Commenter Matt Steinglass takes me to task for this claim. I suppose it depends on what you mean by ending the Great Depression.
The Great Depression indisputably ended during World War II, which is when the output gap closed. But was it causal? Like everything else about the Great Depression, it's really hard to know.
Christina Romer convincingly argues that it was ultimately monetary expansion, driven by gold flows into the United States, that ended it--but later in the decade, before the turnaround, those gold flows were driven by fears about the war that indeed eventually came. Lend-Lease represented a substantial credit expansion.
There are other non-spending factors. Commodity prices spiked in 1939 due to the war, which was good for the resource-rich American continents. American labor started leaking abroad as foreign labor markets tightened. Undoubtedly a lot of firms who made things that warring Europeans needed saw a dramatic improvement in their optimism. Our figures for the period are rather primitive, so it's harder to measure things like business confidence than it would be now.
One thing that makes the question difficult to answer is that it's hard to know when to date the beginning of the recovery. Matt prefers 1940, but argues that net exports cannot justify this as a result of war spending. (By 1941, I think, you cannot reasonably read US history and conclude that America was not defacto ramping up production for a war) But there had been another nasty recession in 1938, and recovery after recessions is unusually fast. Economies are complicated things. Absent the war, would the economy have grown in 1939 and part of 1940, then sunk back into the doldrums? I don't think we know.
Here's the interesting thing, though: if you want government spending to be the solution to the problem of the Great Depression, you want Matt to be badly wrong, because the timing doesn't back up that belief. Most macroeconomists would say that stimulus comes from deficits--but the deficits during 1939 and 1940 were not high relative to earlier years, except 1938. The 1938 contraction in government spending may have produced the 1938 economic contraction--or, as conservatives would prefer it, stopped artificially inflating measured GDP. But the deficits in the late 1930s do not back up the "more is better" philosophy animating current stimulus debates; if anything, they rather suggest that "less is more". Nor were the government spending figures particularly high, if you were planning on arguing that outlays rather than deficits produce growth.
There is no simple narrative of the Great Depression that allows you to atttribute the ultimate recovery to trend output to the simple magic of the New Deal. That's why people like Paul Krugman focus on the high deficits and spending levels of World War II.
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Megan,
I posted this on the other thread but I will post it here again. Think about what we did in World War II. We prevented people from buying most consumer goods. This created a huge pent up demand for the first couple of years post war. Second, we put millions to work in the military and in the military industry. This gave people money but since we stopped making consumer products, didn't give them anywhere to spend it. Then, we made it everyone's patriotic duty to save via war bonds. So at the end of the war what do you have? You have millions of people who haven't been able to buy a consumer good for four years and have basically saved every dime they have made during that time. That is a recipe for a boom. That is what got us out of the depression, not Bretton Woods, not exports, not the New Deal. Now, how exactly we recreate those policies is a good question. More importantly, it seems the cure is about as bad as the disease was.
What about the theory that WWII caused people to accept a massive real wage cut (through taxation and rationing + soldiers' salaries), doing exactly what classical economists always regarded as necessary to end a recession (excessive unemployment)?
And what about the fact that after the war ended, there was another mini-Depression until -- wait for it -- the private sector took on all the extra workers?
I'm under the impression that quite a large chunk of the industrialized world's factories (and workforces) were blown to bits during WWII; and that the US was the main exception to that. And during the war, wouldn't most of the rest of the world's heavy industry have been producing things that were blown up shortly after being rolled out? This could be totally off-mark, but it seems to me that there wasn't much long-term investment that paid off (again, with the exception of the US). All of that productive effort was spent on surviving, rather than prospering.
The success of a private economy is measured by its ability to produce the goods and services desired by the population. WWII, during its interval, does not measure well on this scale. This is the problem with saying the onset of the war ended the depression.
