WW II CIVILIAN REAL GDP
Standard analysis is that military spending for WW II provided the significant Keynesian stimulus that ended the depression. I have nothing new to add to that debate, but I recently looked at the data and found it somewhat surprising.
The surprise was not in what happened to military spending as the military swung from 0.5 million personnel in 1940 to 11.4 million in 1944 and back to 1.6 million in 1947. The total population grew from 132.1 million in 1940 to 144.1 million in 1947.
Rather the surprise is what happened to civilian real GDP ( real GDP less real military spending). Real civilian GDP fell -18.4% in 1942 and -14.8% in 1943. The peak to trough drop of -26.9% was almost as severe as the -30.4% drop from 1929 to 1933. Of course this is tempered somewhat by a -0.5% and -2.4% drop in the civilian population in 1942 and 1943, respectively. No wonder they imposed rationing of many goods, they just were not available. But civilian real GDP rebounded 0.4%, 17.4% and 58.5% in 1944, 1945 and 1946, respectively.
Total real GDP fell -1.1% in 1945 and -11.0% in 1946. Obviously, this recession like the major recession of 1922 was driven by the drop in military spending. This rebound took the civilian economy back to the 5.6% trend growth line that prevailed from 1933 to 1950. I’m not going to make any observations about what this means for economic analysis– that can be done in the comments — but the data is very interesting. The ability of the civilian economy to rebound so strongly clearly reflected the high savings — partially forced — during the war.
Is that just the opposite of what we have now?
Spencer, are you sure we are not looking at the switch from civilian-based to war production? Certainly that would be the case in 42 and early 43. I haven’t looked at employment during those years, but if it does not have as significant drop as the GDP, then I would make that production change assumption.
Yes, but what I’m looking at is the goods and service available for the civilian population– the standard of living. One of the points is that employment and income grew sharply in line with total real gdp during this period. People had the income, but there was nothing to spend it on. Consequently, we had the high savings that fueled the rebound in the civilian real GDP as the military fell in 1946 & 47. So for much of the civilian population the post war recession was a non-event.
One of the difference is that new sources of labor — women — were pulled into the labor force during the war. But after the war when the the soldiers returned to the labor force the women quietly went home and had babies. We now have massive excess labor, but the excess labor is not quietly leaving the labor force.
The other point is that trend civilian real GDP growth did not seem to be much impacted by the war. So what does that mean for the analysis? Does it mean that Keynesian stimulus from WW II was not a big deal? I’m asking, not saying.
Whether it was a big deal depends on what one means by “big deal”. Keynesian stimulus in the WWII period was the war effort. Certainly, when the government spent money on the war, military output rose. Looking at civilian consumption misses the first round impact of the stimulus – spending on the war. If we are looking for a multiplier, we need to see GDP rise faster than the deficit – a different exercise than teasing apart military vs non-military spending. The questions you seem to be addressing have to do with the durability of capacity for producing civilian goods, the impact of savings, and such. When it comes to savings, we have households saving, government dis-saving during the way, then flipping after the war. The flip involves a shift of resources, which takes time, so you have a recession even while household consumption rises.
By the way, we’ve had recessions while household spending rises more recently. The prior recession showed up in real PCE as a slowing from around 4% growth to around 1.5% growth. The difference, as I understand it from your text, is that consumer spending accelerated, rather than slowing, as it did in 2001.
***Spencer, are you sure we are not looking at the switch from civilian-based to war production? Certainly that would be the case in 42 and early 43.*** CoRev
No, Spencer is most likely looking at the right thing. I can just barely remember World War II. Basically, there wasn’t much in the stores except food. Meat was rationed. Gasoline was rationed. New clothes were unavailable. When I was in Kindergarten in 1944, we walked to school without adult supervision including crossing a major four lane highway with no crossing guard. There was about one car every five minutes. If something broke or wore out, you fixed it or did without. Surprisingly, it wasn’t all that uncomfortable a life although the no gasoline thing was a surely a major pain for the adults. BTW, I was still wearing patched pants and socks to school in 1946. As was everybody else. It wasn’t that we or our neighbors were poor. Most were fairly well off and some were fairly wealthy. It was that new clothes were still scarce and there were a lot of worn out pants and socks and shirts to replace.
***The ability of the civilian economy to rebound so strongly clearly reflected the high savings — partially forced — during the war. Is that just the opposite of what we have now?***
Maybe. Problem is that it is very hard to distinguish between savings and paying down/forgiving debt. When some guy walks away from a house and the bank hides the default thru “transparent” bookkeeping that simply adds the missing payments to the outstanding loan balance, consumer debt has been reduced — which is the same as savings, I think. But that doesn’t show up in the data?
