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Paul Krugman’s Economic Silliness

There’s some true silliness this week from The New York Times’ Paul Krugman, who, in his most recent column, 1938 in 2010, makes this rather bizarre point:

In short, welcome to 1938.

The story of 1937, of F.D.R.’s disastrous decision to heed those who said that it was time to slash the deficit, is well known. What’s less well known is the extent to which the public drew the wrong conclusions from the recession that followed: far from calling for a resumption of New Deal programs, voters lost faith in fiscal expansion.

Consider Gallup polling from March 1938. Asked whether government spending should be increased to fight the slump, 63 percent of those polled said no. Asked whether it would be better to increase spending or to cut business taxes, only 15 percent favored spending; 63 percent favored tax cuts. And the 1938 election was a disaster for the Democrats, who lost 70 seats in the House and seven in the Senate.

Then came the war

From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 — the equivalent of roughly $30 trillion today.

(…)

Guess what? Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity. Overall debt in the economy — public plus private — actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts. And after the war, thanks to the improved financial position of the private sector, the economy was able to thrive without continuing deficits.

Actually, I would think that the fact that the United States was the only major industrial economy in the world to have come out of the war without having most of it’s infrastructure bombed to kingdom come probably has a lot more to do with the fact we entered a massive economic boom after the war. This would seem to be especially true given the fact that most of the things we spent money on during the war were either used to blow other things up, or weren’t exactly items that could be put to a viable economic use outside of a military setting.

Krugman’s true failure here, of course, is that he ignores the lesson that Frederic Bastiat taught some 160 years ago when he set forth what has come to be known as the Broken Window Fallacy:

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—”It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs: this is that which is seen.

If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs: this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labour, is affected, whether windows are broken or not.

This isn’t the first time that Krguman has made an argument like this. Only three days after the September 11th attacks, he wrote this:

[T]he direct economic impact of the attacks will probably not be that bad. And there will, potentially, be two favorable effects.

First, the driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I’ve already indicated, the destruction isn’t big compared with the economy, but rebuilding will generate at least some increase in business spending.

World War II didn’t create economic growth, and neither did the September 11th attacks. If anything, the monetary value of what they destroyed, and the investment that was foregone because of the spending they created, far outweighed and “value” they brought to the economy. The fact that an economist like Krguman can’t understand that makes me glad he’s just writing a column for the Times and not in a position where he could do real damage.

Update: Victor Davis Hanson does an excellent job of refuting the hypothesis put forward by Krugman (and several of the commenters below) that World War II spending somehow created the post-war boom:

I’m not an economist, but as an historian, I consider this an abject misreading of the postwar period, at least through the early 1950s. The war years were characterized by frenetic hyperactivity: Americans worked long hours, women were brought into the work force, new towns and manufacturing centers sprang up, and people gave up necessities — all on the assurance that this furious pace and consumer scarcity would be short-lived.

As WWII ended and the clean-up began, there was an enormous amount of pent-up global demand for goods. Given the wreckage in Europe, Japan, and Russia and the underdevelopment of India, Asia, and South America, we were about the only ones with the industrial and commercial wherewithal to supply the world rebound — often receiving cheap oil, gas, minerals, and interest in exchange, which supplemented our own vast supplies of comparatively cheap and easily recoverable resources. Nor should we forget the psychological element: Americans, after winning two wars, were enormously confident about their newfound international stature and influence.

At home, four years of consumer deprivation during the war and the weak demography of the 1930s had combined to create huge demand, all while society was increasingly leaving the farm for good and becoming suburbanized. The result was that in the late 1940s and 1950s, the birth rate soared and consumers enthusiastically made first-time purchases of washers, dryers, fridges, cars, etc. Thus, the American economy grew by leaps and bounds.

As Hanson points out, the position we are in today is far different from what we faced either before, or after, World War II. We aren’t the only manufacturing economy in the world anymore, and we probably aren’t even the most efficient manufacturing economy at this point. To the extent that there is worldwide demand that to be satisfied, it is more likely to come from China, or South Korea, or India, or Brazil, than it is from the United States. Moreover, the debt we owe today isn’t owed to American banks and American bondholders, but to foreign banks many of which are controlled by foreign governments. That’s a horse of a different color.

Krugman’s central hypothesis, that we can spend our way out of this recession, has already been dis-proven. His argument that we need something on the scale of World War II era investment ignores the facts of history, and the reality that we just can’t afford to do that anymore.

Update (Steve Verdon): Doug is right on this one. While there was massive debt financed fiscal spending during WWII the spending was not what lead to the follow economic growth after WWII. The broken window fallacy is indeed correct, but there is another factor here: suppressed consumer demand. During WWII consumer spending was extremely suppressed to feed the war machine. For example, you couldn’t have people buying new tires when the rubber was needed for the war effort. You can see it in the update that quotes Victor Davis Hanson.

The idea that workers were paid good wages is nonsense too. Wages were capped by the government to help keep the debt down. This immediately should call into question the “debt is good” hypothesis Krugman has put forward. If rising debt levels was not only not a problem, but would lead to an economic boom why cap wages? Incidentally, it was this cap in wages that brought about one of our current problems regarding debt as well as health care. With wage caps employers had trouble competing for workers, so to get around the wage cap they competed on benefits packages, notably health care packages which were not subject to the cap and not subject to taxation.