Government can- by borrowing, printing, conscripting, and rationing- produce any level of employment and output it desires, but that is no guarantee of true wealth generation. The meagerness of the citizenry's consumption during the war years is the true measure of the economy's output. The depression ended after the war due to the fact that the private sector had finished clearing its debt problems, the worst aspects of Roosevelt's policies were allowed to lapse along with the additional price controls of the war, and the fact (pointed out by Rob Lyman last night) that uncertainty about future government intervention cleared considerably because the war had a discernible endpoint.
If one believes WWII ended the depression, then we can certainly raise the defense budget to 5 trillion dollars/year for the rest of Obama's 1st term, ration all other goods and services strictly, conscript 40 million men and women, and pay them to sit on army bases all over the country. Prosperity is just around the bend, and we don't even have to fight a world wide war.
"I'm under the impression that quite a large chunk of the industrialized world's factories (and workforces) were blown to bits during WWII; and that the US was the main exception to that. And during the war, wouldn't most of the rest of the world's heavy industry have been producing things that were blown up shortly after being rolled out? This could be totally off-mark, but it seems to me that there wasn't much long-term investment that paid off (again, with the exception of the US). All of that productive effort was spent on surviving, rather than prospering."
I used to think that to. But if that were really what drove the post war boom, the boom would have been an export driven boom. When you look at the numbers it really wasn't driven by exports. It was driven by domestic consumption. That consumption was very high for the reasons I give above. Silas Barta I think makes the same point I made just in terms of classical economics.
WWII did not end the depression in Europe.
My absurd point is only to highlight nature of the spending is more important than the size of spending. As far as the US economy it was just what the doctor ordered. It put our unused resources (labor and capital) to work elimininating the productive capacity in Europe.
After the war Europe had a shortage of both labor and manufacturing capacity, while the US had an abundance. Hence, we had no competition and had eager markets to buy our stuff.
If military spending was the key to recovery or economic stimulation, we wouldn't be in a recession right now. Take a look at the defense budget. It's not exactly bare bones.
Both of my grandmothers report that they wore scandalously short skirts during the war to (wink) "save fabric for the war effort."
So it seems they weren't particularly depressed, even during the war.
That said, I agree with Yancey; expending massive effort to make things that nobody wants to buy may well pump up GDP, but the statistic doesn't reflect the real state of the economy. To use the language of deliberate misinterpretation which has apparently become SOP around here, Rosie the Riveter was a welfare queen.
WWII was the last leg of the Depression; it ended for real when the boys came home and discovered the girls in their short skirts.
I fear, however, I must repeat my question from yesterday: why is the depression the right analogy, instead of the 1970's or 1981-82?
It's not a question of numbers and data it's a question of the underlying realities that the data are meant to represent. Yes, GDP went up. That's because we add G into the equation, even if that spending was on blowing things up. Yes, employment went up. That's because we had a draft, and a lot of other opportunities wasting all the money in G, mentioned above. But did rising GDP and employment actually represent an improvement in the lives of Americans? For some, undoubtedly. If you were out of work and the war helped you get a job, you were almost certainly better off. Otherwise, you were almost certainly worse off. Those who already had work saw their standard of living decline due to rationing. Those who were conscripted had their life expectancy dramatically reduced.
The numbers that told us there was a depression changed, but the pain that word represents persisted, albeit in altered composition. What truly ended the Depression was the END of the war, and the return to a largely peaceful, free, and private economy.
It would seem that during the war the govt ran a huge deficit, but households, given they had been saving because they didn't have much to buy except for govt debt, were in terrific financial shape at the end of the war. The private sector was pretty much deleveraged versus 1929, they'd saved their way out of their debts. What does Wile E. Krugman, Super Genius make of that?
Also, one thing about 1938 I think must be added. One of the things that the Supreme Court struck down that led to the whole Court packing episode, and then, in late 1937 I think, later wimped out on and gave to Roosevelt, was a minimum wage bill. The rate set in that bill would be something that in today's terms would be north of $20 an hour. Not that all the other stuff going on at the time didn't matter, but that all by itself would cause lots of unemployment.
