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Roosevelt, Depression, War

So many myths of today still surround the Great Depression, the New Deal, and the War that followed.  The newspaper account is the one that seems to last.  The research of the actual numbers refutes the simplistic notion that the war brought us out of the Great Depression.  Actually, the eight peacetime years before the war grew the economy 86%.  But when you look at the total war effect including the three year postwar recession which actually started in the last year of the war, the four war years plus the two postwar recession years the economy only grew 17%.   That’s New Deal five to one over the war.  It’s not even close.  What people remember is the coincidence, that the war came at the end of the recovery period and took all the credit for what was really only a tiny last step.  The formula was simple.  Send 12 million men overseas, put the wives to work in the factories, work the factories on Saturday bringing the prewar workweek up from 38 hours per week to 44 hours per week. The workweek went back down to 39 hours per week after the war, when you return to Monday through Friday.  Yes, you bring the 10% unemployment rate of 1941 down to 2%.  It seems like full employment.  But we forget that bringing the rate down from 25% in 1933 represents a 15% change during the new deal and only an 8% change during the war.  The unemployment rate was dropping about 3% each year of the New Deal, before and after the 1938 recession.

But that leaves out the big mistake.  Roosevelt took his foot off the throttle for reelection in 1936, trying to balance the budget for two straight years until they realized their mistake.  Too late, the 1937 and 1938 growth rates drop to the two lowest rates of the prewar recovery period, the New Deal period.  The huge pump priming deficits of the thirties disappear for two years and the recovery reverses course.  1937 starts the social security tax and drops to a rate of 5% growth.  Then 1938 drops further to minus 5% growth, essentially a two year no growth period when the other six New Deal years average over 10% growth per year.  So the steady dropping of the unemployment rate reverses in one year and suddenly climbs up 5%.  The Treasury Secretary panics and says we are hopelessly locked in the Great Depression.  He was wrong, it was just one year, and without that setback year, we would have been back to full employment in 1940 and spared the myth that the war brought us out of the Great Depression. Had the 1937 unemployment rate of 14% kept dropping at the 3% a year rate, it would have been 5% in 1940, essentially full employment, and perhaps 2% in 1941 under the lend lease program of keeping Britain afloat, just like the three war years, 1943-1945, when the unemployment reached about 2% or less.  Only massive deficits kept the economy afloat during the war years, and when the war bonding deficit started failing to match the war cost, the economy reduced its economic growth rate every year from 1941 to 1946, a five year downward slide in economic growth rate.

Paul Krugman still falls for the nonsense that the war brought us out of the Depression, but Joseph Stiglitz is very measured in his description of the war economy, he knows that the peace dividend from the Cold War propelled much of the nineties economic growth spurt under Clinton.  Alone among the leading economists, Stiglitz seems to get it that military spending hurts not helps the economy.  The others still cling to classic Keynesian dogma, what I and others before me have called, military Keynesianism.  They try to have it both ways, that military spending hurts the economy in the long run, but stimulates the economy in the short run.  To the two Nobel laureates just mentioned, add Knox into the last category when I heard him talk at Notre Dame.

That nonsense is refuted by the period 1941 to 1948, where military spending net of the deficit drags the economy down for five years then reverses direction and stimulates the economy for the last two years, with a correlation of 0.97 for the eight year period, just three points below a perfect 100 fit.  The deficit correlates about 0.74 with either the unemployment rate or the economic growth rate changes in the late thirties.

Here are the actual data for those who wish to verify my claims:

Dr. Peace, Dr. Bob Reuschlein, best contact

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