Do wars create wealth? aka, How did WWII help to end the Depression?

[Ivan Seeking]

There is a popular claim that the New Deal didn't end the Great Depression; that it only ended because of WWII.

1). How did WWII help to end the depression?
2). Generally speaking, do wars create wealth, and if so, how?

If your answer to number 1 is government "government spending", then how is this different from any spending package that creates short-term or long-term jobs?

 

[lisab]

If wars created wealth, shouldn't we all be filthy rich by now?

edit: we = Americans

 

[rootX]

I think war creates "consumers" or there are more necessity goods (ammunition). It's pretty obvious that anyone can get a job during the war period.

But I was thinking about post-war unemployment. I googled some graphs which show that post-war unemployment was much less than pre-war.

 

[russ_watters]

If wars created wealth, shouldn't we all be filthy rich by now?

edit: we = Americans

Since we don't fight a lot of wars, probably not...

 

[rootX]

If wars created wealth, shouldn't we all be filthy rich by now?

Not all wars are profitable but I think if one is clever and starts war at the right time with the right opponent, big profits can be made.

Opium war?

 

[Cyrus]

Hell yes wars create wealth.

Where does Israel get its weapons?

Where does Iran get its weapons?

Where does sadam get its weapons?

Where does europe buy its F-16s and F-18s?

Where does Canada get its F-18s?

Let's not forget tanks, RPGs, rifels, hand guns, grenades, smoke gas, armor plating, vehicles...

 

[Cyrus]

Since we don't fight a lot of wars, probably not...

History lesson of the day:

• 1902 they had a powwow with the Phillipines(U.S. Victory)
• 1914-1918 World War 1 aka The Great War until World War 2(Allied Victory U.S. was apart of the allies)
• 1939-1945 World War 2(Allied Victory U.S. was apart of the allies) (U.S. fought from 1941-1945),
• 1945-1992 The Cold War(U.S. Victory)
• 1951-1956 Korean War(U.S. fought with South Korea U.S. Victory)
• 1960-1975 Vietnam War,(U.S. and South Vietnam defeat)
• 1990-1992 The Fist Gulf War(U.S. and allies victory)
• 2001-present Iraq War.

More than half of the 20th centry the US was involved in some form of a war.

 

[Ivan Seeking]

Hell yes wars create wealth.

Where does Israel get its weapons?

Where does Iran get its weapons?

Where does sadam get its weapons?

Where does europe buy its F-16s and F-18s?

Where does Canada get its F-18s?

Let's not forget tanks, RPGs, rifels, hand guns, grenades, smoke gas, armor plating, vehicles...

That all sounds to me more like a transfer of wealth; not a creation of wealth.

While your point is well taken, I am most interested in the notion that wars fought by the US boost the US economy.

 

[Vanadium 50]

WW2 was, essentially, a full employment program for the US.

What made the Great Depression different from other recessions was the high levels of unemployment that persisted, even at times when other economic indicators were favorable. WW2 solved that problem.

 

[lisab]

WW2 was, essentially, a full employment program for the US.

What made the Great Depression different from other recessions was the high levels of unemployment that persisted, even at times when other economic indicators were favorable. WW2 solved that problem.

But WW2 happened at a time when we made stuff here in the States...lots of stuff, and we did it well. We are much more of a service economy now. How can war grow a service-based economy? How does a war encourage people get more haircuts?

 

[Gokul43201]

History lesson of the day:

• 1902 they had a powwow with the Phillipines(U.S. Victory)
• 1914-1918 World War 1 aka The Great War until World War 2(Allied Victory U.S. was apart of the allies)
• 1939-1945 World War 2(Allied Victory U.S. was apart of the allies) (U.S. fought from 1941-1945),
• 1945-1992 The Cold War(U.S. Victory)
• 1951-1956 Korean War(U.S. fought with South Korea U.S. Victory)
• 1960-1975 Vietnam War,(U.S. and South Vietnam defeat)
• 1990-1992 The Fist Gulf War(U.S. and allies victory)
• 2001-present Iraq War.