I should also point out that, contra Yancey, M1911A1 pistols and M1 rifles are quite excellent consumer goods of enduring appeal to this day.
If one believes WWII ended the depression, then we can certainly raise the defense budget to 5 trillion dollars/year for the rest of Obama's 1st term, ration all other goods and services strictly, conscript 40 million men and women, and pay them to sit on army bases all over the country.
That's wrong and completely misses the point. The nature of defense spending and the sources that are used to fund it are completely different today than they were in the 1940's, so there is no comparison.
War spending programs during WWII were far more labor intensive, and were tied to rationing and a domestic bond sales program that could pay for them. Those conditions don't exist today, and no one is arguing in favor of recreating them now. You're arguing against a strawman of your own making, not the argument that is actually being made.
The ideologues tend to confuse two items: What ended the Depression vs. what may work today. The right may try, but it's difficult for them to logically dispute the point that massive government spending ultimately ended the Great Depression without altering the calendar or misapplying the lessons.
I don't see anybody claiming that what worked during the 1940's would necessarily work in 2009. We can learn from the period, but no one is trying to replicate it,. It's the basis for a case study, not a strict formula.
why is the depression the right analogy, instead of the 1970's or 1981-82?
Because the problems of today and the problems of the Depression had similar causes, namely highly leveraged asset bubbles that imploded after a period of being grossly overheated and that are causing a substantial deleveraging effect that negatively impacts all levels of the economy.
There certainly are similarities to both the problems of the 1970's, which were caused by a costly losing war that drained the US economy, and the early 80's, which were a hangover fueled by soaring energy prices. But the bursting of the 1920's asset bubble is probably most relevant to gaining an understanding of our present circumstances.
"I used to think that to. But if that were really what drove the post war boom, the boom would have been an export driven boom. When you look at the numbers it really wasn't driven by exports. It was driven by domestic consumption. That consumption was very high for the reasons I give above. Silas Barta I think makes the same point I made just in terms of classical economics."
One thing that I think might have been overlooked - wouldn't the particular situation (no industry elsewhere) have been the very thing that prevented export? Europe wasn't exactly drowning in cash. If I'm a company that makes manufactured goods in an American factory in 1946, wouldn't the only people able to afford my prices live in America?
M1911A1 pistols and M1 rifles are quite excellent consumer goods of enduring appeal to this day.
Sherman tanks, not so much.
No, RW, it doesn't miss the point. One of the points consistently made by stimulus advocates is that what the money is spent on is quite a bit less important than that it gets spent, and quickly- even wasting a lot of it doesn't matter that much. Read Jon Chait's essay from the other day if you don't believe me.
However, if you like, spend the $5 trillion/year on anything you think is appropriate for today. What would be your suggestions for getting us to prosperity, and we can discuss that instead.
"I don't see anybody claiming that what worked during the 1940's would necessarily work in 2009. We can learn from the period, but no one is trying to replicate it,. It's the basis for a case study, not a strict formula."
The better analogy than 1930s America is 1990s Japan. Japan did exactly what BO is doing right now in response to a very similiar problem; the bursting of a real estate bubble. In the 1990s, Japan propped up dead banks rather than letting them fail just like we are doing with TARP. They also spend and borrowed massive amounts of money for infrastructure and stimulus spending. In fact their spending really was infrastructure spending rather than liberal pork.
These efforts failed in every regard and left Japan with a decade of no or anemic growth. Leftist ideologues like yourself, need to explain why what didn't work a mere ten years ago in Japan will work now. What are the lessons we can learn from Japan's experience with a real estate bubble?
The BEA actually calculated the data and the various sectors contribution to growth.
According to the BEA in 1939 real GDP rose 8.1% and total exports contributed 0.25 percentage points of that growth. Defense spending was 0.16 percentage points.
In 1940 real GDP rose 8.8%. The contribution from total exports was 0.62 and from defense spending was 1.17.
In 1941 real GDP rose 17.1% and military spending accounted for 10.77 percentage points of that while exports contributed 0.12.
Military exports to Europe in 1939 and 1940 would have only been a fraction of total exports so it is fairly safe to conclude that military exports were not large enough to have a significant impact on the recovery from the 1937-38 recession.
Do you have any data to contradict this BEA analysis.
You also see that in 1939, 40 and 41 excluding military spending economic growth would still have been in the 7% -8% range or about the same as in the 1934-1936 period.
So when you actually look at the readily available data it is obvious that military spending nor military exports to Europe played a significant role in the 1938-1940 economic recovery.
Ok, when do you define the end of the depression.
One way to define it is when did the real economy
regain its 3.5% trend growth rate or in modern terms when did it eliminate the GDP GAP. Assuming that potential GDP growth was 3.5% from 1900 to 1950 the GDP GDP was eliminated in late 1941. Essentially, for all of WW II the US economy operated at more than potential -- or the GDP GAP was negative--that was a major reason why rationing was used to limit demand to what the economy could produce.
Based on this definition WW II had an extremely minor role in ending the depression. If you assume that without the War economic growth would have been around the 8% achieved in most of the 1930s than the War essentially caused the depression to end one year earlier than it otherwise would have.
Do you have any factual analysis to disagree with my points?
"I fear, however, I must repeat my question from yesterday: why is the depression the right analogy, instead of the 1970's or 1981-82?"
Perhaps because The Depression was a deflationary period, while the 1970s were inflationary, and the steep recession of the early 80s was a result of the Fed trying to wring that inflation out of the economy.
Maybe we'll get the worst of both worlds though: a deflationary recession followed by a brief recovery spurred by fiscal and monetary stimuli, followed by an inflationary recession, as the Fed jacks up rates to mop up all the liquidity it provided to deal with the threat of deflation.
Read Jon Chait's essay from the other day if you don't believe me.
Not that Mr. Chait is particularly representative of anyone but himself, but you clearly misinterpreted his essay. He's arguing that programs that move money quickly are better than those that don't. He isn't arguing in favor of pissing it away on useless projects, but is disputing the Republican definition of "wasteful," which is apparently defined as "stuff that Republicans dislike, irrespective of its usefulness."
Let's at least be honest about what is being said here. Arguing against strawmen may be self-affirming, but it leads to inaccuracies, as we can see from this example.
RW, thank you for the answer.
P.S. the first lend lease shipment was not till the middle of 1941 and it was essentially all used military equipment. Consequently, it had no significant impact on economic growth until the War started.
Japan propped up dead banks rather than letting them fail just like we are doing with TARP.
Once again, we have a strawman, supported by its cousin, the bogus black-and-white either/or construct.
There are more choices than the two extremes of zombie banks vs. complete failure. Ironically, every time that anyone around here talks about writing down asset values to market values, it is the conservatives who seem most offended, even though it is the failure to properly recognize asset values that leads to zombie banks in the first place.
We literally can't afford to have either massive bank failures or zombie banks; both cost too much money. Both are unacceptable options. I favor a variation of the "bad bank" model, which isn't particularly liberal or conservative, but comes from my understanding of balance sheets and how finance works. Those who can't separate finance from politics will get it wrong every time.
"We literally can't afford to have either massive bank failures or zombie banks; both cost too much money. Both are unacceptable options. I favor a variation of the "bad bank" model, which isn't particularly liberal or conservative, but comes from my understanding of balance sheets and how finance works. Those who can't separate finance from politics will get it wrong every time."
Oh do tell. I would be curious to hear your sollution. In the end, I don't see how you get out of the fact that the banks are broke. You can either prop them up or liquidate them. If you write down the value of the assets, you are putting them into bankruptcy under US Law. They wouldn't have a choice but to go into bankruptcy. I would agree with you that that was the proper sollution. In September, all of the banks should have ended up in bankruptcy and the assets written down and written off. If the credit markets froze up, then fine, take the money we did spend on TARP and start lending it out to the surviving banks at 0%. Let the current banks fail, protect depositors and let the surviving banks buy what ever is left over. It would be painful but doing otherwise seems to dely the inevitable.
Further, you still haven't explained why stimulus will work now when it failed so miserably in Japan.
RW,
Jeez, did you even bother to read Chait? I will make this easy for you- I will quote the very first paragraph in its entirety:
Here is a second piece of the essay:
You are the one that is misinterpreting Chait. He is actually attacking Obama for allowing the debate to "devolve" into one about the actual benefit of the projects themselves. Sure, he hits the Republicans on the head for the item they choose to highlight for PR purposes, but no one with a reading comprehension beyond the 4th grade level could possibly miss what Chait's advice to Obama would have been if he could have designed the bill himself.
It is always amusing to read assertions that it is logically indisputable that action x caused outcome y, based upon a sample size of exactly one.
It muct be observed again that empiricism is to many economic assertions as fiduciuary duty is to Bernie Madoff.
John,
What are the lessons we can learn from Japan's experience with a real estate bubble?
Well, one lesson I've read from pro-stimulus economists...if they address the matter of Japan at all...is they didn't spend enough.
Personally, I don't see how they draw that conclusion since they spent somewhere between $5 and $6 trillion in various spurts over a 10 year period.
He is actually attacking Obama for allowing the debate to "devolve" into one about the actual benefit of the projects themselves.
As noted, you read his piece selectively.
Again, Chait defines a useful stimulus based upon pace, rather than "wastefulness." You're strawmaning again, by applying the Republican benchmark as if it is the only benchmark.
You apparently missed the follow-on paragraph: "Republicans have simply carried on as if the stimulus were filled with pork anyway. In fact, the bill contains either zero pork or a vanishingly tiny amount, depending on how you define the term. But that didn't stop Rush Limbaugh from calling the bill "porkulus," showing, for a man of his girth, an unusual lack of self-consciousness about deploying porcine-themed insults."
Go back and read that again. Chait is arguing that the bill isn't particularly "wasteful" in the first place, which he believe renders the waste discussion irrelevant.
That is quite far from the position that you claim that he is making. He isn't defending wastefulness, per se, he's claiming that the program isn't wasteful to begin with and that focusing on a red herring raised by the GOP slows the recovery effort to bad effect. Again, I'd suggest that you avoid the dishonesty, and just quote your sources accurately.
Further, you still haven't explained why stimulus will work now when it failed so miserably in Japan.
Are you the same John on the other thread, whom I just got finished telling that I don't believe that a stimulus will be particularly effective? If so, is there some reason that you pose this question when you should already know that I don't believe what you are implying?
How did the Vietnam War, which ended for the U.S. in 1973, lead to the stagflation of the 1970s -- especially when the war was costlier for the U.S. during the 1960s, when there was a much larger U.S commitment? And why were soaring energy prices a problem in the early 80's, when energy prices had crashed by then?
You appear to have your causality confused.
How did the Vietnam War, which ended for the U.S. in 1973, lead to the stagflation of the 1970s -- especially when the war was costlier for the U.S. during the 1960s, when there was a much larger U.S commitment?
The Vietnam War fueled a budget deficit that, in an era when monetary policy as we know it today did not exist, contributed to the inflation. Nixon's wage and price controls didn't help, nor did the OPEC crisis, but the war was part of the problem.
And why were soaring energy prices a problem in the early 80's, when energy prices had crashed by then?
Oil prices peaked in 1980, but stayed above $25/bbl until 1986. Claiming that oil prices crashed during the early 1980's is factually incorrect.
"The Vietnam War fueled a budget deficit that, in an era when monetary policy as we know it today did not exist, contributed to the inflation."
