by Mike Kimel
Post WW2 Private Investment v. New Deal Private Investment
Cross posted at the Presimetrics blog.
I had a post the other day (which appeared at the Presimetrics blog and Angry Bear, and which was followed up by my fellow Angry Bear, Spencer, here) looking at a paper by David R. Henderson about the supposed post-World War 2 economic boom.
I noted that his view fit into a libertarian/conservative story line, but required not only assuming the GDP (or GNP) data from WW2 is wrong, but also that the data at least through the early ’50s is wrong too, despite the fact that the data fits other known facts pretty well. By contrast, Henderson’s story conflicts with known facts in a number of places.
However, there is one point – another libertarian/conservative myth which comes up in the paper that I’d like to focus on in this post. Henderson tells us:
Why did the economy do much better after the war than at the beginning? We can’t know for sure, but the most likely explanation is the change in administration from Roosevelt, who championed central government planning of the economy, to Truman, who was much less inclined to support government control.
Before the United States entered into World War II, the New Dealers—the faction of Franklin Roosevelt’s administration that was most hostile to economic freedom—had significant power. During the war, they were largely displaced by more pragmatic people who were not hostile to free markets (thus the quote from Henry Stimson at the beginning of this section).
Roosevelt’s death cleared the way for President Harry Truman. Although he was a New Dealer, Truman had no love for “the long-haired boys” who were associated with the most anti-market parts of the New Deal—people such as Ben Cohen, William O. Douglas, trust-buster Thurman Arnold, price controller Leon Henderson, and Felix Frankfurter. In 1945 and 1946, Truman got rid of a number of New Dealers, including two of the most prominent ones: former vice president Henry Wallace and Harold Ickes.28
Higgs points out that the polling data bear out the perception of a regime change under Truman. As a result of the change, writes Higgs, “Investors were then much more willing to hazard their private property than they had been before the war, as both survey data and financial market data confirm.”29
And invest they did. As table 2 shows, gross private domestic investment in real 1964 dollars was $44.4 billion in 1941. For all the war years it was half or less of that 1941 level. In 1946, it shot up to $51.7 billion, grew slightly to $51.8 billion in 1947, and then grew to $60.6 billion in 1948.
So essentially, Henderson’s belief is that there was a boom after WW2 and that it was caused because greater economic freedom encouraged more private investment. We’ve already dealt with the supposed boom, but what about private investment? Was private investment really booming in the post-WW2 era relative to the pre-WW2 era? Simply put, no, as is evident from the following graph, constructed using data from NIPA table 1.1.6:
From the graph, its pretty obvious that the New Deal easily beat Henderson’s post-WW2 boom when it comes to encouraging private investment. The explanation for why is obvious to anyone who has not bought into libertarian or conservative beliefs about how the economy works.