Below is a quote from Paul Krugman’s blog yesterday:
“All around, right now, there are people declaring that our best days are behind us, that the economy has suffered a general loss of dynamism, that it’s unrealistic to expect a quick return to anything like full employment. There were people saying the same thing in the 1930s! Then came the approach of World War II, which finally induced an adequate-sized fiscal stimulus — and suddenly there were enough jobs, and all those unneeded and useless workers turned out to be quite productive, thank you.”
While perhaps a majority of people believe that World War II ended the Great Depression, that simply is not fact. Indeed, it is one of the most pervasive economic fallacies. Yes, certain economic indicators seem to point to the war period as the end of the Depression. But such indicators are deceiving, and the end of the Great Depression was simply not as simple as Krugman suggests. Bob Higgs of the Independent Institute explains this best in a paper I strongly recommend:
“During the war years the economy operated essentially as a command system, and as a result the normal measures of macroeconomic performance (e.g., gross domestic product, the price level, and the rate of unemployment) were either conceptually or statistically incomparable with corresponding measures before and after the period subject to the wartime distortions…
“Because the actual wartime prices could not even have approximated the prices of an economy in full competitive equilibrium, they cannot serve as appropriate weights for the construction of a meaningful national product aggregate. Unemployment virtually disappeared as conscription, directly and indirectly, pulled more than 12 million potential workers into the armed forces and millions of others into draft-exempt employments, but under the prevailing conditions the disappearance of unemployment can hardly be interpreted as a valid index of economic prosperity…
“During the war, private investment fell to much lower levels, and the federal government itself became the chief investor, directing investment into building up the nation’s capacity to produce munitions. After the war ended, private investment, for the first time since the 1920s, rose to and remained at levels sufficient to create a prosperous and normally growing economy.”
Today’s “Video of the Day” is also helpful in explaining the basic fallacy of believing war and other major disasters to be economically beneficial.
Another note: why does Krugman resort to citing World War II as the end of the Depression? Was 8 years of New Deal stimulus — during which government grew and spent more than at any other time in American history — not enough? Krugman explains this by citing the lack of fiscal stimulus during the New Deal, though FDR did provide the “armies of government workers” and “big public works projects” that Krugman says would be the fix for today’s economic recession.