A few months ago, I took a class on Canadian military history at Université de Montréal with professors Michel Fortmann and Carl Bouchard which was then followed by a trip in France and Belgium to visit battlefields and cemeteries. It was a very insightful class, for me it was an expedition into a completely new field so I rarely commented unless I had read papers. We were also teamed with professors and students from University of Waterloo and at one point, I don't remember who exactly, someone from that group said that the Second World War had kickstarted the economy. I am always skeptical of that claim. For starters, I don't see why such a catastrophic event as a war would actually increase growth.
But the case of the United States lies apart from the rest of the World when it comes to the Second World War. First of all because the territory of the United States did not change as it did for some countries. Secondly, it was spared from destruction of physical capital at home which is not true for the United Kingdom, France and Germany. Thus, it is easier to look at the effect on the US economy of a gigantic rise in government spending during wartime because there are no effects of destruction.
At first sight, the idea that each dollar spent in defence industry actually got the economy growing seems to hold (using Angus Maddison's data). Taking real GDP per capita in 1913 and giving a 1.95% trend of growth and looking at the difference between observed figure and the expected 1.95% trend, we see that the Second World War is a gigantic increase.
But the case of the United States lies apart from the rest of the World when it comes to the Second World War. First of all because the territory of the United States did not change as it did for some countries. Secondly, it was spared from destruction of physical capital at home which is not true for the United Kingdom, France and Germany. Thus, it is easier to look at the effect on the US economy of a gigantic rise in government spending during wartime because there are no effects of destruction.
At first sight, the idea that each dollar spent in defence industry actually got the economy growing seems to hold (using Angus Maddison's data). Taking real GDP per capita in 1913 and giving a 1.95% trend of growth and looking at the difference between observed figure and the expected 1.95% trend, we see that the Second World War is a gigantic increase.
However, we ought to be skeptical. As Karl Popper said, science is not really about proving than it is about raising reasonnable doubt. First of all, when the War started it is reasonable to assume that most of the unemployed went into the armed forces which means that the labour force has been modified. Because of the definition of employement used by the Bureau of Labour Statistics (military are not calculated as employed), you don’t need a model to understand that reducing your pre-war labour force by 22% by dragging them under the flag leads a significant drop in unemployment.
Additionnaly, what defines economic activity during wartime? How do we consider some goods? Are they intermediate goods, are they final goods? It is reasonable to affirm that revisions to the official figures are needed. I did not find a revised figure of GDP, but I did find a revised figure of GNP compared with the official figure. Economist Simon Kuznets did such a revision during the 1960s to include a more realist inflation figure, recalculating for cost of munitions, industrial production and price distorsions from the government to attract ressources to ensure production. So we end up with the following figure for wartime economy. The blue line is the revised estimate by Kuznets while the red is the one from the Department of Commerce in 1990 (quoted in Higgs)
A gigantic difference in which we see that the economy did not perform as admirably as indicated. So what might have happened?
Robert Barro and John Redlick attempt to answer that by estimating the spending multiplier during the second world war. They ended up with a figure between 0.6 and 0.7. That means that while the defence component increased (the main source of increased spending), other components decline. In fact, during the war private investment fell considerably and using the Schwartz-Friedman price deflator, private consumption did not increase at all during the war. This is very telling especially since we can't configure very easily non-monetary "prices" like waiting in line to get that piece of bread that government ticket should get you.
So wartime prosperity is probably exagerated if not false. Sadly, I do not have any figures for revised GDP during the war, but I don't think they would tell a very different story than GNP does (international trade being somewhat minor in World War 2). The Great Depression actually seems to have continued until the end of Second World War rather than being ended by the war. That leaves more perplex, why would growth then return at the war's end after a very slow economic growth between 1933(time at which the economy hit the bottom of the barrell) and 1941 and then declining a little during the war?
Additionnaly, what defines economic activity during wartime? How do we consider some goods? Are they intermediate goods, are they final goods? It is reasonable to affirm that revisions to the official figures are needed. I did not find a revised figure of GDP, but I did find a revised figure of GNP compared with the official figure. Economist Simon Kuznets did such a revision during the 1960s to include a more realist inflation figure, recalculating for cost of munitions, industrial production and price distorsions from the government to attract ressources to ensure production. So we end up with the following figure for wartime economy. The blue line is the revised estimate by Kuznets while the red is the one from the Department of Commerce in 1990 (quoted in Higgs)
A gigantic difference in which we see that the economy did not perform as admirably as indicated. So what might have happened?
Robert Barro and John Redlick attempt to answer that by estimating the spending multiplier during the second world war. They ended up with a figure between 0.6 and 0.7. That means that while the defence component increased (the main source of increased spending), other components decline. In fact, during the war private investment fell considerably and using the Schwartz-Friedman price deflator, private consumption did not increase at all during the war. This is very telling especially since we can't configure very easily non-monetary "prices" like waiting in line to get that piece of bread that government ticket should get you.
So wartime prosperity is probably exagerated if not false. Sadly, I do not have any figures for revised GDP during the war, but I don't think they would tell a very different story than GNP does (international trade being somewhat minor in World War 2). The Great Depression actually seems to have continued until the end of Second World War rather than being ended by the war. That leaves more perplex, why would growth then return at the war's end after a very slow economic growth between 1933(time at which the economy hit the bottom of the barrell) and 1941 and then declining a little during the war?
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Angus Maddisson. 2009. Statistics on World Population, GDP and Per Capita GDP, 1-2006 AD
Robert Higgs. 1992. Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s. Journal of Economic History
Simon Kuznets. 1961. Capital in the American Economy: Its Formation and Financing : Annex A. National Bureau of Economic Research.
Robert Barro and John Redlick. 2009. Macroeconomic effects from government purchases and taxes. National Bureau of Economic Research.
