War is bad for children, other living things, and the economy

by Russ Roberts on September 6, 2010

in History, Stimulus, War

Paul Krugman (HT: John Papola) calls on history to justify more government spending:

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.

Had anyone proposed spending even a fraction that much before the war, people would have said the same things they’re saying today. They would have warned about crushing debt and runaway inflation. They would also have said, rightly, that the Depression was in large part caused by excess debt — and then have declared that it was impossible to fix this problem by issuing even more debt.

But guess what? Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity.

But it didn’t create an economic boom. That’s the biggest and most dangerous economic myth of all time, the idea that war stimulates the economy. War stimulates the military sector of the economy.

Yes, the measured size of the economy grew between 1940 and 1945. But did the private sector grow? Did consumption boom? Did all that government spending on bombs and tanks and rifles create boom times in the private sector via the Keynesian multiplier?

Ask someone alive during the war what it was like. Was the British economy thriving? Or the German economy? Or the American? No. Economic life was miserable despite the measured growth in the economy. Economic life in wartime is miserable because so much of the economy was devoted to building those tanks and bombs. There weren’t enough resources to create very much private consumption. So the measured economy boomed because it included all that military production.

And yes, unemployment was close to zero. That’s because the government used conscription to put people in the military. It’s easy to get rid of unemployment that way. But it didn’t create economic health. The opposite was true. Times were miserable.

Robert Higgs explained why the measured size of the economy can be booming but there wasn’t much meat and there weren’t many stockings and not much sugar. What kind of boom is that? It’s a deceptive boom. A boom that fits in with the Keynesian story. But it’s very misleading.

After the war ended, the Keyensians predicted economic collapse. They were wrong. They assumed the great reduction in aggregate demand would cause mass unemployment as government spending on the military fell. They were wrong.

War is unhealthy for children, other living things and economies.

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