The borrowing point that Tano raises in comments is also highly suspect. We borrowed mainly from ourselves–i.e. it was Americans buying war bonds that financed the war. Thus, his ancillary claim of rising standards of living is suspect. Added on top that many consumer goods simply were not available because resources were diverted to the war effort and it becomes even more suspect. Finally, in the later stages of the war obtaining the money to continue fighting the war was not an easy proposition. There was quite a bit of effort put into pushing war bonds on the public. The idea that there was this pile of money that we borrowed from with little or no trouble or cost is just not true.

And there was two other factors at work in 1937-1938 besides federal spending. Taxes were also raised and the money supply also contracted. These policies would also tend to have negative effects on economic growth. Adding on Roosevelt’s extremely anti-business rhetoric and it isn’t surprising that the economy went back into recession.

And this kind of viewpoint in the comments is simply staggering.

That WWII ended the depression was taught in my schools, and seconded by my dad. It seems an odd thing to hang a very conventional wisdom on Krugman, as his “bizarre point.”

This was not Doug’s original point. I don’t see where Doug claims that the Great Depression did not end due to WWII, although I think one can make that case considering that the economy was growing at a rapid pace from 1933 – 1937. Doug was questioning the claims of follow on growth due to investments made during WWII.

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About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway. Follow Doug on Twitter | Facebook

Comments

  1. Michael Harris says:

    I wouldn’t expect a person with a J.D. and poly sci degree to understand the nuance of macro-economics, but one can hope.  Instead, he uses the broken window fallacy to try and create a point because he can not rely on facts, figures and data.  What krugman says is true, WWII by EVERY account, took us out of the stagnant economy forced upon us by the Laissez-faire 20′s and Hoover.  Does that ring a resemblance to the Bush administration and their stance to business without regulations.  It is also no coincidence that the two worst crashes in the past 100 years were at the hands of these people.
    If you want to try to discredit a Noble Prize winning economist that knows more about the economy than you ever could, you might was to start by stating facts, figures and data instead of allegory.
    One more question, why is it that all of a sudden the deficit is horrid, but when the GOP was in charge, it was an after thought?  The last time a dem was in office, there was a $250+ Billion surplus, that was taken to a $1.4trillion deficit by the GOP.  Why on earth would ANY sane person want to put them in charge?

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  2. Francis says:

    “Actually, I would think that the fact that the United States was the only major industrial economy in the world to have come out of the war without having most of it’s infrastructure bombed to kingdom come probably has a lot more to do with the fact we entered a massive economic boom after the war.”
     
    Evidence, please.  If everyone else was so impoverished, how could they have been buying from us?  What were our primary exports in the late 40s?  What percentage of GDP was attributable to exports?  And why would anyone take the word of an attorney with a Poli Sci BA over a prize-winning economist?

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  3. ponce says:

    “World War II didn’t create economic growth and neither did the September 11th attacks.”
     
    Is this a joke?
     
    The U.S. economy has never grown faster than it did during WWII.
     
     
     
     

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  4. Brummagem Joe says:

    Actually Doug it’s you who is being rather silly. At no point does Krugman say that WW 2 was desirable in and of itself (although there is an argument it was but he’s not making it). He’s just pointing out what is boilerplate in most books on the subject I’ve ever read. Namely, that one of the consequences of WW 2 was that it brought the great depression to a conclusive close by the massive amount of govt spending it evoked. And au contraire it created massive economic growth in the US which emerged from the war as the world’s dominant economic power, a position it has retained ever since. By conflating what was purely an economic judgement related to the US economy with the wider issue of the war’s overall destructiveness you’re not exactly doing a service to your reputation as a political/economic analyst.        

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  5. Brummagem Joe says:

    “I wouldn’t expect a person with a J.D. and poly sci degree to understand the nuance of macro-economics, but one can hope.”

    Hardly a nuance and yes I would expect someone with a JD to be be able to follow Krugman’s analysis. I literally blinked when I read this. One hears odd stories about George Mason from time to time but one has always assumed they taught economic history properly. I’m going to assume Mr Mataconis has had too many beers by the pool.    

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  6. Tano says:

    Doug,
     
    You are not making any sense here. In WWII we borrowed massively and PUT PEOPLE TO WORK without taking any work away from others. Wealth was filtered down to the working classes which had been largely destitute for the previous decade. Their standard of living greatly increased, along with thier skills and work-experience. Companies that had been struggling for a decade found steady work, were able to expand, buy machinery that could later be put to other uses, built up workforces, etc.
     
    The passage from Krugman that you highlight is absolutely true. It isn’t even open to opinion, it is a simple fact.
     
    Its rather remarkable that you cannot understand how the Bastiat story is inapplicable. You have to try to think these things through a bit deeper than just the surface (broken windows,,,war blows things up). During WWII we did not divert money to warmaking that we would have spent elsewhere. Did you not absorb the main point that Krugman was making (its even the main point in the passage highlighted!)? We BORROWED money to make war – and thus injected a stimulus into the economy that would NOT have been approved were it not for the war. That is the whole point of the column – that even though the 1938 experiment of abandoning deficit spending in order to balance the budget failed – plunging us into a renewed recession, there was no political will to go back to spending, until the war came along.
     
