Conveniently for most politicians, a popular doctrine holds that government spending is good for the economy. According to this doctrine, when the economy needs to recover from a recession or even a slowdown, an increase in government spending is indispensable—even if huge budget deficits and a growing national debt result. Keep spending! is the battle cry. This is one reason why there is widespread opposition to "sequestration," the scheduled across-the-board reductions in the rate of growth in government spending. (For the most part, absolute reductions in spending are not on the table.)
The advocates of spending think they have a killer piece of evidence for their position that economic vitality requires larger government budgets: World War II. The standard story has it that despite Franklin D. Roosevelt's best efforts, the New Deal did not quite end the Great Depression. What did? According to this story, it was the massive spending behind U.S. participation in the wars in Europe and the Pacific. The vigorous economic growth of the late 1940s and 1950s is touted as evidence for the blessings of big government spending.
This version of events is routinely conveyed by Keynesian economists, including at least one Nobel laureate with a prominent newspaper column, and the pundits who parrot their doctrine. Hardly a day goes by that a cable-TV commentator doesn't credit World War II with "getting us out of the Depression." This belief has prompted members of the intelligentsia to lament that perhaps nothing short of a big war can cure a sick economy. The political will for major domestic spending is lacking, they say, but a national emergency (perhaps rumor of an alien invasion) would unite the country and dispel fears of deficits and debt.
The underlying theory is that economies slow down because aggregate demand is insufficient to keep things humming. If we consumers aren't buying enough, and various efforts to stimulate private consumption don't do the trick, there is no alternative to government stepping up its own spending. This surge in demand, so the theory goes, will put people and capital to work, and by the miracle of the "multiplier effect," the bang will be far bigger than the buck. All will be well—as long as we have the political will to spend and spend, which requires losing our Puritan fear of deficits and borrowing.
It shouldn't take much deliberation, however, to see the flaw in this doctrine and the associated belief that World War II ended the Depression. We have to start by asking: What does "end the depression" mean? The technical definition of a recession is a specified period of shrinking gross domestic product (GDP). (We may think of a depression as a severe and prolonged recession). The focus on GDP seems to suggest that a recession ends when GDP stops shrinking and starts growing.
But there's a problem: There's less to GDP than meets the eye. It's a statistical aggregate that includes government spending, but in itself, it tells us nothing about what's happening with living standards.
In human terms, a depression isn't a shrinking GDP or some other changed statistical construct. It's a decline in real people's living standards. Therefore, ending a depression requires not a change in sign from minus to plus in a statistical measure, but a rise in prosperity. You can tell a depression has ended by the fact that people live better than they did previously.
When we apply this standard to life during World War II in America, it's clear that the war did not end the depression in any meaningful sense. Economic historian Robert Higgs has debunked the statistics that purport to show that the depression ended during the war. Take unemployment. Unemployment of course was historically high throughout the 1930s, and the rate plummeted once the U.S. government entered the war. But this was no sign of returning prosperity. The government drafted 10 million men into the armed forces and others enlisted to avoid conscription. Those men were not producing prosperity by making consumer goods. They were fighting a war. Moreover, statistics showing that industrial production picked up steam in the 1940s are no indication of prosperity because those plants weren't making consumer goods; they were making war materiel. In fact, those plants diverted scarce resources from the production of consumer goods. The few consumer goods that were produced were rationed. People could buy only a fixed and small quantity of foods, gasoline, and other previously taken-for-granted products. Many things weren't available at all.
Thus the aggregate statistics fail to capture essential details of life. A million dollars spent making automobiles and a million dollars spent making tanks look the same in the GDP tables. But the difference is vast in terms of consumer welfare.
As Higgs has written:
Yes, national output as conventionally measured did grow hugely during the war... [G]ross domestic product (in constant 1987 prices) increased by 84 percent between 1940 and 1944. What the orthodox account neglects, however, is that this "miracle of production" consisted entirely (and then some) of increased government spending, nearly all of it for war materials and equipment and military personnel. The private component of GDP (consumption plus investment) actually fell after 1941, and while the war lasted, private output never recovered to its pre-Pearl Harbor level. In 1943, real private GDP was 14 percent lower than it had been in 1941. If a nation produces an abundance of guns and ammunition, it does not thereby achieve genuine prosperity.
Those who lived through the war ... forget the scarcity of decent housing, the hassles in commuting to work, and the severe rationing or complete absence of basic consumer goods...
Because of the many other ways that the well-being of consumers deteriorated during the war, which the official data fail to capture, actual wartime conditions were even worse than [the] figures suggest.
Note that this argument has nothing to do with whether the U.S. government should have entered the war. That's a different subject altogether. What we're dealing with here is whether war spending brought a return to prosperity. It emphatically did not. Deprivation worsened, even if people felt differently about it.
Higgs's thesis has recently been extended and strengthened by economist Steven Horwitz of St. Lawrence University and a former student of his, Michael J. McPhillips, in "The Reality of the Wartime Economy: More Historical Evidence on Whether World War II Ended the Great Depression" (Independent Review, Winter 2013). Horwitz and McPhillips emphasize the deterioration in daily living that occurred during the war because of the diversion of scarce resources to war production. The trend toward the division of labor was actually reversed as people had to spend time making or repairing things they previously had relied on the marketplace for. Horwitz and McPhillips write: