What Was So Great about the Marshall Plan?

In The New Yorker, Niall Ferguson reviews Greg Behrman's The Most Noble Adventure: The Marshall Plan and the Time When America Helped Save Europe and challenges the idea that the Marshall Plan, the U.S. post-war redevelopment plan for Europe, was a panacea:

Under the Marshall Plan, grants and loans were received by sixteen different countries. Britain received more than twice the amount given to West Germany. Yet no European economy performed more dismally in the postwar period than Britain's. A crucial difference between the two was the success of the German currency reform of 1948, which saw the birth of the enormously successful Deutsche Mark, compared with the ephemeral stimulus of the British devaluation of 1949, the first of several vain attempts to revive the U.K. economy by cheapening exports.

Which isn't to say that Ferguson thinks the massive amounts of aid were a total bust:

To West Europeans struggling to make ends meet, [the Marshall Plan] was the most visible manifestation of American good will-and a mirror image of the Soviet policy of mulcting Eastern Europe. This, more than its macroeconomic impact, explains its endurance in the popular imagination.

More here.

Update: Here's a link (pdf) to Tyler Cowen's 1985 takedown of the Marshall Plan.

And while mentioning the Inner Economist, let me wish him and co-blogger Alex Tabbarok a belated fourth birthday. Their consistently great blog, Marginal Revolution, just celebrated its fourth year.

Comments

[The Wine Commonsewer-Reg US Pa]

Mulcting? Dude, I had to look that up.

I'da used mulching, a much more intense visual. Especially if you picture a giant tree limb shredder that accepts branches up to 4 inches in diameter.

[SIV]

One effect of the Marshall plan was the Belgians and French developing a taste for our charity cheval.

[emme]

Didn't Tyler Cowen write a similar article on the Marshall Plan for Reason magazine a while back? Does anyone have the link to that article?

[Dan T.]

It sounds like the Marshall Plan is getting the New Deal treatment here - because no government program can work, the ones that did appear to work actually just prevented things from being even better.

[Jesse Walker]

emme: I don't know if Cowen wrote about it for Reason, but the Heritage Foundation published a paper he wrote on the subject back in the '80s. A pdf of that paper is here.

[Cesar]

Dan T.--

The New Deal failed to lift the United States out of the Great Depression. Thats just a fact, it lasted until the outbreak of WWII.

[Episiarch]

What Was So Great about the Marshall Plan?

Come on, that's obvious--it got us into the habit of paying for Europe's security while they turned around and became condescending, arrogant assholes towards us. What's not great about that?

[Pro Libertate]

We needed people to buy our stuff.

[Warren]

Check me if I'm wrong here. But I thought the time it took for a European Country to recover from WWII was directly proportional to the amount of aid it received. It thought this was common knowledge.

[Kenobi]

Check me if I'm wrong here. But I thought the time it took for a European Country to recover from WWII was directly proportional to the amount of aid it received. It thought this was common knowledge.

Well, the US government has given the equivalent of five Marshall Plans to various African governments over the years, so that seems right.

[Dan T.]

Dan T.--

The New Deal failed to lift the United States out of the Great Depression. Thats just a fact, it lasted until the outbreak of WWII.

Kind of depends on who you believe as to which government program lifted us out of the depression. War, on balance, is a destructive activity, not a creative one, so it's hard to see exactly how it could lift us out of a depression.

Also, one of the features of the New Deal is that it's helped prevent future great depressions and helped prevent the kind of severe income inequality that leads to the kind of popular revolts that brings about such things as communism and fascism.

[MikeP]

it lasted until the outbreak of WWII.

And, to be clear, it's not as though World War II magically ended the depression. It is just that the war brought about a very large consumer with a very clear and predictable appetite for goods. Workers still weren't getting what they wanted to consume. They simply didn't mind that the products of the economy were going to the war effort rather than into their refrigerators or their garages.

[Cesar]

And, to be clear, it's not as though World War II magically ended the depression. It is just that the war brought about a very large consumer with a very clear and predictable appetite for goods. Workers still weren't getting what they wanted to consume. They simply didn't mind that the products of the economy were going to the war effort rather than into their refrigerators or their garages.

Scary that such a system wasn't too different from Nazi Germany in peace time.

[Kenobi]

Kind of depends on who you believe as to which government program lifted us out of the depression. War, on balance, is a destructive activity, not a creative one, so it's hard to see exactly how it could lift us out of a depression.

Dan T. out-libertarians the libertarian. Good job, dude.

Also, one of the features of the New Deal is that it's helped prevent future great depressions and helped prevent the kind of severe income inequality that leads to the kind of popular revolts that brings about such things as communism and fascism.

I fail to understand how artificially propping up prices so that poor people could afford less things would affect that. How do you figure the new deal did this?

[Cesar]

Also, one of the features of the New Deal is that it's helped prevent future great depressions and helped prevent the kind of severe income inequality that leads to the kind of popular revolts that brings about such things as communism and fascism.