Again, the U.S. spent a lot more on Vietnam in the 1960s, and those were boom years versus the 1970s. So how is Vietnam a factor in the malaise of the 1970s and not the boom of the 1960s?
Regarding oil, prices peaked in early 1980 and then began a steep decline. It's hard to see how, as oil prices were declining steeply, they could have been the proximate cause of the early 80s recession.
Describing the monetary policy we know today as not existing when Arthur Burns' was making the choices he did is a somewhat odd statement. Could you explain that a little? Is it your belief that many of Burns' contemporaries did not differ strongly with regard to the choices Burns' made, for reasons which turned out to be well-founded?
Take a look at the graphs in
http://rasmusen1.blogspot.com/2009/01/keynesian-stimulus-and-world-war-ii.html
Unemployment started falling in 1933. It fell till it blipped up again in 1938 and then fell again. Even without WW2, if it kept falling as it had been, it would have reached full employment around 1941.
So maybe policy after 1933 just wasn't important.
A critical reason why the deficits of the war years were stimulative is because the Federal Reserve pegged interest rates--it increased the money supply by whatever amount was necessary to keep them flat.
Re: I'm under the impression that quite a large chunk of the industrialized world's factories (and workforces) were blown to bits during WWII
That's mainly the case in a zone from the North Sea and English channel east across Germany (but south of the Baltic) into Poland and Russia. Oh, and Japan too. a few other areas had moderate damage (e.g., Italy); a few more had slight damage (e.g., Britain) and some others escaped with no damage (e.g, Sweden and Canada). The US was not the only nation with functioning industry.
Re: In the 1990s, Japan propped up dead banks rather than letting them fail just like we are doing with TARP.
In case you haven't noticed the FDIC has taken over, closed and sold the remains of a number if banks. Citibank and maybe Bank of America might qualify as potential zombies, but the rest if the banking sector is either in an FDIC-dug grave or is still alive, if a bit thin and haggard.
This was a good response; thanks. My response to Megan is here: http://mattsteinglass.wordpress.com/.
Spencer at 2:55 seems to have taken care of a lot of the discussion:
According to the BEA in 1939 real GDP rose 8.1% and total exports contributed 0.25 percentage points of that growth. Defense spending was 0.16 percentage points. In 1940 real GDP rose 8.8%. The contribution from total exports was 0.62 and from defense spending was 1.17. In 1941 real GDP rose 17.1% and military spending accounted for 10.77 percentage points of that while exports contributed 0.12.
...in 1939, 40 and 41 excluding military spending economic growth would still have been in the 7% -8% range or about the same as in the 1934-1936 period....when did it eliminate the GDP GAP. Assuming that potential GDP growth was 3.5% from 1900 to 1950 the GDP GDP was eliminated in late 1941. ...Based on this definition WW II had an extremely minor role in ending the depression.
I too am curious whether anyone has any data or clear arguments from economic historians which contradict this analysis.
How long did it take to build the industrial infrastructure to produce all that war materiel?
Aircraft production. You need aluminum. It takes hydroelectric projects, very large ones, to smelt it. Boats to carry the bauxite from Jamaica. Harbors and trains to transport it all. Presses and rollers and tool and die makers etc. This stuff takes years to get ready.
Guns and tanks and boats. You need steel. Iron mines, coal mines for coking coal. Smelters, rail stock, and the equipment and plants to finish the raw material into something useful. Again, years.
No wonder the economy started growing in 1940.
Derek
Another source of stimulus apart from US Government deficits in 1939, 1940 and 1941 that could be considered is British Government's general and defense purchases. Not exactly the return of free trade but a considerable boost with the USA becoming the Arsenal of Democracy.
I too am curious whether anyone has any data or clear arguments from economic historians which contradict this analysis.
Not a contradiction per se, but the GDP growth of that period did not result in a commensurate reduction in unemployment. It was WWII that created full employment.
