Before I get to the focus of my post, I wanted to make some comments about the Occupy Wall Street phenomenon. While I understand and accept the frustration as it relates to wealth inequality in this country, and that Wall Street has become the target for built-up ire, I have to say that the movement has started to come across more and more like a bunch of misguided simpletons. I say that because it feels like it is getting co-opted by people with bad ideas. To wit, I've seen Michael Moore at the site in Lower Manhattan and on TV talking about how capitalism has failed -- and that idea has definitely gained traction in the message of the protesters. But, let's think about it for a minute -- capitalism is normally a system where winners and losers get their just rewards. At the point in time when the big banks got bailed out, it was no longer capitalism nor the free markets at play. What we witnessed was crony capitalism, which is a totally different animal. And the suggestion that deregulation is to blame also seems overstated. The financial services industry is chock full of rules and regulations -- that they were sometimes misguided and unenforced is again a black eye for crony capitalism, not the free markets. So, with that out of the way...
I just finished reading Depression, War, and Cold War by Robert Higgs. I was actually pretty excited about it because Mssr. Higgs is a very well regarded Austrian economist and historian, who occasionally draws praise even from his ideological opponents. In any event, the part that had me interested was that (by reputation) the book successfully challenged the standard narrative that World War II brought the country out of the Great Depression. In truth, I had perhaps set my expectations too high -- not because I came away thinking that the traditional orthodoxy is correct, but because there was no silver bullet argument in the book that altered my own level of conviction about the correct interpretation. Perhaps, what I should have recognized is that neither side has an incontestable version of the impact of the war. Nevertheless, I did come away from the book with important questions that leave doubt about what is often thrown out as fact. Some examples:
-While unemployment dropped to 1.2% during the war, in large measure it was the result of 10 million men who were conscripted, and another 6 million men who volunteered only to avoid the draft and likely assignment to infantry.
-While GDP spiked up during the war period, private investment represented only 3 to 6 percent in any given year. It was not until after the war was actually over that we see private investment back to levels that matched those in 1929.
-Even before the war, the New Deal was unable to bring about any self-sustaining recovery, in large part because the policies implemented did not engender the private investment that's needed to create jobs. Again, it was not until after the end of the war that we see GPI begin to approach pre-Depression levels. Higgs spends a bit of time discussing the notion of regime uncertainty and how the FDR presidency was very anti-business, both in policy and personality, exacerbating the problems of trying to get recovery going.
-The U.S. lived in a command economy during the war, which is to say life was not easy. Many products and services were simply not available. Even if money was being made, consumers could not enjoy the fruits of their labor in this period.
-An interesting quote: "Simply by sniffing the data for the years 1941-46, one ought to have smelled a rat. Consider that between 1940 and 1944, real GDP increased at an average rate of 13 percent -- a growth spurt wholly out of line with any experienced before or since. Moreover, that extraordinary growth took place notwithstanding the movement of some 16 million men (equivalent to 28.6 percent of the total labor force of 1940) into some armed forces at some time during the war and the replacement of those prime workers mainly by teenagers, women with little or no previous experience in the labor market, and elderly men. Is it plausible that an economy subject to such severe and abruptly imposed human-resource constraints could generate a growth spurt far greater than any other in its entire history? Further, is it plausible that when the great majority of the servicemen returned to the civilian labor force -- some 9 million of them in the year following V-J Day -- while millions of their relatively unproductive wartime replacements left the labor force, the economy's real output would fall by 22 percent from 1945 to 1947? The utter implausibility of such developments suggests that scholars have placed far too much weight on the metaphor of a war time production 'miracle'." (pp. 136)
-As an addendum to the quote, Higgs notes that given it was a command economy, any rational way of tracking market prices, as part of keeping track of GDP during that period, is incredibly difficult and unscientific, given that such measures were "manifestly arbitrary". Which arguably again calls into question the degree of recovery.
In hindsight, the thought that struck me while reading the book was that war sure was an unpleasant way of trying to get the country back on track. And we say that knowing two things now: the results from fiscal policy on the scale of war are inconclusive in achieving their stated aim, while anything short of it is conclusively unable to do what is needed.
