I’m sure most readers of this blog have already heard Paul Krugman’s infamous “space aliens” claim by now. For those who haven’t, allow me to recap. During a recent appearance on CNN’s GPS with Fareed Zakaria, Paul Krugman stated,
“If we discovered that space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months.”
Although Krugman’s statement made for a great laugh line for anyone with a basic understanding of economics, it didn’t evoke much reaction from Mr. Zakaria, who quite correctly recognized it as a 21st-century update of the old Keynesian notion that paying people to dig ditches and fill them back up again is as valid as any other economic activity. (Mr. Zakaria gave no indication that he understands how ludicrous such an idea really is, however). Indeed, the spending-for-spending’s-sake idea is one of the many fallacies that can be found throughout the entire body of Keynesianism - an economic theory that mistakes spending and consumption as the cause of, rather than an effect of, prosperity. Like most everything else from The General Theory, it’s nothing but a dressed-up version of the broken window fallacy.
Although most of the commentary in the blogosphere has been focused on Krugman’s claim that a massive deficit-fueled military buildup to combat a non-existent enemy from Nebulon 12 is exactly what the economy needs right now, I was more interested in the comment he made just prior to that.
“Think about World War II, right? That was actually negative social product spending, and yet it brought us out” [of the Great Depression].
I had to play back the video a couple of times, as I could barely hear the Nobel Prize-winning “economist” over the sound of all that breaking glass. To my mind, this was the more disturbing part of Krugman’s CNN debacle. After all, the spurious economic benefits of an imaginary alien invasion will be dismissed easily enough by Krugman’s mainstream intellectual opponents, but the idea that World War II ended the Great Depression seems to enjoy unshakable bi-partisan support. How many times have you heard conservatives correctly claim that New Deal spending failed to end the Great Depression, only to turn around and claim that WWII did? Basically they’re saying Keynesian government spending in the form of unemployment insurance and public works projects doesn’t work, but Keynesian government spending in the form of tanks, bullets, and bombs does.
At least Krugman has the good grace to be wrong consistently.
But regardless of whether a liberal or a conservative makes the claim, there are a number of conceptual problems with the idea that WWII ended the Depression (and for this I draw heavily from the work of Dr. Robert Higgs of The Independent Institute). I suspect this misunderstanding is so widespread simply because historians, most of whom lack a strong background in economics, rely on statistics from the period without understanding the key assumptions behind the numbers. Wartime statistics are especially problematic because all standard macro models assume the existence of functioning markets for the pricing of goods and services – markets that did not exist during WWII, when the US was operating under a command-and-control economy, not a market economy.
Adherents of the “WWII ended the Depression” theory typically point to the fact that GDP went up during the war and unemployment went down, and therefore the Depression ended because of the war (post hoc, ergo propter hoc). However, GDP includes government spending – a problematic notion in peacetime, made even worse in wartime. GDP is supposed to be a reflection of the nation’s economic output – output that is created to meet real consumer demand. During the war, government spending as a percentage of GDP (on munitions and other war materiel) increased dramatically, and those government purchases were treated exactly the same as private purchases of consumer goods. But there was no consumer demand for Sherman tanks and B17 bombers – these items did nothing to improve the well-being of the individuals who made up the economy. In addition, the prices paid by government for those goods were not based on market factors (nor could they be), so the dollars paid for them also skew the GDP numbers up.
The fact that unemployment decreased during the war is also completely meaningless in real economic terms. During the war the government pulled the equivalent of 22 percent of the prewar labor force into the armed forces. Not surprisingly, unemployment went down. When it comes to government statistics, a soldier is every bit as employed as a carpenter (another problematic feature of economic statistics). But that does not mean that the previously unemployed were suddenly better off once they had been drafted into the Army to get shot at for low pay in Europe, North Africa, and the Pacific theater.
Presumably this is what Paul Krugman meant by the term “negative social product spending,” and he evidently approves of it as a rational means of ending a depression. For the rest of us, however, “negative social product spending” just means blowing things up and killing a lot of people – and few psychologically healthy individuals would support that particular government policy as a legitimate means for reducing unemployment.
Another problem with relying too heavily on statistical extracts is that the numbers don’t reflect the privation suffered during the war as industry converted to munitions production at the expense of consumer goods. Rationing, black markets, wage and price controls, etc. all lowered the real standard of living for American citizens at home during the war.
It was not until after the end of the war – when government expenditures as a percent of GDP were dramatically slashed – that prosperity returned. This despite dire warnings from Keynesians at the time that such a reduction in government spending would send the economy back into recession. It didn’t happen. Instead, the reduction in government spending and the general (though by no means complete) relaxation of various New Deal and wartime government interventions in the marketplace freed up scarce resources for private-sector use, setting the stage for an economic recovery the likes of which has not been seen since.
I suppose one could defend the Krugmanite claim that America’s entry into World War II ended the Great Depression if one’s definition of recovery is merely the point at which government-generated statistics start to look better on paper. If, on the other hand, we define the end of a depression as the point at which individuals’ standards of living begin to improve in real terms, then only the end of WWII and the return to normal peacetime economic activity makes any sense.
War does not create prosperity, it destroys prosperity. World War II did not end the last depression, and despite Paul Krugman’s claims to the contrary, Star Wars won’t end this one.
Note: As regular readers have no doubt noticed, I’ve been posting less frequently lately due to time constraints. I’ve also dropped the domain site for the same reason. The www.abeginnersguidetofreedom.blogspot.com site is now the sole repository for my full-length posts. That being said, I am doing more on Twitter (@abeginnersguide) and Facebook (www.facebook.com/abeginnersguidetofreedom) these days, so check it out if you’re so inclined. Thanks!
