The Alchemy of Military Expenditure

Yes, good post, Prof. Lemieux.

I trust that you were being facetious in writing ” . . .  of course we cannot suspect the WSJ . . . “

And interesting comments and responses.

Thanks.

The following is from the latest draft of my book, Caveman Econ: Basic Economics in 33 Prehistoric Tales:

The war-is-good-for-the-economy belief has been applied both to the victor and the vanquished. For example, some have claimed that Japan was helped by the destruction of its industrial base during World War II. When the Japanese rebuilt their factories, the argument goes, they used the latest, most efficient technology. As a result, American steel mills could not compete with the more modern Japanese facilities.

But companies in the United States could have modernized their plants far more easily and inexpensively than Japan’s steel manufacturers could clear the rubble, rebuild their plants from scratch, and train replacements for the experienced workers who had been killed or disabled. Instead, the American firms chose to lobby the government for restrictions on Japanese steel imports. In the end, Japanese steel was still imported into the United States but in the form of finished goods rather than as raw steel, and any jobs saved in American steel mills were more than offset by jobs lost in manufacturing. We see the steel industry jobs that the tariffs saved, but not the jobs lost throughout the rest of the economy.

An example of the war-is-good-for-the-victor argument is the belief that WWII pulled the United States out of the Great Depression. What proponents of this idea see is industry expansion sparked by the need for munitions. What they do not see are the consumer goods that were not made. The war made Americans materially worse off. Some sixteen million American men and women – over ten percent of the population – served in the armed forces at some time during the war. Living, and sometimes dying, in a foxhole was not an improvement over stateside life – even life during the worst of the Depression. Back in the States, living standards also fell as the government rationed consumer goods, including food and gasoline, and imposed wage controls.

What the war did do was end President Roosevelt’s New Deal, and it was the end of the New Deal that ended the Depression. First, President Roosevelt stopped his incessant verbal and legal attacks on business. As Amity Shlaes points out in The Forgotten Man, FDR needed big business to produce the tanks, planes, and ships required to defeat Hitler and his allies.

Second, he ended his erratic, trial-and-error experimentation. Before the war, the stated strategy of FDR and his Brain Trust was to try one program after another until they found something that worked. This resulted in perpetual market churn that made long-term planning and investment risky if not impossible.

Government experimentation also created myriad tiny, short-lived, economic booms (or “bubbles”). Jobs created in various locations and in various crafts disappeared when the government lost interest and shifted its gaze to new “solutions.”

The war also brought an end to the Federal Reserve’s tight monetary policies. In the years leading up to the 1929 stock market crash, the country’s money supply increased by nearly half; after the crash, it fell by a third. The war’s end brought huge cuts in federal spending and taxes, an end to prices controls, and the repeal of the Smoot-Hawley Tariffs that had led to the 1930’s global trade war. All these changes combined to pull the nation’s economy out of its long and painful slide, but all could have been made without a war.