More than half of the 20th centry the US was involved in some form of a war.

Seems you forgot Afghanistan and Kosovo.

 

[Cyrus]

Seems you forgot Afghanistan and Kosovo.

Well, I got that list from googling US wars in 20th century: I just copy pased.

 

[Ivan Seeking]

WW2 was, essentially, a full employment program for the US.

What made the Great Depression different from other recessions was the high levels of unemployment that persisted, even at times when other economic indicators were favorable. WW2 solved that problem.

Who paid for the employment? Again, how is this different from any other spending program that creates short-term or long-term jobs?

Beyond that, how does the production of weapons benefit the economy, as opposed to building infrastructure, for example?

lisab, that is one reason that I like Obama's approach: He wants to create a new industry in the process of working to solve our energy and environmental problems. Many Green jobs are Blue jobs.

 

[russ_watters]

History lesson of the day:

More than half of the 20th centry the US was involved in some form of a war.

...which makes it about the most peaceful century in history for major world powers.

 

[Cyrus]

...which makes it about the most peaceful century in history for major world powers.

I have no idea what you mean by this, or why its relevant.

 

[Gokul43201]

...which makes it about the most peaceful century in history for major world powers.

So, when you said "Since we don't fight a lot of wars..." you meant we don't fight a lot of wars, compared to, say, the 15th century, and not we don't fight a lot of wars, compared to say, Canada?

If wars created wealth, shouldn't we all be filthy rich by now?

edit: we = Americans

Since we don't fight a lot of wars, probably not...

And what 'we' were you talking about: the US or "major world powers"?

What made the Great Depression different from other recessions was the high levels of unemployment that persisted, even at times when other economic indicators were favorable. WW2 solved that problem.

At the very least, that's an oversimplification.

Unemployment rates had been falling long before Pearl Harbor.

In attachment (when it becomes visible), the first vertical line indicates the approximate timing of the New Deal, and the second roughly marks Pearl Harbor. Unemployment rates were down below 10% - from a high of 25% - before the US declared war on Japan.

 

[russ_watters]

...anyway...

In general, military spending works about the same as any other government spending: it both helps and hurts the economy. Money is taken from everyone and given to specific sectors, whether it is for defense, infrastructure, or welfare. Some money is better spent than other, but in general, money spent on defense or infrastructure has a neutral effect on the economy when in a steady-state (roughly constant yearly spending), whereas money spent on welfare is essentially flushed down the toilet because the government gets nothing in return for that money.

Now a war isn't constant defense spending, but in many circumstances, it works similar to the economic stimulus package in that it is basically neutral except that since it isn't a steady-state, so when the money is spent, you get a large benefit... which is then balanced out by a large negative by the fact that you have to pay for it later. It is simple math that running up the debt sucks money out of the gdp. I read an article today that predicted a -.3% effect for the next decade from the stimulus package: +$800 B over two years, -$800 B (plus interest, of course) over the next 10.

Now not all wars/stimulus packages are created equal. Little to medium sized wars like the last few don't have any impact on the national morale and stay self-contained. Wars like WWII are often called "total wars" meaning the entire effort of the country has to be dedicated to wartime production. It changed behaviors in ways that helped change our economy beyond what simple spending could do. People bought bonds, women learned to build tanks and airplanes, people donated rubber to the war effort and grew little gardens, etc. When it comes down to it, economics is more about attitude than anything else. We're in a deep recession now instead of the mild one we were in in August because of confidence and in a major war effort, patriotism takes over, and turns the economy around.

 

[russ_watters]

I have no idea what you mean by this, or why its relevant.

You brought it up, Cyrus. You implied that the 20th century for the US was one that saw a lot of war. For that to be true, you have to compare it to other countries and other centuries. Otherwise, what you said was just meaningless.

 

[russ_watters]

At the very least, that's an oversimplification.

Unemployment rates had been falling long before Pearl Harbor.

In attachment (when it becomes visible), the first vertical line indicates the approximate timing of the New Deal, and the second roughly marks Pearl Harbor. Unemployment rates were down below 10% - from a high of 25% - before the US declared war on Japan.

