rocket program.
et cetera, et cetera
bigmaq1980: Counter-cyclical policy is a theoretical construct that gets used by people who think they know "better" than others how everyone else's money ought to be used.
Countercyclical policy is standard economics.
bigmaq1980: Since Keynes came up with his theory, government spending has grown from 10% of GDP to a whopping 40% of GDP today.
That's not because of countercyclical policy, but because people vote for the government to provide a wide variety of services, such as Social Security and Medicare. Indeed, every major successful economy has a public sector of from a third to a half of GDP.
Confession: I only skimmed the comments below. Sorry if I'm unoriginal.
Two points:
1) WWII inspired the female workforce. Once hubby got home, Rosie realized that working wasn't so bad, and she could keep that up. This assuredly increased future US productivity.
2) To the point where war reallocates bad government spending (entitlements) into good government spending (infrastructure), this can have future payoffs.
So this isn't to say that war is economically ideal, but that the cost of war might be at least partially offset by avoiding whatever poor policies would have happened.
Zachriel, you have some valid points, but also many of your comments illustrate the appalling misconceptions of economic history and understanding that are taught in schools. First on the 1930s: Hoover was not idle; the economy was recovery until government intervention sent us into the the Great Depression -- that intervention included large tax hikes and the Smoot-Hartly Act, accompanied by Monetary contraction. When FDR took over, the economy still contracted and unemployment rose in 1933. True, the economy expanded in 1934, but that is not cause for rejoicing -- even a dead cat bounces. And a 10% rebound following a 10% fall does not get you back to square one. The economoy contracted in 1938, not in 1937. There were reasons for that contraction, not connected to the drive for budget surplus, but Keynesians like to get confused on that. The economy started expanding nicely in 1940 -- 2 years before we got involved in WW2. The main reason for the expansion: following the 9/1/1939 Nazi invasion of Poland, it was a foregone conclusion in most of government that the U.S. would eventually be in WW2, and FDR told his cabinet that we cannot be fighting a war on business at the same time as fighting a war on the Nazis. So FDR called in business for ideas and implemented those ideas -- the result was a nice expansion. By the way, GDP is a terrible way to measure economic well-being during a war. Although idleness decreased, deprivation during WW2 was often more than during the Great Depression.
The balanced budget of the late 1990s came from the antithesis of Keynesian economics.
In his last six years, President Clinton presided over the most massive dose of Supply Side economics that this country has ever seen. Welfare reform, deregulation, and cuts in tax rates led to the budget surplus.
(By the way, tax cuts under Clinton overwhelmingly benefited the rich, not intentionally but as a natural consequence of who pays capital gains taxes. In contrast, Bush’s tax cuts were much more Keynesian in nature.)
The Financial Crisis was not a result of the federal budget – it was the result of activist federal policies on housing. Both parties were to blame; perhaps the best description is that these policies that led to devastating results were actively promoted by Democrats and accepted by Republicans.
Government often thinks it knows better than the markets, but we often find out how short sighted the government is.