Roosevelt Was No Keynesian, But WWII Was

Ground was broken for the Pentagon on September 11, 1941, and the Japanese bombed Pearl Harbor on December 7, 1941. So war-time spending started early. GM reportxlnk.gif producing trucks for WWII in 1940. But 1942 was when spending really took off. So here’s what happend to GDP and Unemployment.

  GDP Growth Unemployment xlnk.gif
Debt Growth
Relative to 2011*
1940 – 1941 15.7% 14.6% – 9.9% $0.8 Trillion
1941 – 1942 16.9% 9.9% – 4.7% $2.5 Trillion
1942 – 1943 15.1% 4.7%  – 1.9% $5.4 Trillion
Relative to 2011(1)The increase in debt was divided by the GDP to get the debt increases as a percent of GDP. That percentage was mulitplied by todays $15 Trillion GDP.

Notice that stimulus spending works more easily when there is high unemployment. It stops working when everyone is employed. It’s hard to say how effective the 2009 stimulus was but it seems to have been about as effective when the differences are accounted for. The economy was in free fall when it was passed. It is hard to know how much worse it would have gotten without the stimulus spending and without the confidence that government was stepping in to get things under control.

Also, the 2009 stimulus package, although about $0.8 Trillion in total was spread out over several years. So it was not nearly as strong in any one year as even the first year in the table above. On top of that, the 2009 stimulus was, in large part, tax cuts which are not fully spent and so are much less effective that the direct, rapid government spending of WWII.

GM-6x6-Trucks.jpg
ca. 1942 GMC CCKW 353
6×6 Military Personnel Carrier

Although conservatives like to argue that the WWII spending had nothing to do with reducing unemployment, this seems preposterous. For example, GM tells us: “From 1940 through 1945 GMC built over 528,000 6×6 military trucks.” To build those it had to hire people first to build the plants and assembly lines and then to build the trucks. How could hiring all those people not reduce unemployment? And then of course there was building the Pentagon, the Navy and the Airforce. All of the hiring happened because of goverment spending.

For economists: A new analysis of the multiplier effect of government spending find it too be quite large xlnk.gif.

 

References

1. The increase in debt was divided by the GDP to get the debt increases as a percent of GDP. That percentage was mulitplied by todays $15 Trillion GDP.