Speaking of oversimplifications, are you meaning to say that American involvement in WWII started with Pearl Harbor? And are we to assume that any drop in unemployment was a direct result of the New Deal (perhaps it could have dropped faster without it?)? Have you heard of the "Roosevelt recession?" It's that little blip where unemployment rises again after falling - which is what you would expect when a quick influx of cash wears off.

Now it is also true that some parts of the New Deal involved preparing for the war, but I tend to take separate parts separately: Like the current proposed economic stimulus package, there are good and bad parts. Hoover Dam? Turns water into money for 75 years. That's a good thing. Pyramid scheme welfare system? That's a bad thing. Wartime shipbuilding long before the start of the war? That's WWII helping to pull us out of the Depression more than 5 years before Pearl Harbor.

Now though I said the tone of the country made WWII different from other wars, it was still a lot like this economic stimulus package: money into the economy now, paying for it later. But we had another ace in the hole that helped us in that situation: Europe owed us money too. So it didn't hurt us as much in the long run as the 2nd Gulf War or this economic stimulus package will. [edit] And another one: Europe was destroyed, we weren't. That put us in a unique position to help rebuild their decimated countries/economies using our still strong economy.

 

[Cyrus]

You brought it up, Cyrus. You implied that the 20th century for the US was one that saw a lot of war. For that to be true, you have to compare it to other countries and other centuries. Otherwise, what you said was just meaningless.

Why do I have to compare it to other countries and other centuries to validate my statement? I simply said over 50% of the last hundred years the US was involved in major wars, which is contrary to your claim that the US wasn't in a lot of wars. In fact, it was involved in three major wars, the last one (cold war) consumed more money and resources than any past war in the US history. Again, I fail to see merit in your complaint.

 

[Gokul43201]

Speaking of oversimplifications, are you meaning to say that American involvement in WWII started with Pearl Harbor?

No. But involvement in terms of war spending did not see any significant increase (long) before Pearl Harbor. And during that time, it is not true that high levels of unemployment were persisting. Furthermore, unemployment is a lagging indicator of the economy.

http://www.usgovernmentspending.com...&stack=1&size=m&title=Total Spending&state=US

And are we to assume that any drop in unemployment was a direct result of the New Deal (perhaps it could have dropped faster without it?)?

You can assume anything you wish. I did not say anything of that kind.

 

[Gokul43201]

Wartime shipbuilding long before the start of the war? That's WWII helping to pull us out of the Depression more than 5 years before Pearl Harbor.

You're violating causality. Wartime shipbuilding 5 years before Pearl Harbor would have happened even if, 3 years later, WW2 was prevented. But anyway, that's only a minor point, and I don't disagree with the general argument about what kinds of spending are useful and what kinds, not so much.

 

[aquitaine]

When it comes down to it, economics is more about attitude than anything else. We're in a deep recession now instead of the mild one we were in in August because of confidence and in a major war effort, patriotism takes over, and turns the economy around.

Or war can completely flatten your country, like what happened with Germany, the USSR, and to a lesser extent France and Britain.

We're in a deep recession not just because of lack of confidence but because so many families are broke and too deep into debt. Combine that with an insolvent financial system that is still hiding large amounts of bad debt and you have a bad recession.

EDIT: And it's also worth pointing out that even though we are in a financially costly two front war, we're still in a bad recession.

 

[Vanadium 50]

How does a war encourage people get more haircuts?

Look at a soldier's haircut sometime. It grows back in about a week, thus requiring another haircut.

 

[Ivan Seeking]

but in general, money spent on defense or infrastructure has a neutral effect on the economy

Money spent on defense is neutral [not counting interest on the debt], but money spent on infrastructure can make the country more competitive in a global economy. Upgrade roads and reduce gridlock and you benefit every company with a truck on the road. Improve schools and education and you have a more competitive workforce. Provide high-speed internet to rural areas and you benefit businesses and education. Increase energy efficiency and you reduce financial waste. Develop domestic energy supplies and we reduce our dependence on foreign oil - worth about 1/2 trillion dollars a year [depending on the price of oil]; all sent to foreign suppliers. Reduce pollution and you reduce the demand on the health care system and programs like medicare, welfare. etc, etc, etc.

