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Economically, World War II Was Stimulus on Steroids

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The next time someone argues that the New Deal failed, and only the Second World War ended the Depression, as 'proof' that government spending does not work, one can respond with the details of economic growth and unemployment reduction up to 1940, or one can ignore the claim and thank them for making your case for massive government spending in a deep, broad recession.

Right wing politicians are loathe to credit the New Deal with any success in hoisting the United States out of the Great Depression, but credit World War II for that achievement, believing that that somehow disproves Keynesian economic theory.

That claim, however, undermines their entire premise.

World War II was many things, and one hesitates to write about it as an economic phenomenon for fear of being misinterpreted as claiming that its economic value was of more importance than its profoundly human dimensions. That is not what this is intended to convey.

Rather, this is designed to make the "war economy" more concrete, so that, instead of claiming that the Depression finally being ended by World War II proves that government spending failed, it actually proves the opposite, and that massive spending, commensurate with the depth, breadth and scope of the Great Recession, will indeed work. The inadequately-sized stimulus saved a few million jobs, and has added another 2 million, but that rate is insufficient to make the economy hum, and put millions of people back to work.

Although one suspects that the right wing will take cheap shots at this article, because it undermines their entire philosophy, let me be explicit that this does not suggest in any way that war, or the preparation for wars, is required or justified for economic recovery. As indicated below, there are plenty of "public goods" that we need as a foundation for our economic future that we can spend that money on much more productively than war.

From the perspective of economic theory and practice, government spending during World War II demonstrated not that the New Deal -- programs such as Harry Hopkins's WPA that hired 4 million workers in 4 months, and built or repaired infrastructure that continues to serve as the foundation for our economy -- or government spending does not work, but rather how massive government spending at a time of severe economic downturn and dislocation can indeed get an economy humming again.

What were the macroeconomics of World War II? Government spent money on aircraft, ships, landing-craft, weapons, tanks, trucks, jeeps, food for millions of soldiers, supplies, and so forth. Indeed, while critical for winning the war, many of these expenditures did not have lasting economic value per se, as compared, for example, to the Grand Coulee dam built by the WPA, and still providing irrigation and electricity for tens of thousands of people.

Government spending not only skyrocketed to over 40% of GDP during the war, but it was accompanied by a command and control economy, with civilian agencies directing what was to be produced. Unemployment, as a percentage of the civilian labor force, declined from nearly 15% (down from a high of 25% as the Great Depression took root) to less than 2%. The economy absorbed not only the young who just came of working age after Pearl Harbor, but also those, such as 3.25 million women, who never previously entered the labor force.

Through government spending, the country invested in technological and scientific progress, and touched nearly every aspect of the war effort. In addition to major breakthroughs -- such as the Manhattan Project -- the country also innovated in plant layout, production organization, economies of scale and process engineering. (See David Kennedy, Freedom from Fear: The American People in Depression and War, 1929-1945, p. 648) as referenced here.

The economic lesson, then, of right wing claims that the New Deal accomplished nothing, and it took the Second World War to end the Great Depression, ought to be that truly massive spending by the government would put get this economy humming again as well.

Moreover, instead of spending it on machines of war, we could spend it on rebuilding our decaying infrastructure much of which dates from the Great Depression or the 1950s, and is wearing out. The neglect of the last 30 years, based upon a short-sighted desire to cut taxes on the wealthy, is catching up to us. Rebuilding roads, bridges, upgrading the electric grid, would not only provide jobs today, but create a strong foundation for our economic future.

Instead of spending the massive amount of money on war, we could spend it far more productively on developing home-grown new energy sources. For example, algae (the cells that make up "scum" that grows on ponds) have been engineered to produce oil. Since they use carbon dioxide to make the oil, when that oil is burned as gasoline the net increase in carbon dioxide is close to zero. It could put many people to work at high-paying jobs, including in rural areas, wean ourselves off of oil -- both foreign and domestic -- and power our cars and trucks.

We have a glut of housing today. We could employ those who normally construct new housing in retrofitting existing homes and buildings in every city, suburb and rural area of the country to make them more energy efficient. Every kilowatt saved is saved over-and-over-and-over, and is energy we do not have to produce. It would lower energy costs for homeowners and building owners. It would put people to work, and make the country energy efficient for the future.

We can build high-speed rail so that total journey times rival those of driving to airports, flying, and driving into cities. We can build good, attractive, cost-effective urban mass transit to reduce congestion on the roads, and pollution in the air.

We can increase our investments in basic research. For example, the largest and most dramatic reductions in the future costs of Medicare will come with scientific breakthroughs in the treatment of diabetes, Alzheimer's and Parksinson's diseases, all most likely to arise from human stem cell research. Enable people to live better lives and save tens of billions annually? What better bargain is there?

Will there be "waste, fraud and abuse"? Of course. Name the large organization that does not suffer from that. Senator Harry Truman (D-MO) became nationally famous investigating fraud in military procurements during World War II. Does that fraud mean that we should not have provisioned our troops? Or that we should not have fought Hitler, Mussolini and Tojo at all?

Those questions seem absurd, until one realizes that the same arguments about the inevitability of "waste, fraud and abuse" are exactly what are raised against massive civilian government spending and invoked as reasons not to do it.

Should we pay for all this with massive deficits, or by raising tax revenues? During World War II, the tax base was, for the first time, extended to nearly every worker, and those who made a million dollars or more were taxed at a rate of 94%. Today, we are being taxed less than at anytime since prior to the Second World War. So, yes, there is plenty of room to raise revenues by increasing enforcement, cutting loopholes, and raising rates on the wealthiest.

Of course, none of this will ever happen.

But, the next time someone tries to justify opposition to it on the basis that government spending in a profound and prolonged economic downturn doesn't work, remind him of his own argument that massive government spending during World War II worked very well. And, although "waste, fraud and abuse" will occur, it will be sternly punished, and ought not to be an excuse to deny millions of people productive employment, and our economy the foundation it needs for the future.