Yesterday, co-blogger Arnold Kling referenced my work on the U.S. post-World War II austerity. I had pointed out that Keynesian wunderkind Paul Samuelson had blown it with his prediction of a postwar slump.

In the comments, wd40 writes:

During WW2, there was forced saving (war bonds) and investment went into the war effort. Hence, the robust economy of 1946 when consumers could draw drawn their savings and consume items that were not not available during the war. Naive regressions did not sufficiently account for this pent up demand.

This has become the standard response and, in fact, you can find it in textbooks, to the extent textbooks talk about this event.

The problem is that the part about the drawdown of savings is wrong. Here’s what I wrote in my Mercatus study, “The U.S. Postwar Miracle.”

Keynesian economists also explained why their glum postwar predictions hadn’t come true by arguing that people drew down their savings to finance their “pent-up demand” for the various goods they could not have during the war: cars, tires, refrigerators, stoves, and so on. In 1943, Paul Samuelson, in the article quoted at the beginning of this paper, laid out the idea that pent-up demand for consumer goods would cushion the blow of demobilization. Cited in almost every textbook on U.S. economic history, this explanation has become the orthodox one. There’s a problem with this explanation, though: it doesn’t fit the evidence.

There are two parts of this explanation. The first, which is plausible, is that there was pent-up demand due to the heavy rationing that the government imposed during the war. People were ready to buy cars, for example, after having not been able to do so for over three years. But Samuelson pointed out that this would be a short-term cushion at best. Of course, one could argue that the two years from 1945 to 1947 were short term. But then, after this pent-up demand was satisfied, there should have been a major drop in economic activity and a major increase in unemployment in the medium term. That didn’t happen. The unemployment rate was 3.8 percent in 1948 and kicked up to only 5.9 percent in 1949.

The second part of the explanation is that people drew down their savings that they had accumulated during the war. But the term “savings” is what economists call a stock, whereas “saving” is a flow. If I draw down my savings this year, not only do I not save anything this year, but I also spend some of my stock of savings. So, if people were
drawing down their savings, they would have a negative rate of saving. They didn’t. While the personal saving rate did fall substantially from a wartime peak of 25.5 percent in 1944 to 9.5 percent in 1946 and 4.3 percent in 1947, it remained positive.