The US, along with every other western nation with a Democratic tradition, was in no way threatened by such a revolt in the 1930s.

The places were fascism and communism appeared were in backward nations with authoritarian traditions--Italy, Spain, Russia, Portugal.

[UCrawford]

The greatest thing about the Marshall Plan was that it was that the major rebuilding phase had actual concrete goals and was designed to eventually end, unlike Iraq. Of course the Marshall Plan also wasn't being implemented by a moron with a third-grader's comprehension of Vietnam.

God, that press conference today really pissed me off.

[MikeP]

Also, one of the features of the New Deal is that it's helped prevent future great depressions

Care to offer any examples?

As far as I can tell, the only reforms that help prevent future great depressions are changes to banking and trading rules -- hardly refinements that should be considered part of the New Deal.

[UCrawford]

Correction. Should have read. "The greatest thing about the Marshall Plan was that the major rebuilding phase had actual, concrete goals and was designed to eventually end, unlike Iraq." Long day.

[MikeP]

Scary that such a system wasn't too different from Nazi Germany in peace time.

Indeed. The "economic miracle" that the ill-informed consider Nazi Germany to be is nothing more than convincing the populace that they don't want what they are making in the factories. Reading the government's wants two years hence is a much easier path to economic "recovery" -- or at least full employment -- than divining the wants of the citizen consumer two years hence.

[iowan]

Kind of depends on who you believe as to which government program lifted us out of the depression. War, on balance, is a destructive activity, not a creative one, so it's hard to see exactly how it could lift us out of a depression.

Basic Marco-Economics Dan. War causes inflation. The Government pumps lots and lots of dollars into the economy to produce widgets that go overseas and get destroyed rather than find their way into the general economy.

Workers have more cash, but do not have more goods to buy. Prices rise accordingly.

WWII put heavy industry to use, unemployed people to work, etc. That is how WWII ended the depression.

[DannyK]

Niall Ferguson is a consistently interesting historian, but he says pretty daft things sometimes. There are a significant number of differences between post-war UK and post-war Germany; I don't think the difference in Marshall Plan funding is the greatest difference, and neither does Ferguson when he's not being provocative.

I suspect that being demolished and rebuilt under U.S. supervision helps a lot, especially when compared to the post-war socialist government in the UK. Also note that Germany had gotten stomped pretty thoroughly as well as dismembered -- but it never had any colonies worth mentioning, so it didn't have an economy that was crippled when they all went their own way after the war.

[Dan T.]

Basic Marco-Economics Dan. War causes inflation. The Government pumps lots and lots of dollars into the economy to produce widgets that go overseas and get destroyed rather than find their way into the general economy.

Workers have more cash, but do not have more goods to buy. Prices rise accordingly.

WWII put heavy industry to use, unemployed people to work, etc. That is how WWII ended the depression.

So you're saying that you can end a depression simply by printing more money and/or establishing socialist programs where the government buys a lot of stuff? That seems unlikely to me, and I wonder if you could actually argue that the end of the depression is what enabled the US to produce so much war munitions?

And didn't the New Deal through the WPA also put unemployed people to work?

[Tim]

"WWII put heavy industry to use, unemployed people to work, etc. That is how WWII ended the depression."

Wait...what? So if people had just gone out and built stuff or better yet not even built things just stood in factories pretending to build stuff it would have ended the Depression?

[SIV]

I thought the New Deal banned machine guns and marijuana? Oh yeah, and forces you to contribute to a bunch of old people's retirement rather than funding your own.

[Dan T.]

Care to offer any examples?

As far as I can tell, the only reforms that help prevent future great depressions are changes to banking and trading rules -- hardly refinements that should be considered part of the New Deal.

I would consider them part of the New Deal but maybe they're generally not. Aside from that, I think Social Security is the most obvious example.

[Cesar]

Dan T.--

Great Britain had an extensive social insurance network since 1912. It didn't stop the depression from occurring there.

[Kenobi]

WWII put heavy industry to use, unemployed people to work, etc. That is how WWII ended the depression.

Have you ever heard of the broken window fallacy?

[MikeP]

iowan,

Your definition of "depression" leaves something rather crucial on the table. As others note, your notion of depression could be ended by having the government borrow money and pay to have people dig useless ditches.

As with most economic metrics, the measure of goodness of a recovery from a depression is not how many people are working, but how many wants of people are satisfied.

I would go so far as to say that the depression lasted throughout World War II. So long as the government was borrowing money, redirecting industry to its ends, and rationing goods to the general consumer, the economy was not in recovery.

Then again, if spending money on the war is what people really wanted -- as they appeared to during World War II -- then perhaps you could say the economy had recovered.

Don't try this with an unpopular war...

[MikeP]

I think Social Security is the most obvious example.

You are kidding.

How does Social Security keep depressions from happening?