    Krugman is also correct about 9/11. Although there was considerable dislocation in the airline industry in the very short term, the overall effect of the attacks was a spur to business – not just in the trivial way of spurring the building of a few new replacement skyscrapers, but if you consider the national security expenditures, including two wars – financed through borrowing, then the effect was very large.

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  7. john personna says:

    That WWII ended the depression was taught in my schools, and seconded by my dad.  It seems an odd thing to hang a very conventional wisdom on Krugman, as his “bizarre point.”
     
    Beyond that the “broken window fallacy” is greatly misunderstood and misapplied.  To start, to really have a “broken window” scenario, you’ve got to have someone breaking a perfectly fine window in their town, for the purpose of drumming up business.
     
    No American bombed Perl Harbor for the economic stimulus.

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  8. ratufa says:

    To see that Bastiat’s example may sometimes not be the whole story:

    Suppose the shopkeeper was keeping those 6 francs under his mattress, to help finance his retirement in a few decades, or he’s scared to spend it on anything because of economic insecurity, or the money’s deposited in a bank, but the bank isn’t lending much at the moment because the economy is in a slump. In cases like those, the broken window results in economic activity that wouldn’t have otherwise occurred in the near term.

    Now, in the longer term, when the shopkeeper faces retirement or wants to buy something, he doesn’t have those 6 francs. He may still be better off, since the earlier spending may have caused economic growth that wouldn’t have otherwise happened. Or, it may be the case that other events, such as a good part of the rest of the world’s infrastructure having been destroyed in a war, could have led to greatly improved economic conditions such that 6 francs may not be so dear.

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  9. john personna says:

    You are not making any sense here. In WWII we borrowed massively and PUT PEOPLE TO WORK without taking any work away from others. Wealth was filtered down to the working classes which had been largely destitute for the previous decade. Their standard of living greatly increased, along with thier skills and work-experience. Companies that had been struggling for a decade found steady work, were able to expand, buy machinery that could later be put to other uses, built up workforces, etc.

    WWII was a lot of everything.  It was national mobilization.  It was command and control.  It was rationing.  It was bond-buying  as sacrifice, and for patriotic, and not investment reasons.

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  10. john personna says:

    Shorter:  Why does James Woolsey drive a Prius?
     

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  11. john personna says:

    Doh!  Wrong window on the Woolsey/Prius thing.  Should be with the “General Petraeus: “Burn A Koran” Day A Threat To U.S. Troops” thread.

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  12. Rather than trying to address all of your arguments in turn, I’ve posted an update that responds to the substance of them, I suggest you take a look at it.

    However, I’ll just note that the fact that Krugman won a Nobel Prize, for work that has almost nothing to do with the issue addressed in his column, means little to me. If he’s wrong, he’s wrong. And, in this case, he’s wrong

     

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  13. Dave says:

    “However, I’ll just note that the fact that Krugman won a Nobel Prize, for work that has almost nothing to do with the issue addressed in his column, means little to me. If he’s wrong, he’s wrong. And, in this case, he’s wrong”

    Krugman’s hardly the only economist out there arguing that WWII spending sparked the post-war boom. It’s pretty much a consensus opinion (certainly not a “silly” or somehow outlandish position.” You can forgive your commenters for putting more stock in the economic analysis of a Nobel Prize-winner, no matter what his concentration, than a lawyer on a blog and a conservative historian who prefaced his argument with “I’m not an economist, but…” We’re not economists, so we’ll trust the economist.

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  14. Patrick T. McGuire says:

    Damn, did Hell just freeze over? You actually wrote something with which I agree!

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  15. Tano says:

    Well obviously its not the Nobel Prize per se, but the fact that he has spent his life studying and teaching economics, and is respected at the highest ranks of his profession might mean that his ideas should be taken a tad more seriously than being dismissed as silly. Especially by someone (now two) who is not an economist.
     
    Especially when the specific ideas relevant here, as others have noted, are not even his per se, but represent the overwhelming consensus of everyone who knows anything about 20th century economics. Including people with very different political ideologies. In fact, the conservative economists are even more prone than the liberals to argue about how the stimulative effects of WWII borrowing ended the Depression and brought our economy back into health. (they use this argument, of course, as a way of trashing the New Deal programs).
     

    As WWII ended and the clean-up began, there was an enormous amount of pent-up global demand for goods. Given the wreckage in Europe, Japan, and Russia and the underdevelopment of India, Asia, and South America, we were about the only ones with the industrial and commercial wherewithal to supply the world rebound

     
    This argument, which you add in your update, is actually a direct refutation of your own “broken windows” argument. Hanson is basically claiming that the postwar boom was a result of all the windows that were broken during the war and the fact that we were the only glaziers around.
     
    Don’t you realize that you have been arguing the exact opposite – that fixing broken windows does not make an economy stronger because it simply is a displacement of other activity that would have gone on otherwise?
     

    The result was that in the late 1940s and 1950s, the birth rate soared and consumers enthusiastically made first-time purchases of washers, dryers, fridges, cars, etc. Thus, the American economy grew by leaps and bounds.