***The other point is that trend civilian real GDP growth did not seem to be much impacted by the war. So what does that mean for the analysis? Does it mean that Keynesian stimulus from WW II was not a big deal? I’m asking, not saying.***
At a guess, there were simply too many things going on to sort out. There was massive savings, massive consumption of goods that were destroyed either by their intended use or after the war. Massive built up demand. Construction of a good deal of material that was later put to civilian use (e.g. C157s, Aluminum plants, 2.5 ton trucks).
One huge difference from today. The US exited WWII with massive pent up demand for cars, major appliances, and cheaper stuff like clothing that wasn’t worn out — and with the savings to buy that stuff. Today we have a massive glut of housing, too many cars, and too much just about everything else … and no savings to buy the stuff with if anyone wanted it.
Codger said: “One huge difference from today. The US exited WWII with massive pent up demand for cars, major appliances, and cheaper stuff like clothing that wasn’t worn out…” What is also forgotten, is the deamd was world-wide, and we were the largest, nealy onliest, supplier for that demand. I find it not at all surprising that we recovered so quickly, as we shifted to fulfill our own and world demand.
That kind of demand also made us lax on quality. Why build better, it’s Just a personal observation on that last comment. all going to be bought anyway.
Unemployment plunged from 15% to under 5% during 41 and 42, starting with lend lease and defense build up. Savings, whether debt reduction or actual savings, represented a real transfer of borrowing capacity and wealth to workers and was the most significant feature of the recovery. The GI Bill, 44, diverted many veterans into education as well as providing for unemployment for them. The Marshall Plan, 47-51, provided the wherewithal for those countries to spend. All helped the transition. One of the biggest things was there was no doubt about what was needed since so much had been deferred or destroyed by the war. People didn’t sit on their thumbs thinking about what was needed or what to do next.
***That kind of demand also made us lax on quality.***
Maybe. My memory tells me that the US preference for cheap over good dates from around 1960. And personally, I’d blame it the slow take over of the means of distribution by lawyers, MBAs and mass advertisers who we have never held to reasonable standards of veractity/integrity. But I’m old and my memory is not so good so maybe it really was a case of Americans deciding en masse that things were going too well and we really needed to put some effort into screwing things up.
If we are looking to make comparisons, one think to keep in mind is the financialization of the economy since WWII. Yeah, there was borrowing back then, but credit was not a huge multiple of otuput then, as it is now. Say’s Law gets wobbly when you move away from barter, and I wonder if we haven’t magnified the disconnections in the economy by putting layer after layer of finance in between real activities.
If people didn’t “sit on their thumbs thinking about what was needed or what to do next” perhaps that was partly because credit troubles had not put as much grit into the economy.
Having something like 13% of your population in the military does tend to reduce the civilian unemployment rate.
What happened to US experts post WWII? The rest of the war-torn world needed stuff I suspect.
What happened to US exports post WWII? The rest of the war-torn world needed stuff I suspect.
I’ve been thinking of this, too, and came to the same conclusion.
It wasn’t the military spending, per se, that provided the push–most of that vast investment was almost worthless at the end of the war. But it was the high level of employment and forced savings. The war ended with the civilian population loaded with savings, little debt and a phenoenal pent-up demand for housing, cars, appliances, etc.
Krugman makes a mistake in bringing up WWII spending. If you had the governement spending without the restricted access to goods and forced savings, you aren’t going to get the big push when the spending ends.
We’ve done almost the opposite. We’ve spent trillions and just kicked the can down the road.
What if we tried to mimic the 1940s and spent the same level on the global warming emergency? Spend the money on renewable energy, state-of-the-art regional rail, making city centers more attractive to live in, etc. And likewise force savings. Then ran the thing until we had some pent-up demand and spending capacity.
We might get the same bang for our buck, plus we’d have something to show for the investment other than hundreds of C-47s, etc., lined up in the desert.
Spencer has made an excellent post.
We cannot mimic the 1940s. I do not see how we could destroy the industrial capacity of a large part of the world, especially central Europe, force roughly 10-13% of the US population into the military, and then deny everyone basic consumer goods. Oh and force them to save their money (I assume after they pay off their huge consumer debts).
Not going to happen. Well…
As for GW. Even skipping the discussion on if we can actually do anything about it and if its an emergency iin the first place. To quickly reduce carbon and gets us into clean energy would need a massive nuclear fission plant building spree. That would help the construction trades as would a massive Eisenhower highway type expansion of the US rail infastructure. I’d throw in a total end-to-end upgrade of our electrical distribution system to boot. Cleaning up inner cities should be relatively easy with aggressive use of Kelo type takings. I would add cleaning up the rest of the superfund type sites and restoring the Gulf wetlands into the mix also (we could all think of some good labor consuming environmental jobs).
