By John Ballard
From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 � the equivalent of roughly $30 trillion today.
Had anyone proposed spending even a fraction that much before the war, people would have said the same things they�re saying today. They would have warned about crushing debt and runaway inflation. They would also have said, rightly, that the Depression was in large part caused by excess debt � and then have declared that it was impossible to fix this problem by issuing even more debt.
But guess what? Deficit spending created an economic boom � and the boom laid the foundation for long-run prosperity. Overall debt in the economy � public plus private � actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts. And after the war, thanks to the improved financial position of the private sector, the economy was able to thrive without continuing deficits.
The economic moral is clear: when the economy is deeply depressed, the usual rules don�t apply. Austerity is self-defeating: when everyone tries to pay down debt at the same time, the result is depression and deflation, and debt problems grow even worse. And conversely, it is possible � indeed, necessary � for the nation as a whole to spend its way out of debt: a temporary surge of deficit spending, on a sufficient scale, can cure problems brought on by past excesses.
I can't think of much to add. There's more at the link filling column-inches, but that's the point in a nutshell.
Somebody put this fascinating sentence into the Wikipedia article on Keynesian economics. My bold.
Some interpretations of Keynes have emphasized his stress on the international coordination of Keynesian policies, the need for international economic institutions, and the ways in which economic forces could lead to war or could promote peace.
Economic theory, like science fiction, feeds fertile imaginations.
Too bad our politics remains in the stone age. After thousands of years we are still just baby steps away from hunting and gathering. That's why we call economics the dismal science.
Why does Krugman hate America?
ReplyDeleteI dunno. We all have different reasons.
ReplyDeleteWhat's yours?
To duplicate the performance of World War Two and it aftermath, we would need to recreate the conditions of World War Two and its aftermath.
ReplyDeletePerhaps Krugman should be looking at something other than financial ledgers when he studies history; maybe picture books which show the entire developed world as a pile of rubble after World War Two, with the notable exception of the vast manufacturing capacity of the United States.
Russia, all of Europe, England, Japan and China all reduced to smoking piles of rubble; the rest of the world industrially undeveloped, and only the United States untouched.
Perhaps that economic boom had more to do with a world in desperate need of manufactured goods which we, and we alone, were capable of supplying than it did with the deficits in which we indulged in order to pound a good part of that world into rubble. Perhaps it had to do with the world�s need for the oil which we were exporting. Perhaps it had to do with our own craving for consumer goods, which were manufactured here because no other country in the world could manufacture them.
Perhaps our prosperity was the result of a world market where we had almost unlimited demand and essentially no competition, and that is a vastly different world than we face today. Perhaps deficits didn�t matter then, but that doesn�t mean they don�t matter now.
I understand and agree in principle. But at the heart of the issue lies a fundamental puzzle of economic theory: To what extent does infused capital stimulate value, both service and real? It seems important that the two most vigorous economies of the post-war years were Germany and Japan, the very countries destroyed by war. Neither had oil or resources to boost them.
ReplyDeleteAs a layman I can't argue economic theory, but when I was in Korea it was clear that the Koreans regarded the Korean conflict as the springboard for Japan's economic recovery. And to that end they regarded the Vietnam conflict as their opportunity to replicate the Japanese economic resurgence. There were more Korean troops and civilians in Vietnam in 1966 than Americans in Korea. Korean taxi drivers and translators were sending money earned in Saigon back to their families in Korea. And here we are a few decades later and Korea is booming as the Japanese economy cools. And last I looked, the Vietnamese economy wasn't doing all that bad. Over twenty-five years years ago the place where I worked was selling imported Vietnamese catfish.
My personal view is that the deficit is just another term for debt. When businesses and individuals incur debt to "expand" or get a mortgage we like those examples of spending money that doesn't exist. But when the country essentially does the same thing it becomes odious. All this hand-wringing over deficits is a red herring aimed at extending the seriously out of proportion "Bush tax cuts," a totally misleading phrase. Even Peter Orszag, no longer anybody's favorite wonk, said "It�s hard to believe... that effectively returning the tax code to its 1990s form would lead to economic catastrophe, especially when many leading Republican economists � including Alan Greenspan and Martin Feldstein � agree that we can�t afford to continue the tax cuts forever."