It took a demand event as substantial as WWII in order to absorb the enormous industrial capacity fed by the 1920's equity bubble. US GDP bottomed out in 1933, but total GDP did not surpass 1929 levels until 1941. The growth rates of the era were strong relative to the bottom from which they had come, but the absolute amount of GDP was still low compared to what it had been prior to the crash.
I would surmise that because the 1920's equity bubble had created so much overcapacity that there was little need during the 1930's to add to it. That excess capacity was necessarily accompanied by a lack of investment, which led to continued low employment, which slowed the growth of consumption. Additional consumption during the 1930's was still below that of 1929 levels, so it was easily absorbed by preexisting capacity; accordingly, employment and investment did not need to be increased to fulfill increasing demand.
Consequently, the economic growth of that period didn't create enough jobs to eliminate excess unemployment. The government programs of the 1930's weren't substantial enough to absorb the excess industrial capacity, either, so investment stagnated along with everything else.
The government programs of the 1930's may have made things more bearable, but they weren't large enough to break the overcapacity logjam. The lead up to WWII was significant enough to change that.
The military spending of 1941 was the beginning of the end. WWII was such an enormous undertaking that it easily absorbed all of that capacity, and generated enough new demand that employment could be created. But that was a unique event. Wars are usually bad for economies; WWII was an exception, and then only for a few nations, such as the US.
dkite and Paul Rintoule, you are repeating assertions that have already been dealt with and dismissed. dkite, defense spending in the US was the same in 1940 as in 1936; it did not start to increase until 1941, and we already have the BEA's figure for how much defense spending fueled growth in 1941: 10% out of 17%. The other 7%, be it aluminum smelters, wool sweaters, or what have you, is not defense-related. Paul, defense exports to Britain show up either as exports or as defense expenses, and the BEA figures show they contributed almost nothing to growth in 1940 and '41.
RW, you are basically repeating, again, the same thing Megan said days ago, without answering the objections. Unemployment was very high in 1939, following the '37-8 recession: 19%. In 1940 it fell to 14%, without any help from defense spending. In 1941 it fell to 9%; about half of that decrease was enlistment and war-related government growth. So without WW2 you have unemployment falling from 19% to 12% as the economy grows at a 7-9% clip. Do you really think unemployment would have remained in permanent double digits as the economy grew at that speed? Why? If so, you are espousing a very big-government Keynesian view that only an expansive government, not private sector growth, can bump the economy up to full employment.
The disturbing thing about many of these comments is how far removed they are from what the Great Depression meant to the people who lived through it. The important element was NOT the gold standard, production of war goods, tariffs, deficit spending or any other of the numerous delights of the economists. It was HOPE. When people couldn't find work, when they lost their homes, when they found themselves in breadlines, when they had to depend on charity (if available), the hope that Roosevelt gave them was more important than the actual programs he initiated. The coming days, weeks, months, perhaps even years are going to make some of the same demands on the President, the Congress, and political leaders in general to do something. To do nothing, to be the Party of No is the worst possible thing those in power can do in what we now know is a serious economic crisis.
But FDR stopped spending at one point and tried instead to balance this budget to disastrous effect. That's a pretty simple direct causation story....
you are basically repeating, again, the same thing Megan said days ago, without answering the objections
I directly dealt with the question. The other poster focused on GDP growth; I pointed out that the GDP growth was not accompanied by the sort of unemployment rate that one might expect, given that level of growth. I explained that opining that this growth-with-unemployment paradox was possible because the growth of the 30's could be achieved without additional capacity.
That explanation addresses your issue directly, and fills the holes that you couldn't fill yourself. If you don't like the data, take it up with the BEA.
Do you really think unemployment would have remained in permanent double digits as the economy grew at that speed
You miss the point. The 20's fueled a massive amount of overcapacity. Even after a decade, that capacity had not yet been absorbed.