     
    Because consumers had the WEALTH necessary to buy those goods after 4 years of full employment because of the war (and its deficit spending), and companies had the capital, infrastructure and workers needed to continue producing them – all of which was NOT the case for the decade before the war. And the difference was that there was four years of massive deficit-funded stimulation to allow that capital to form.

     
    Krugman’s central hypothesis, that we can spend our way out of this recession, has already been dis-proven.

     
    Huh? How has it been disproven? You are just pulling absurd statements out of your rear end here. Krugman actually accurately predicted the significant, but insufficient effect that a stimulus of the size that was passed would produce. He argued for a significantly larger stimulus, and gave good reasons for exactly why it should be the size that he advocated.
     
    If you want to talk about silly arguments, consider these two sentences of Hanson’s…
    The first one characterizes his criticism of Krugman:
     

    …the assumption being that, in the 1940s, the economy was jump-started by the war, got into high gear, and created the sort of revenues that make massive debt manageable.

    But what really happend was:

    The war years were characterized by frenetic hyperactivity: Americans worked long hours, women were brought into the work force, new towns and manufacturing centers sprang up, and people gave up necessities —

     
    In other words, the war years were exactly as Krugman says – an economy jump-started  into high gear, producing large amounts of broadly distributed wealth that was then spent, once the war was over to continue the economic expansion.
     
    I think you are going to actually do some thinking about this one if you hope to have any kind of a persuasive argument.

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  16. Dan says:

    Could Joyner maybe hire someone qualified to write about economics to write about economics?

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  17. ponce says:

    “Could Joyner maybe hire someone qualified to write about economics to write about economics?”
     
    Or at least some who who doesn’t quote that moron Victor Davis Hanson un-ironically.
     
    A few days ago Hanson wrote about the enormously fertile Central Valley of California and said the federal government had nothing to do with it…ignoring massive projects like the Hoover and Shasta dams.
     

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  18. Gerry W. says:

    We are going to have to spend the money from within our country. I am not saying Obama is doing everything right as he seems to be lost in what to do. But the republicans have no answer except the same o trickle down that did not trickle down. And the hope by economists that we will sell our goods to China and other countries.
    We have lost every stimulative aspect to move out of a recession. Housing has been overdone, tax cuts are overdone and less stimulative, low interest rates overdone and less stimulative. And we lost our jobs that went overseas. So the only thing we can do is to build from within to preserve the middle class and to rebuild our country. You got to get America working again. It is so unfortunate that we wasted eight years under Bush as he drove our country into the ground. It is very difficult to make up the wasted years, and the loss in money, and the loss in jobs. You are going to have to do something big, big enough to fight a depression. You have to do the following:

    1. Fix the antitrust laws that Reagan relaxed. Monopolies and consolidations destroyed jobs.
     
    2. Invest in your country: That is energy independence for security and jobs. Also a new air traffic control system that will save 12% on fuel. The savings to the airlines can go to build new aircraft. A high speed internet system. Perhaps high speed rail.
     
    3. Invest in your people: That is mandatory vocational training. We live in a globalized world and you can no longer rely on factories. We have to be an educated society.
     
    4. Invest in the future: Federal research grants to be given to universities and business to bring out new technologies. Today there are no new jobs to go to for those unemployed. You need new areas of growth. No playing games with embryonic stem cell research.
     
    5. Consider an “American job elimination tax” on companies that move out of the country. These companies do not pay middle class wages, healthcare, pensions, social security, or city and state taxes.
     
    6. Get away from failed ideology. We saw it for 8 years. Tax cuts was used as an ideology. It did not prevent recessions. And did not create prosperity. You still have to solve problems. Ideology does not solve problems.
     
    7. Supporting small business sounds nice and it is heard in Washington, but it does not work in my community as the big business left. That means you cannot have small business as people lost their jobs. Besides, small business will never pay what big business paid in wages.
     
    8. We are losing the middle class. We cannot compete with 2 billion cheap laborers in the world that want our jobs. There are not enough jobs to go around. Competition is good, but it can be harmful also. All we are doing in this country is build the same business environment so that we can knock the other guy out. A person loses his job and has no place to go to. And the reason is that we did not invest in our country, in our people, and in the future.
     
    9. Have commissions to cut government spending. It seems to be the only approach to doing this. Obviously, one side or the other will complain, but something has to be done now.
     
    10. Government appointed jobs and organizations need to be slimmed down. Every 50 to 60 years we need to go through this. There are too many secretaries, deputy-secretaries, under-secretaries, and under-under-secretaries. Information gets loss through the process and government becomes ineffective. The last time this was done was with the Hoover Commission in the late 40’s.
     
    11. Pour money into new drugs and preliminary medical science. Drugs are becoming less resistant to diseases. And potential super bugs are coming.
     
    12. Fix the infrastructure. It is the reflection of our country and to the rest of the world.
     
    13. And if we have not kept up with it, every school should have physical education. Also wash your hands when you come home to prevent viruses and less trips to the doctor. And as we see so often, stop throwing pop cans, etc. outside the car.
     
    14. We need to slow down urban sprawl. Inner cities are being abandoned. As people leave there is no money left to support the inner city. This maybe controversial to some, but at some point we will have to deal with the problem. Sprawl also takes away from farms and spreads cities out too far in a time when you have empty buildings. We cannot have cities in decay. And cities in decay cannot create jobs or small business
     
    15. And finally, I don’t think our elected political system works anymore. Every candidate is bought off and it takes huge amounts of money to run a campaign. I would suggest a management team or a turn around specialist to be a president for a couple of years. And there would be a board of directors who he answers to and for the middle class. The parties are riddled with failed ideologies. We can do better than what we have.