Money spent on infrastructure has a much greater economic benefit than money spent on wars or weapons.

From my point of view, we spend on wars, but we invest in infrastructure. To this day we benefit from New Deal projects. And to this day we are still paying for the cold war. Also, we pay the national debt by growing the economy; which relies in part on a robust infrastructure.

Superficially I would agree that spending is spending and jobs are jobs. So the argument that the New Deal didn't solve the crisis but WWII did only suggests that, ignoring WWII, we should have spent more money on the New Deal - much more money!

 

[Skyhunter]

Defense spending did not increase until 1940, less that two years before America entered the war. In 1940 there were 5 million unemployed, down from 11.5 million at the height of the depression.

There is a lot of debate among economist's but far less among historians as to whether or not the New Deal prolonged the depression.

A number of economists believe the New Deal delayed economic recovery.[55] A 1995 survey of economic historians asked whether "Taken as a whole, government policies of the New Deal served to lengthen and deepen the Great Depression." Of those in economics departments 27% agreed, 22% agreed 'with provisos' (what provisos the survey does not state) and 51% disagreed. Of those in history departments, only 27% agreed and 73% disagreed.[56]

http://en.wikipedia.org/wiki/New_Deal#Prolonged.2Fworsened_the_Depression"

 

[Ivan Seeking]

As far as I can see, the argument that the New Deal hurt but the war helped is indefensible as it applies to government spending for jobs creation. The only justification that I can imagine is that the types of jobs created by the war were somehow better than the jobs created by the New Deal. Otherwise I would bet that the objections relate to more complex aspects of monetary policy, and not spending.

Also, the role of infrastructure built under the New Deal in supporting the economic boom that followed the war cannot be ignored. Hoover Dam is one example that comes to mind; roads are another. Also contributing to the post-war boom were government welfare programs [from a purely economic point of view] in the form of defense spending for the cold war.

 

[Gokul43201]

Defense spending did not increase until 1940, less that two years before America entered the war.

Actually, defense spending did not increase until 1941.

Year	GDP-US	Defense-total
1920	88.4	2.64
1921	73.6	2.09
1922	73.4	1.30
1923	85.4	1.27
1924	86.9	1.25
1925	90.6	1.23
1926	96.9	1.22
1927	95.5	1.21
1928	97.4	1.29
1929	103.6	1.37
1930	91.2	1.46
1931	76.5	1.56
1932	58.7	1.67
1933	56.4	1.38
1934	66	1.08
1935	73.3	1.87
1936	83.8	2.65
1937	91.9	2.15
1938	86.1	1.65
1939	92.2	1.91
1940	101.4	2.16
1941	126.7	7.24
1942	161.9	27.08
1943	198.6	70.44
1944	219.8	86.10
1945	223.1	93.74
1946	222.3	53.33
1947	244.2	22.83
1948	269.2	19.75
1949	267.3	21.99
1950	293.8	24.24

(all numbers in $ billion)

http://www.usgovernmentspending.com...&stack=1&size=m&title=Total Spending&state=US

 

[Skyhunter]

As far as I can see, the argument that the New Deal hurt but the war helped is indefensible as it applies to government spending for jobs creation. The only justification that I can imagine is that the types of jobs created by the war were somehow better than the jobs created by the New Deal. Otherwise I would bet that the objections relate to more complex aspects of monetary policy, and not spending.

Also, the role of infrastructure built under the New Deal in supporting the economic boom that followed the war cannot be ignored. Hoover Dam is one example that comes to mind; roads are another.

Also what cannot be ignored is that administering the New Deal prepared the government to administer the even larger program that was WWII.

 

[Skyhunter]

Actually, defense spending did not increase until 1941.