There were a variety of ways to absorb that capacity, but the relative stagnation of the post-1929 period clearly didn't absorb enough of it. Consumers couldn't do it, producers couldn't do it, and a peacetime government that was making an effort to address it couldn't do it. The problem was that large.
Judging by the factories built and the money spent to fight the war, WWII absorbed and created demand for substantially higher levels of capacity. We can easily see what the war did to create employment levels that exceeded full employment. Give credit to WWII for where it's due.
Of course, in the absence of war, that capacity most likely would have been absorbed at some point. But it is highly unlikely that there was any other type of event, program, or source of demand that would have demanded so much, so quickly.
If you can tell me what other market changes post 1940-41 could have likely developed that would have otherwise created demand **at the scale and pace** of the war, then I'd like to hear it. I would surmise that there was nothing else comparable, and that in the absence of the war that a recovery would have eventually occurred but that it would have taken years. When one considers the extreme measures that were needed to fight the war, you'd be hard pressed to dispute that.
Just found this posting and it's a breath of fresh air. More then just opinions masquerading as facts. Saying it's so just doesn't make it so, no matter how many times you repeat it. While this is still head and shoulders above what is seen in the drive by media or the right wing echo chamber, it still seems to have several hidden assumptions which cause it to fall short.
The first hidden assumption is that economics is a science like physics, it isn't and for several reasons. First and foremost it's psychology, it's how individuals and groups respond to things, without people there is no economics, while there was physics before people and probably will be long after we become extinct. Second there is no economics per say, only schools of thought with literally dozens of different opinions about how things work and why. It's more like the Blind Men and an Elephant then science. If economics was really as useful as some would claim then economist would be able to rule the markets. Instead there was Long-Term Capital Management.
The second hidden assumption is that only some form of market economics can get us out of this mess. WW II may or may not have been the engine that got us out of the depression but there is little doubt that from an economic perspective it was not any sort of market economy. WW II was not government intervention but rather government control of the economy.
What is one of the problems with the economy the way it is now? Henry Ford figured it out in 1914, when he gave his workers the unheard of wage of five dollars a day. He wanted the people building his cars to be able to buy his cars. We face the same problem today. Every job in this country except that of upper management is no longer able to buy the products they build. In fact they don't even build the products they sell, thanks to outsourcing. Simply put, you can't have mass production without a mass market, and you can't have a mass market without having good paying jobs. If the CEOs suck every last nickel out of the company for themselves then all too soon the economy will falter. Given the Rent seeking behavior of CEOs, there doesn't really seem to be much of a market based solution.
So what would a non market based solution be? Bankruptcy! The country should declare bankruptcy and restructure. There are approximately forty four trillion dollars in assets spread over slightly more then a hundred and twelve million households with the bottom two quintiles having almost no wealth whatsoever. The top one percent of the households controlling over a third of the wealth. With bankruptcy, the government could insure all assets up to ten million per household and give the lower forty some million people a hundred thousand dollars. This would get the economy moving again and it would be fair to all. The cost of a hundred thousand dollars to forty some million households is a mere four trillion dollars, about what they are probably going to spend anyway. Those in the lower two quintiles who saved would now be flush with cash, those who didn't would be able to pay down/off their debt and start borrowing again. Those who's houses were underwater would be able to take the money and pay down their mortgages to a level which would make them and the banks whole again. Everyone wins except for the wealthiest households who always claim not to need the government's help anyway. To give them a little something extra anyway the inheritance tax threshold could be raised to ten million dollars so that everyone gets something. This would be a reasonably fair approach which rewards those who save and does not reward those rent seekers who were the root cause of this anyway.
The government would nationalize the failing industry, just about all of them, restructure them and then take them public, much as Private Equity (PE) firms do with Leveraged By Outs (LBOs). People could trade their stocks and bonds to banks and convert them to savings (up to ten million dollars per household). When the companies were taken public again they could reinvest. This would allow for fair and reasonable rebooting of the economy without anyone suffering too much or being rewarded too much for bad behavior.