     

     

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  19. john personna says:

    You are being schooled today, aren’t you Doug?  ;-)
     
    I think you did get caught up a bit in the superficial with your response to Krugman.  I agree with Hanson that WWII was about more than spending.  Heck, I said that myself, above.
     
    But the reason I see this as superficial is that it latches on to one of the end-points of Krugman’s essay, and not the start.  The starting point is a credit-bust recession, a real-estate bubble recession.  That combination has been rare.  We are more experienced with simple business cycle recessions, or the Fed forcing a slowing with higher interest rates (as an inflation response).
     
    These aren’t the 30′s but they have more of a 30′s ring to them than a 70′s sound.  It is accepted economic wisdom that late-30′s tightening was ill-timed.  Just as it is accepted wisdom that WWII, with its spending and its throttling of consumer production set the stage for a post-war boom.
     
    Going off about the spending part of WWII doesn’t really address the starting point:  a credit recession that isn’t showing much recovery

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  20. john personna says:

    Shorter:  During the war everyone was being paid, and no one was making cars or building houses.  What did you think was going to happen when consumer production was suddenly allowed?  Heck yeah, Ford and “Levittown” were hiring.
     

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  21. Brummagem Joe says:

    “Update: Victor Davis Hanson does an excellent job of refuting the hypothesis put forward by Krugman (and several of the commenters below) that World War II spending somehow created the post-war boom:”

    1. Krugman was referring to the ending of the depression by deficit spending not what happened after the war. In fact right after the war there was a bit of slowdown in growth as war spending came to an end. If this the best Hanson (who apart from being a totally fanatical partisan admits he isn’t an economist) can do I think Krugman will have him for breakfast because he doesn’t actually address Krugman’s case at all.
    2. Then you change the subject from your preposterous claim that Krugman was suggesting the second world war was desirable in and of itself rather than advancing the narrow economic argument that deficit spending on the war ended the depression conclusively to talking about deficit spending today.

    3. And as for this:  
    “Krugman’s central hypothesis, that we can spend our way out of this recession, has already been dis-proven. His argument that we need something on the scale of World War II era investment ignores the facts of history, and the reality that we just can’t afford to do that anymore.”

    It’s poppycock. a)Even economists on the right argued that we needed to inject liquidity into the economy b) he didn’t say we needed to spend on the scale of WW 2 but provided it as an example of what happens when you inject a lot of govt spending into the economy c) the facts of history show that every major recession since the war has been brought to an end by govt pump priming d) then you end by a purely personal opinion that Krugman already disproved by demonstrating we couldn’t actually “afford” the second world war.

     

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  22. john personna says:

    The best question for Doug is: if you can’t take Krugman’s spending, explain how long it will take austerity to fix deleveraging, disinflation, and possibly a looming Japanese lost-decade scenario.
     

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  23. Brummagem Joe says:

    “Update: Victor Davis Hanson does an excellent job of refuting ”

    And btw Doug, and I regret having to say this because on the whole you appear reasonably grounded, but if you really think Hanson does an excellent job of refuting Krugman on his specific points then I hope you know more about the law than you do about economics. To my mind you’ve effectively disqualifeid yourself as a serious commentator on any economic issues.      

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  24. Bill Jempty says:

    The Star Trek version of the broken window fallacy aka  Ferengi rules of acquisition-
    34 Peace is good for business
    35 War is good for business

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  25. Rebecca Burlingame says:

    Doug, If you haven’t read it already, read the post 1938? by Stephen Williamson, New Monetarist Economics, it deals with the same Krugman post and I guarantee you will feel better.

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  26. Pete says:

    It is highly likely that many of the “experts” herein were taught economics by professors who idolize Krugman, and, who read economic history as published by Keynesian accolytes.

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  27. ponce says:

    Facts are stubborn things, Pete.
     
    U.S. GDP grew 18.5% in 1942.
     
    No amount of wingnut squid ink can change that.
     
     
     

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  28. alkali says:

    The confusion here is between stock and flow variables.  The overall level of wealth in the country is a stock; the level of wealth-generating activity is a flow.  A disaster, whether natural (Katrina) or man-made (9/11) can reduce the country’s level of wealth (the stock) but increase the country’s level of economic activity (the flow) by putting idle labor and capital to work.
    The Keynesian argument is that where there is a crisis in demand (e.g., because of a failure of confidence in the financial system, as we have recently experienced), the government can step in to provide demand by financing infrastructure projects, etc., and thereby raise the level of economic activity (the flow).  Obviously the government should do this in a fashion which increases or at least does not significantly impair the nation’s net wealth (the stock).  For example, the government could borrow at very low interest rates to catch up on deferred infrastructure maintenance.  It would be stupid for the government to go around blowing up things just so that they could be rebuilt.

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  29. G.A.Phillips says:
  30. Has anyone ever explored the possibility that the Great Depression ended when the Japanese distracted FDR from his messianic task of trying to end the Great Depression? 