Year	GDP-US	Defense-total
1920	88.4	2.64
1921	73.6	2.09
1922	73.4	1.30
1923	85.4	1.27
1924	86.9	1.25
1925	90.6	1.23
1926	96.9	1.22
1927	95.5	1.21
1928	97.4	1.29
1929	103.6	1.37
1930	91.2	1.46
1931	76.5	1.56
1932	58.7	1.67
1933	56.4	1.38
1934	66	1.08
1935	73.3	1.87
1936	83.8	2.65
1937	91.9	2.15
1938	86.1	1.65
1939	92.2	1.91
1940	101.4	2.16
1941	126.7	7.24
1942	161.9	27.08
1943	198.6	70.44
1944	219.8	86.10
1945	223.1	93.74
1946	222.3	53.33
1947	244.2	22.83
1948	269.2	19.75
1949	267.3	21.99
1950	293.8	24.24

(all numbers in $ billion)

http://www.usgovernmentspending.com...&stack=1&size=m&title=Total Spending&state=US

Your right my bad.

 

[Ivan Seeking]

While clearly not all New Deal spending went to such projects, the expansion in
spillover-creating public capital such as roads, bridges, water and sewage systems, schools, hospitals, power plants, and airports, among others, during 1930s is indisputable. For example, the installed capacity of publicly owned electricity generating plants rose 55 percent between 1932 and 1939, while capacity of hydroelectric power rose 35 percent across the decade.4 Miles of surfaced roads on state highway systems increased 34 percent from 1930 to 1940.5 The number of municipal airports rose 42 percent between 1932 and 1938.6 The construction of new school capacity accompanied a 50 percent boost in enrollment in public high schools from 1930 to 1940.7 Hospital bed capacity rose 35 percent between 1933 and 1942.8 Although the economy languished well below full employment throughout the 1930s—and some New Deal spending went toward either direct income redistribution or so-called “leaf raking” projects that brought no spillover benefits—the stock of public capital boomed in large part due to a series of government reemployment projects entailing the construction of such investments...

http://economicsbulletin.vanderbilt.edu/2007/volume8/EB-07H40002A.pdf

 

[Ivan Seeking]

Right now [Feb 2009] our debt as a percentage of GDP is about 71%.
http://upload.wikimedia.org/wikipedia/en/3/3b/USDebt.png
http://en.wikipedia.org/wiki/United_States_public_debt

After WWII we hit a peak of about 122%. To be on par with this level of spending we could add another ~ 7 trillion to our debt.

 

[Gokul43201]

Ivan, those pictures are H U G E ! Take them down; I've plotted the same data here:

 

[Ivan Seeking]

Ivan, those pictures are H U G E ! Take them down; I've plotted the same data here:

Jeez, they were only up for a second!

Yeah, I thought I had grabbed a snapshot.

 

[Gokul43201]

This figure is interesting.

The Great Dep knocked the socks off the federal debt, boosting it from below 20% in 1929 to above 40% in 1933. Oddly, all of FDR's New Deal spending between '33 and '39 didn't affect the debt one bit. From my naive pov, that seems to suggest that the spending must have had, on average, a 2.5X multiplicative effect on the GDP growth (inverting 40%), which would be pretty neat.

Then with WWII, the debt sky-rocketed to 120%, but slowly ebbed its way back down to below 40%, either because of fiscally sound government until the '80s, or because of long term GDP growth induced by some of the wartime spending, or a combination of the two.

Then came Reagan! He inherited a contracting economy (though the debt appears to have been fairly stable all the way till the end of his first year, and only starting climbing in his second year in office), but even after the end of his second term, the debt wasn't under check. Between '81 and '88, the debt nearly doubled, getting up to over 50%. Bush Sr then rode it up to nearly 65%. In the last year of Sr's term, it had gone up by 3% to 66.3%, and that's where it was when Clinton was sworn in.

When Clinton left office, it was down below 58% and falling moderately. It even continued to drop a little bit during Bush Jr's first year in office, ending that year at about 57%, but over the next 7 years, it went back up again, all the way up to 70%, where it stands now.