Man-power supplied by a universal draft of all healthy males/females age 18-25 with no deferments for anything – even wheelchair bound types can do inventory at warehouses. Plus a draft of skilled personel as required (doctors, nuclear engineers etc)So that sucks up the manpower. Pay minimum wage just like the army did (really below minimum).
Force everyone to put 10% of their after tax income into GW bonds that can’t be redeemed for 5 years. There’s your forced savings.
Declare a jubilee on all debts. So that gets rid of all consumer debt. Gov. makes everyone whole by writing checks at 10 cents on the dollar.
Heck I have almost talked myself into making this doable!
So how do we lower the supply of goods and destroy the worlds industrial capacity?
And how do we handle the humongous US Gov debt (adding to the already huge debt?)?
Well I was on a roll for awhile…. 🙂
Islam will change
Good points. Destroying other countries’ industrial base could make the G20 meetings a little awkward.;-)
I was leaving the scinence of global warming aside. But say it turns out to false, we’d still have cheap power, a regional rail network and livable cities.
I never understood the logic of the debt jubilee. You reduce someone’s $150,000 mortgage, but then their 401k drops in value by $300,000. That’s not going to make them want to spend.
Bob, so what’s wrong with a G-1???? ;-))
Your comments about 1944 remind me of commentary about the novel, Lucky Jim, which many people have pointed out isn’t really a book about 1950’s UK but about 1940’s UK. My folks have similar comments about growing up in the Midwest during the War. However, growing up in the 70’s was pretty similar (patched pants, fixing stuff yourself, walking to school, etc.), even the gas shortages of the late-70’s. I know it wasn’t the same, but I think the same mindset existed. That seemed to change a decade later.
Aaaahhh! You are too smart not to understand an extremely simple fact! Following WWII, the entire developed world, other than the U.S. had their factories decimated, and the only production immediately available came from the U.S. That is how we became the “richest” country in the world, at least until about 1980.
There was no economic miracle. It was simply that we became the export leader for the entire planet, and only because the Atlantic and Pacific Oceans protected our industries from being destroyed. Nothing fancy there, just a lot of luck and a geographical advantage. Had the U.S. been attached to the European continent, we would have suffered damage to our industrial complex, and we would have been much poorer for generations to come.
Nowadays, multinationals control Congress, and outsourcing makes us poorer by the day. But no effort is made to stop this tidal wave, because you and I cannot afford to finance modern political campaigns. Tough luck American suckers!
No, don’t blame anybody else but ourselfs. This country suffers from blame disease, Always blaming someone else for the problems we face as a nation.
Last time I checked we still have a functional justice system, a representative government. Alas, our representatives suffer the same malaise too, blame. Either it’s Republican’s or Democrates fault.
I think America still is the best country in the world, just ask any immigrant who come and work hard and succeeded.
Why is punishment of success a “good thing?” the Democrate friends demonizes wealth and the Republicans friends demonizes social welfare.
What America needs is a proper kick in the pants. The world war II generation suffered stoically but their sacrifice alas saving for the nation lasted for 50 years. I think it’s time for our generation to do the same.
No pain No gain….
Whose pain, whose gain? The point of the meaness posts is that there is no common ground declared, as well as loyalties held. The nation-state is the only strong enough mechanism allowed so far for a notion of common good of citizens….blaming is a tactic and message, but what is the larger question?
And fear and hate tend to take the notion of the commons out of the equation overall.
For the person who has a same day line of credit of $500,000 the world and the opportunities are quite different than the $100,000 or $50,000 wage earner. And the great generation leaders had the wisdom to share the wealth more than this generation.
I think it is an awful lot like what we have now, except in reverse. The government imposed a labor shortage that raised wages while limiting spending. That meant huge savings. When the war ended there was serious pent up demand.
More recently, the government has imposed a labor glut by allowing unlimited immigration and fighting unionization while encouraging spending with low interest rates and an unregulated loan market. We are now facing a serious glut of goods.
I suppose the government could impose a command economy as it did in the 1940s and limit production and imports while hiring everyone in sight to work in the service sector at high wages. With the government providing most of the services and limits on available goods, the result would be a fair bit of savings. It even makes demographic sense if we hire lots of people to run retirement communities, hospices and other stuff to see the baby boomers through the end of their days, then let the new generation with its big savings build a new America.
Respectfully, are you expecting someone else to help you to succeed? Why do you think the wealthy nowdays contribute less to society? What about Bill Gates? Just think about how Microsoft transfomed the world in a very positive way.
There are two main types of personality. Type A whom belief they can control their destiny or Type B the world controls them.
I guess the country have transformed from Type A to Type B… Everyone expects the government to do something for them. If one truely believes in government to encompass our daily needs, then what’s the difference between Republicans or Democrates…. A very philosophlical question.