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  31. André Kenji says:

    “Evidence, please.  If everyone else was so impoverished, how could they have been buying from us?”
    There was a big domestic market, the Europeans were spending plenty of money reconstructing themselves, there was zero competition from Africa, Asia and Latin America and besides that, US losses during the war were relatively minor, and the US itself suffered small damage. There was nothing to rebuild in the US.

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  32. Justin Bowen says:

    Just a short note on WW2 and the economy.
    First and foremost, price controls, quotas, and other government interferences during the depression/WW2 era make economic data for that time period about as reliable as economic data from the Soviet Union, China, or any other communist country.
    Second, what reliable data there is on the economy during WW2 shows that what growth there was came almost entirely from the government.  Private-sector investment and consumption during the war actually shrank and didn’t recover until 1946.  Had the war gone on indefinitely, there would have been absolutely nothing left of the economy for the government to draw on.
    Third, the myth of Hoover being a do-nothing president has been debunked so many times and for so long that I can’t believe that people are still repeating that tired old myth.  He was interfering in the economy in major ways even before the onset of the Great Depression and did so in even larger ways afterward.  That people here are accusing Mr. Mataconis of being economically-ignorant and then going on to argue that Hoover was some kind of do-nothing president is laughable at best.
    Fourth, the same can be said of the supposed laissez-faire nature of the ’20s and the ’00s.  The government and the Fed were interfering in the economy in major ways back then just as much as they were during every other decade – including and especially the ’90s and ’00s.  Heck, the economy during the ’20s had just came out of the same kind of situation that the economy was put into during WW2.

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  33. JKB says:

    Funny Paul Krugman doesn’t look like a hornets’ nest but take a whack at him and see what happens.
     
    Let us create some of the same conditions to ensure the boom after the deficit spending.  A deep pent-up demand caused by years of deprivation followed by rationing when money was available. Then after most of the productive capacity of the rest of the world is destroyed, we start selling, everything.  Of course, this time all those people who got rurally electrified during the thirties won’t be desperate to buy all those new-fangled electric appliances.  Good news for the lantern makers, I guess.  And of course, most who are going to leave the farm, have already left the farm so we don’t have all those farm-to-Army-to-factory needing new stuff to outfit their shotgun shack as they go to university.
     
    So let’s stimulate by blowing some stuff up.  Maybe China this time, then they can forgive our debt while we send them blankets.
     
    All WWII did was accelerate the economic shift from agriculture to manufacturing while charging the population to demand the output of that manufacturing.  Which was poised and ready when the normal workforce came back from their overseas efforts.  Since the eighties manufacturing in the US has been in decline, then we increased productivity of the white collar workforce with IT, now we’re poise for what as the economic driver?  Government?  There’s a flaw in that plan.

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  34. Gerry W. says:

    Justin Bowen,
    I am trying to find the right way to define “laissez-faire” as people perceive it different ways. Certainly Bush added to Medicare and he supported home ownership and he also had a no child left behind. But his basic concept and we see it today with republicans is just to give tax cuts and let the private sector alone. Well, I can tell you that each time Bush came to Ohio, he said “free trade is good” and we saw our jobs go to other countries. I mean, if we have problems, don’t you think they should be fixed?
    In short, Bush gave tax cuts and he said “stay the course” while we saw our jobs leave the country, our money going to Iraq, deficits and debt, and an infrastructure and country in neglect.
    The premise of the republican party is to just have tax cuts and do nothing else. And I can list a dozen things to do to fix our country and get people working again. But like I was told by some republican lady (a Sarah Palin grizzly bear) that *we do not have to invest in our country, that we need more tax cuts.” Well, we had the tax cuts, but what happened? Why a recession? Why lost jobs? Why do we not have prosperity?

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  35. Justin Bowen says:

    Since the eighties manufacturing in the US has been in decline

     
    This is yet another myth that needs to go away.  Just because fewer people work in manufacturing doesn’t mean that manufacturing is in decline in the US: http://www.federalreserve.gov/releases/g17/iphist/iphist_sa.txt; http://www.federalreserve.gov/releases/g17/ipdisk/ip_sa.txt.  Do I need to explain what you’re looking at?
    Most people recognize that having fewer people working in agriculture today than did around the turn of the last century and before isn’t a bad thing (many, if not most or all, of those same people can also press a few buttons on their keyboards and find data that shows that agricultural output has risen over the past century DESPITE there being fewer people employed in the agricultural sector).  And yet, it’s almost completely lost on many of those same people that the same principle applies to the manufacturing sector as well (and it never dawns on them that even though the same dire warnings of world-ending consequences were made when agricultural employment was on the decline, the world didn’t come to an end).  Manufacturing is not on the decline in the US; it’s stronger than ever.  Employment in the manufacturing sector in the US is on the decline, but I see no need for worry about that fact.

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  36. Gerry W. says:

    Ohhhh. Now you are cracking me up. Unemployment and underemployment is in the high teens. And we lost 8 million jobs, and the time on unemployment is at record levels. A lot of our deficits today in contributed to the high unemployment. In fact, until you create jobs, you cannot solve one problem in our country. Our jobs went to people working for a dollar an hour. And they do not pay taxes to our government. We have cities and states going broke with factories closed. People are not paying city, state, and federal taxes and social security taxes. You have 50 year olds (a lost generation) that may not adapt or are unemployable. Heck, we can’t get our country out of a slump. But never mind, we don’t have to worry about anything. And we know Bush didn’t either. It was laissez-faire and “stay the course.” Well, he ran the country into the ground as well as the war.
    Since it does not bother you that so many people lost jobs, just what jobs to you think we can have to replace the ones we gave to China and Mexico?

