Did World War II Get Us Out of the Depression? Paul Krugman Thinks So. I Don’t.

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Paul Krugman is back spouting more nonsense than ever. It’s not on par with his most epic screw up; when in 2002 he recommended “Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.” (Yes, he’s still considered a respectable economist.) This time around he starts off well enough, basically saying we’re smack dab in 1937, about to face a double dip recession. I agree, but then everything goes awry as he gives his reason: because we “didn’t spend enough.”

“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… Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity.”

But guess what Paul, the economic boom didn’t begin until after the war ended… in other words, the economic boom began with the United States demobilized! Even under Krugman’s analysis, the boom sustained through a massive negative stimulus when the United States pulled back from a war economy. But the ‘war prosperity’ Krugman alludes to is a myth. During the war, GDP went up because the government set the price of everything and inflated the currency. And unemployment went down because several million men were drafted and sent overseas. On the home front, there was no such boom; price controls, rationing, shortages and restrictions were all the citizens of the United States saw between 1941 and 1945.

Indeed, Paul Krugman needs to read Robert Higgs on the subject of World War II. As Higgs points out:

“…from 1941 to 1943, real gross private domestic investment plunged by 64 percent; during the four years of the war, it never rose above 55 percent of its 1941 level [and] only in 1946 did it reach a new high.”

Keynesian economists were convinced the economy would fall back into depression after the war ended. As the famous American Keynesian Alvin Hansen said during World War II, “the government cannot just disband the Army, close down munitions factories, stop building ships, and remove all economic controls.” If they did that, we’d surely fall back into a depression. The “Great Depression of 1946″ obviously didn’t happen, (although the United States had some pretty wicked inflation in the late 1940′s, due to inflationary policies during the war). No, instead a return to normalcy was a return to prosperity, in fact, 1946 was the most productive year of the private sector in American history. But look at the drop in government spending after the war:

Government Spending as a Percentage of GDP

How does Krugman explain this? Furthermore, as I pointed out the first time I attempted to eviscerate this nonsense, even if World War II “helped” the United States, it’s simply an outlier. To quote myself:

“The United States went into a severe recession in 1920, just after World War I. Germany’s currency hyperinflated while the Austrian, Ottoman and Russian Empires simply collapsed. In the American Civil War, the South was reduced to rubble and the North suffered runaway inflation. After the Revolutionary War, the American currency hyperinflated (thus the saying “not worth a Continental”). Rome’s collapse was mostly due to corruption at home and military over extension abroad. Napoleon was so strapped for money after the early stages of the Napoleonic War, he had to sell the Louisiana territories to the United States for pennies on the dollar.  The Franco-Prussian War was almost immediately followed by a speculative housing bust, which created the panic of 1873 and a global depression. Spain was more or less left to the ash bin of history, after the Spanish Armada was destroyed (shouldn’t there have been an enormous economic stimulus to rebuild?). The combination of spending on the Vietnam War and the Great Society lead to the stagflation of the 1970′s. In addition, the United States suffered recessions immediately following the Korean War, Gulf War and Serbian War. The Soviet Union collapsed after a long war in Afghanistan. Honestly, have the many sub-Saharan wars in Africa stimulated their economies? Has this economic strategy worked for Middle Eastern countries bogged down in decades of conflict? And really, if war is so good for an economy, why is our own economy collapsing all around us, while we are engaged in outrageously expensive boondoggles in Iraq and Afghanistan?”

Wars are bad… for everything.

And Paul Krguman, or any Keynesian for that matter, also needs to explain why the Depression of 1920 ended so quickly with no government intervention. I can’t find any discussion of it whatsoever. If anyone can find his explanation for it (or the many other short recessions with no or limited government interference, say 1857 or 1987). If someone has a Keynesian explanation, please let me know of it.

But until then, we need to recognize that the United States is completely underwater, Greece has already gone down; Portugal, Spain, Ireland and Iceland could very well be on the way, and Krugman apparently wants us to join them.

But Paul, seriously, there is no one big enough to bail us out. Sooner or later this insanity needs to stop.

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