Regardless of how thoroughly one massages the data, even using the most sophisticated tools known to man, no one has come convincingly close to establishing the widespread, if not virtually universal, view that U.S. participation in World War II was the factor that brought the Great Depression to a close. If this theory were true, it leaves us with a gloomy outlook: We virtually need wars to recover from severe economic downturns.
BUT THIS POSITION is very mischievous for another reason: It is used to support the view that greater stimulus spending – financed with deficits – is needed to generate economic growth in our current economic environment.
The nub of the theory is that World War II provided the massive stimulus that ended the Depression. After all, had not the United States struggled for more than a decade to find prosperity? And with the war’s end, were we not blasted into prosperity? And is it not obvious that the war caused, or at the least was the major factor behind, our marvelous revival?
If only the economic world were that simple.
Frequently cited as alleged evidence in support of this view is that, during the 1940s, U.S. per-capita real income reached its zenith in 1944. This argument can be quickly dispensed with by noting that the overwhelming consensus among economists is that this statistic is fatally flawed.
AS AN INDICATOR of the intensity of our war effort, the ratio of federal government expenditures to gross domestic product (GDP) reached a maximum of about 60 percent in the war years 1944-45. Because of the nation’s commitment to the war’s goals, its citizens had been living in a state of suffocating government controls for more than four years. They ranged from controls on prices and wages to the flat denial to consumers of a vast array of goods whose ingredients were required by the military.
Well-known too is that, at the end of the war, the huge pent-up demand for autos, trucks, homes, infrastructure and appliances was eager to be satisfied by entrepreneurs who had the incentives to undertake risky investments.
Advocates of the end-of-Depression theory argue that the war ended the Depression in the sense that pent-up consumer demand was linked to the war. True enough, but what was the source of the original demand that led to the accumulated pent-up demand? It was certainly not the war effort. These original demands arose from rock-bottom consumer wants and desires, with or without a war. In other words, if during World War II a homemaker decided she wanted a new refrigerator, what is the relevance of the war to this want suddenly appearing?
THE ADVOCATE’S view, if valid, leads to a tongue-in-cheek suggestion for ending recessions: Duplicate the essential economic conditions after World War II. One way is to forbid producers from producing and selling civilian goods to consumers (just as in World War II) until “pent-up demand” builds up (analogous to post-World War II). You say this is absurd. But these duplicate the consumer demand conditions that prevailed after World War II. However, these conditions are not adequate for achieving robust growth. In a free environment, incentives for undertaking risky investments also are necessary.
Of course, after the war, marked reductions in taxes and wartime controls allowed everyone to breathe the fresh air of personal freedom again. Beginning in 1946, the ratio of government expenditures to GDP drastically declined (from a war time peak of 60 percent to an average of 20 percent in the 1946-49 period). GDP then mounted an upward sweep that has been extended, on average, well into the 21st century.
But in the recovery period 1946-50, deficit spending also was drastically reduced, adding dramatically to the confidence of entrepreneurial risk-takers.
In a real sense, the end of World War II marked the absolute depth of the Depression. We had to move vast resources under conditions of contractual freedom from war production to peace activities. This was done without unleashing a program of massive deficit-stimulus spending. Indeed, throughout the 1946-50 period we were subjected to the steady drumbeat of the dire need for massive stimulus programs to avoid the worst of all possible depressions. These warnings stemmed from some of our most reputable economists.
IN THE ABSENCE of any postwar massive stimulus, what caused the revival? The answer was suggested above. Demand for goods was obviously present; what was lacking was a production-delivery system motivated by individual incentives to freely take investment risks. Conditions essential for sparking these incentives are, as always, low taxes to help ensure adequate rewards (and especially the absence of political authorities issuing constant threats to increase taxes on those most likely to undertake risky investments), and fewer government regulations, including the hasty relaxation of those suffocating wartime controls.
Millions of individual contracts for the sale of products and personal services were negotiated under conditions of freedom to contract. These actions helped unleash the animal spirits of innovation and the desire to satisfy human demands. Above all, the repeal of the Excess Profits Tax and the overall reduction in income taxes, coupled with the removal of government controls, allowed private incentives to really flourish – the lifeblood of a free-market competitive economy.
EVEN THOUGH our participation in the war did not end the Depression, we still bear the burden of the war’s debt. Its size pales in comparison, however, to the magnitude of the debt incurred by the miserable failure of current massive deficit-spending efforts to achieve a robust recovery from our existing doldrums.
(The writer is a professor emeritus of financial economics at the University of Georgia. He lives in Aiken, S.C.)