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  37. Tano says:

    Do I need to explain what you’re looking at?
     

    Yes. The first link is to a page of numbers, with no column headings, and no explanation of what the numbers refer to at all. The second link is a “page not found”.
     

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  38. the Q says:

    Wait a minute conservatives…it seems Mr. Hanson describes a dynamic economy “The result was that in the late 1940s and 1950s, the birth rate soared and consumers enthusiastically made first-time purchases of washers, dryers, fridges, cars, etc. Thus, the American economy grew by leaps and bounds.
    But how is this possible? Wasn’t this the dark ages of American capitalism when those unfortunate rich people were taxed at 90% and those dastardly liberal New Dealers were in charge?
    Why I thought St. Laffer taught all you good Reagan acolytes that what Hanson stated is IMPOSSIBLE, for surely those confiscatory rates sapped the incentive out of all those hard working capitalists in America until the good St. Ronnie freed the economy from the shackles of those dystopic liberals who had kept our economy on a par with Cuba because of all their backward tax the rich and expand the middle class Bolvshevism.
    So what is it revisionists?
    America was a vibrant, dynamic, booming economy even when taxing the wealthy at 90% or was it an economic basket case which needed to cut taxes to increase output.
    The answer is clear, the entire bulwark of conservative thinking since ’80 has been high taxes rates = communism.
    Obviously, as one of your own (Hanson) inadvertently admits to the booming economy of 50s, your whole failed ideology is outed.

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  39. sam says:

    Bill J’s citing of a couple of the Ferengi Rules of Acquisition prompted me to go and look them up. I defy anyone to show why shitcanning every department of economics in the United States and, instead, teaching the Rules of Acquisition in high school would not have a salutary influence on our economy. Oh, I know, some will say, “But the Rules are in some places criminal!”, to which I reply, “Yeah, so?” What the Rules do is make clear the meaning of the word ‘naked’ in the expression ‘naked capitalism’.  By following the Rules, we would at least be freed from the baggage of hypocrisy foisted upon us by the fictions of “the level playing field” and “fair play” and “honesty is the best policy”.  I mean, Jesus, the biggies on Wall Street follow the Rules, why can’t the rest of us, too?
    Here is the cite. Read them and see if you don’t agree with the foregoing.
    The Complete Ferengi Rules Of Acquisition
    http://projectsanctuary.com/the_complete_ferengi_rules_of_acquisition.htm
     
     

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  40. Brummagem Joe says:

    Krugman explains the paradoxes of leveraging. With simple pictures!

    http://krugman.blogs.nytimes.com/2010/09/03/paradoxes-of-deleveraging-and-releveraging/

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  41. Brummagem Joe says:

    Pete says:

    Monday, September 6, 2010 at 20:57

    ” It is highly likely that many of the “experts” herein were taught economics by professors”

    Probably because they teach most economic theorems in most reputable universities including Keynes’ in citadels of monetarism like Chicago. I was taugh about Hayek and Schumpeter by a dedicated Keynesian. Some people have weird ideas about education. There’s also the fact that Keynesianism has been the basis for economic management of every advanced economy in the world since WW2. For example, Hank Paulson arrived in Washington as a monetarist and left as a Keynesian. 

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  42. Brummagem Joe says:

    Justin Bowen says:
    Monday, September 6, 2010 at 23:58

    “This is yet another myth that needs to go away…….. Employment in the manufacturing sector in the US is on the decline, but I see no need for worry about that fact.

    Justin, it’s no myth. Manfacturing has been declining as a % of GDP for 50 years which is the true measure. And if you don’t worry about the decline in industrial employment I’d say your knowledge of the importance of manufacturing as a source of employment is on a par with your knowledge of myths.   

    http://www.allbusiness.com/manufacturing/computer-electronic-product-manufacturing/1182847-1.html

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  43. Brummagem Joe says:

    Justin Bowen says:
    Monday, September 6, 2010 at 23:58

    And just to pre-empt your obvious bounce back that despite a GDP decline actual manufacturing output has increased enormously because of productivity improvements. I know it has. However, as a proportion of world manufacturing output it’s shrunk by about a third. Back in 1980, as best I recall, we had about 33% of world manufacturing output but now we have only about 20%.     

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  44. JKB says:

    I wrote imprecisely.  I should have said manufacturing employment was in decline.  Tie that to the IT revolution that obsoleted a lot of office jobs and you have a growing workforce that will get -what?- well paying jobs after the stimulus to support the projected boom.  It certainly isn’t going to be “green” jobs.  If they exist they go off shore faster than a receding tide.  Maybe a few government coordinator jobs will remain.
     
