Follow up by Spencer to Kimel’s WWll takedown
lifted from comments by spencer on Mike Kimel’s post Very bad economic theory (historiography)
From Real Civilian GDP in July this year.
From 1933 to 1950 real civilian GDP grew at a 5.6% growth rate even though it fell -18.4% and -14.8% in
1943 and 1944 — a decline about the same as the drop in 1929-33.
The analysis that the economy boomed after WW II by Henderson is really bad analysis, largely because it omits so much information, some of which Mike has pointed out. But mainly it omits the information on “forced savings” during WW II that provided people the means to finance the post war increase in spending. To say the post war economy happened without government policy playing a significant role is just blatantly misleading and dishonest. Second, no one brought up the question of what happened to all the women who had been drawn into the labor force during WW II like by mother who was a Rosy the Riveter in the local aluminum plant in eastern Tennessee. Like most of her fellow female workers she silently went home and started having babies. In other words they dropped out of the labor force and this created openings for the returning servicemen. This movement in and out of the labor force of female wartime workers massively distorted the data but of course no is pointing this out in the analysis. That is why the labor force contracted in 1946. Note Henderson did not say anything about this.
Moreover, his analysis of Germany is just as blatantly misleading in that it says nothing about the Marshall Plan or the German currency reform. The German recovery did not really start until after the currency reform of 1948.
I have followed the deate somewhat.
My take is that the USA is very good at war demobilization, we have done it five or six times in our history. Like we all know what to do when the war is over, especially for the side that won.
The funny thing about the libertarian argument you see all the time when they argue that the US came out of deep post war recessions after WW I & WW II without government actions that they never point out that it was the government cutting back on war time spending that caused the recessions in the first place. After US wars the US does experience bad recessions because the economy can not shift seamlessly from producing tanks to producing refrigerators. I get so tired of the simple arguments they make on the basis of cherry picked data.
Around WW II the personal savings rate rose from about 5% in 1940 to some 25% in 1944 before falling back to nearly 5% after the war. Despite or because of the collapse in civilian GDP in WW II workers still earned their very high incomes during the war but they could not spend it because the factories were building military supplies not consumer durables. For example, there was not a single US auto built in 1943 and 1944.
Henderson’s “analysis” is so bad that I was sorry to see fine minds here wasting neurons on it. But just for laughs, perhaps I’ll presume Henderson is recommending drastic cuts in defense procurement and operations spending as a way to boost consumer spending and production.
How about the GI bill which affected some 16 million American veterans? I suppose that wasn’t a government policy either.
And how can you talk about the postwar German economy without mentioning the currency reform which made possible the removal of wartime price controls? Oops. Kinda let the cat out of the bag there–positive government action as a prerequisite to lifting economic controls…sorry!
What Henderson is giving us is simply the next round of New Deal denialism; and the reason we have to devote our neurons to debunking it is that otherwise it slips into the common wisdom as another erroneous factoid.
Lets look at all of the post war data on his Fig 2 graph, and compare it to the New Deal. I picked the numbers from the graph, as best I could, for the relevant years.
Values here, if anyone is interested.
http://jazzbumpa.blogspot.com/2010/11/private-real-gdp-growth-before-and.html
An average of the post WW years from 1946 through 1950 is 8.2%. The average of the New Deal Years from 1934 through 1941 is 6.4%. A difference, to be sure, but not enough to call one a miracle, while suggesting that the other was a flop. In fact, without the bad year of 1938, which occurred because FDR made the mistake of prematurely abandoning New Deal policies, and attempting to balance the budget, the rest of those years average to 8.4%. If we include 1945 in the post WW II set, it increases that average to 8.5%
On average, there is not enough difference here to even mention, let alone hang any economic theories on.
It’s nothing but cherry picking.
What a sham!
JzB
jzb,
Trouble is, debunking works for a fairly narrow slice of the public. This is one of the results of investigations into the “limits to ratioality” that have been underway for some time. Rebutting requires repeating, and the repetition tends to make the bad argument stick better.
I’m sure this was not understood when lying as a political way of life was first attempted, but I am also pretty sure that today’s practitioners revel in their new knowledge. I’m not all that up on any research into how to overcome this problem, but I’e guess what you want is your own, true narrative, rather than a rebuttal of the lie. Instead of starting with “Henderson is wrong because…”, we need something more along the lines of “Fiscal policy worked in ending the Great Depression – twice. It still works today.”
kharris –
Yeah. We’ve seen it play out right here. Mike would make a point, some commenter would say,” but what about this . . . ” Mike would chase that down, and then: “but what about that . . .” And at the end they’d say -“Well I still don’t believe it.”
You can never outrun the liars who just make stuff up.
It’s turned me into a truth squadder, irrespective of what the most effective strategy might be.
BTW, Henderson’s big fundamental flaw is the kind of misrepresentation of Keynesianism that is all-pervasive, and generally not challenged.
Here is his first paragraph.
We often hear that big cuts in government spending over a short time are a bad idea. The
case against big cuts, typically made by Keynesian economists, is twofold. First, large
cuts in government spending, with no offsetting tax cuts, would lead to a large drop in
aggregate demand for goods and services, thus causing a recession or even a depression.
Second, with a major shift in demand (fewer government goods and services and more
private ones), the economy will experience a wrenching readjustment, during which
people will be unemployed and the economy will slow.
That’s bull shit. Keynes only proposed government spending as an economic solution under certain circumstances: AD shortfall, zero interest bound, monetary policy not working (kind of like now.) To the pain caucus, all govt spending is Keynesian. That’s what Ron Paul said about the preceding decade.
I can’t find a direct link to that post anymore. Here is my take-down of it.
http://jazzbumpa.blogspot.com/2010/01/deep-stupid-14.html
Cheers!
JzB
In fact, there are two reasons one would expect a decline in output from a decline in government spending – neither of which needs Keynes. One is simple accounting, which is what Henderson mistakes for Keynes. Y=C+G…. If G falls, then Y falls, all else equal. The other has to do with the time required to move resources from one use to another. This applies even if there is an offsetting tax cut to balance the cut in government spending. Unless by some miracle, private sector actors put their tax cut right back into demand from the same goods and services (from the same firms) as were purchased by government, there will be a demand shock. In a strong economy, the demand shock won’t last, so won’t matter much. In a weak economy, it could matter a great deal.
The cost of adjustment to new policies is often ignored when those policies are proposed, but should not be. This is yet another reason that counter-cyclical policy is best designed into strong automatic stabilizers, rather than being left to policy makers or legislators. Smooth is better when times are hard, and policy change is lumpy.
Which is to say, Henderson really isn’t doing economics here. He isn’t even trying. He’s just making up bad stuff to say about Keynesian policy, because he knows that’s what his audience wants to hear and his masters want him to do.
Absolutely right, Dan. I put together a couple of charts a while back to get a feeling for how big that savings and ensuing spending was.
Answer: MASSIVE.
http://www.asymptosis.com/tyler-cowen-10-trillion-in-stimulus-would-have-no-effect.html