    So after we spend all this stimulus, exactly what are we going to make with our hand, our minds, our enlightened spirits to get some cash to fuel the boom?  Construction is probably going to be at reduced employment for sometime due to the overbuild.  Finance will consolidate as there will be fewer suckers to reel into a NINJA loan.  What will we sell to the world, our good looks and white smile?  Our new ideas of socialist utopia?  Witty, insightful blog posts?  Although I hear not matter how valued added, people won’t pay much for that without a bit of soft core porn.
     
    What pent up demand, like the worldwide demand for consumer goods after WWII, can we rise to supply so that we’ll boom instead of bust?  Unless Krugman’s stimulus is staging America to meet that demand, it will be a waste and decidedly not the thing to do.

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  45. john personna says:

    Well JKB, your post at least engages with the world going forward.  Too many are caught in the WWIII parallel and can’t disengage to talk about now.
     
    For what it’s worth, I don’t think Krugman-scale stimulus is on the radar.  You don’t need to worry about that.  The political base for it is … essentially Krugman.  That’s it.  (We might worry that he’s right, or had been right when he called for bigger stimulus last year, but it’s a philosophical discussion.  No one was going to do a Krugman-sized stimulus then, no one will now).
     
    As I understand it, the Administration’s starting point for Stimulus II is much smaller and more practical.  It’s $50B for roads, rails (and ports?):
     
    http://www.boston.com/news/nation/washington/articles/2010/09/07/obama_proposes_50b_for_roads_rails/
     
    If you ask me, $50B isn’t a lot either way.  We’ll see if any Republicans rally themselves to actually oppose it … but stepping back we can certainly see that Obama isn’t with Team Krugman on this.
     

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  46. john personna says:

    Oh, did some of you want to fight Krugman because you thought in doing so you were painting “Democrats?”
     
    That might work, with those not paying attention, of course.

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  47. Steve Verdon says:

    Doug is right.  Not having our infrastructure and capital pretty much untouched by WWII while most of the rest of the developed world did not was a huge boon. Another factor for the economic boom was the pent up consumer demand.  Consumer spending/consumption during WWII was kept extremely low to finance the war.  When the war ended that demand was unleashed allowing for considerable economic growth.

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  48. taiko drum says:

    “Wages were capped by the government to help keep the debt down.”

    I have never heard this before, link please.  I have always been taught that wages were capped in an effort to control inflation.  Manpower was extremely limited during the war due to massive wartime enlistment/conscription so a wage freeze was instituted to prevent uncontrolled business bidding for the most qualified workers.

    “And there was two other factors at work in 1937-1938 besides federal spending. Taxes were also raised and the money supply also contracted. These policies would also tend to have negative effects on economic growth. Adding on Roosevelt’s extremely anti-business rhetoric and it isn’t surprising that the economy went back into recession.”

    I disagree.  Taxes were raised and money supply tightened due to the pressure  from the anti-deficit crowd–notably his Treasury Sec., Henry Morgenthau.  Govt spending was drastically cut back in 1937 and 1938 and the economy followed, after double digit GDP growth in the prior four years.  In 1936, FDR also ran on a platform of deficit reduction so I fail to see how that is synonymous with “anti-business rhetoric” in the context that I’m assuming you’re using it (govt deficit is bad for private sector and not in the crony capitalism sense)?  Please correct me if I’m wrong.

    “Consumer spending/consumption during WWII was kept extremely low to finance the war.  When the war ended that demand was unleashed allowing for considerable economic growth.”

    No argument here, but this statement is overly broad.  How much of that consumer spending following the war was a result of accumulated savings and/or skills learned from govt programs/stimulus before and during the war?  How much was a result of post-war US govt programs such as the Marshall Plan which was basically a US export plan?  Personally, I believe that Marshall Plan effects have probably been overstated, but there were undeniable beneficial effects for the US economy.  How about the GI Bill? Demographic changes definitely helped such as the the baby boom and, IIRC, the shift from bue collar to white collar jobs and the rural to urban/suburban migration.  Of course, the federal highway system contributed to easier access.  I also wonder what role unions played in the post-war boom as they were a much higher percentage of the workforce at this time and acquring better pay/benefits for their members.  No disrespect intended, but I believe that the post-war boom was a result of many inter-related factors too complicated to explain in two sentences, IMHO.

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  49. john personna says:

    Related:
     

    Somewhere between the rantings of the Republican right, which is peddling the nonsense that excessive government spending is to blame for high unemployment, and the Democratic left, which clings to the false hope that another helping of fiscal stimulus is all that is needed to get millions of Americans permanently back to work, is this stubborn reality:

     
    http://www.washingtonpost.com/wp-dyn/content/article/2010/09/07/AR2010090706644.html?hpid=topnews
     
    That’s been my feeling for a while now …

    The loss of 8 million jobs reflects problems that are largely structural, not cyclical, which means they won’t be brought back by fiddling with a magic dial in Washington that controls how much the government spends.

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  50. john personna says:

    not sure why that got garbled.  The two big paragraphs are from the article, the “that’s been my feeling” line is mine.

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  51. Steve Verdon says:

    Taiko,

    Yes, the “inflation” made the cost of the war rather larger than the politicians, public, and most everyone liked.

    I disagree.  Taxes were raised and money supply tightened due to the pressure  from the anti-deficit crowd–notably his Treasury Sec., Henry Morgenthau.

    So what, the point is that several things were going on at one time, not just one.  The motivation is irrelevant in that all of these things were contractionary.

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