[iowan]

So you're saying that you can end a depression simply by printing more money . . .

I believe that the federal government operated for several decades under the assumption that it could wipe out the business cycle by controlling the money supply.

You were aware of that weren't you Dan?

[iowan]

MikeP, I was responding to DanT's observation that war is destructive.

I said that war causes inflation. In the case of WWII, prices had falled out of the bottom; unemployment was double digits. I would argue that artificially raising prices for consumer goods by building war goods and by putting many many people to work had more effect on ending the great depression that the new deal policies did.

Don't try this with an unpopular war...

Can you say "stagflation". It was great to come of age in the middle 70's.

[Dan T.]

You are kidding.

How does Social Security keep depressions from happening?

It doesn't do it by itself, but it certainly helps maintain economic stability by making sure that there is not a significant number of people living in abject poverty.

[Dan T.]

I would argue that artificially raising prices for consumer goods by building war goods and by putting many many people to work had more effect on ending the great depression that the new deal policies did.

But didn't many of the New Deal policies involve artificially raising prices and putting people to work on government projects? Why did it not work then but did work for WWII?

[squarooticus]

Kind of depends on who you believe as to which government program lifted us out of the depression. War, on balance, is a destructive activity, not a creative one, so it's hard to see exactly how it could lift us out of a depression.
Of course war is a net-destructive activity...in a closed system: you will get no broken window argument from me. But there are certainly winners and losers in any war, and the US was one of the winners, at the expense of many other countries. To argue that a world war cannot provide economic benefit to some portion of that world is absurd.

Kyle

[Cesar]

But didn't many of the New Deal policies involve artificially raising prices and putting people to work on government projects? Why did it not work then but did work for WWII?

Dan T. heres a book that deals with that very issue, and many more.

[iowan]

It doesn't do it by itself, but it certainly helps maintain economic stability by making sure that there is not a significant number of people living in abject poverty.

Social security was an intential effort to encourage/force older, working men to retire so that younger, unemployed men could take their places.

Poverty prevention was the lipstick put on the pig to achieve public acceptance

[Cesar]

Actually, the main arguments are also posted in a short cartoon online as well.

[Lamar]

Funny how everybody is making a big distinction between the New Deal and World War Two spending. It's all gov't money taken from taxes and bonds. Get over yourselves, the Depression took government intervention no matter how you look at it.

Ultimately, Pro Libertate hit the nail on the head with one simple sentence. We needed people to buy our stuff, and we gave them money to get their act together. Some did better than others. How does this contradict the idea that the Marshall Plan worked?

[Kenobi]

iowan,

According to national wealth statistics compiled by the U.S. Department of Commerce, there was virtually no change in national wealth in real terms from 1941 to 1945. Based on 1947-49 prices, the nation's wealth amounted to $748.4 billion in 1939. In 1945, it was$763.7 billion. But in per capita terms, the national standard of living appears to have declined.

Check it out:

http://www.mises.org/journals/rae/pdf/rae2_1_14.pdf

As Dan T. points out, the New Deal did plenty of artificial price raising; the Smoot-Hawley [sp?] tariff also would have raised them dramatically as well.

[iowan]

As I have read, the programs that really ended the depression were the many veterans benefits that put milions of returning soldiers through college and allowed them to buy houses.

[MikeP]

I would argue that artificially raising prices for consumer goods by building war goods and by putting many many people to work had more effect on ending the great depression that the new deal policies did.

But the raising of prices is a side effect. Full employment and the concomitant demand for (unrationed) consumer goods could have been accomplished without raising prices. For instance, the government could have -- money valuation permitting -- paid for goods with gold assets. Or they could have sold land to acquire the cash to buy war supplies.

It is possible that after so many years of depression there was not enough monetary liquidity to allow someone to buy gold or land from the government and that it would need to invent money from thin air. But my point is that the inflationary effect is not fundamentally required to get the benefits attributed to the war effort.

[MikeP]

But didn't many of the New Deal policies involve artificially raising prices and putting people to work on government projects? Why did it not work then but did work for WWII?

Once again...

Government spending to beat the daylights out of Germany and Japan was wanted more than consumer goods in the refrigerator or garage. Government spending to paint murals on walls was not.

The depression continued through the war (see Kenobi's numbers). It's just that people didn't mind it in comparison to the war.

It is also worth noting that building tanks and airplanes actually does mobilize and organize industry and capital that, when freed up after the war, can satisfy consumer desires. Building sidewalks does not.

[iowan]

But my point is that the inflationary effect is not fundamentally required to get the benefits attributed to the war effort.

I'm not going to argue with you mikeP. I have alot of respect for you from other threads.

My general point is that the new deal did not stop the depression. The depression ended when the following combination of things occurred, each with differing levels of impact:

The population's attention was focussed on solving a problem bigger than the depression at home.

Young to middle aged men were plucked from an extrodinarily tight job market and sent overseas.

Heavey industry was ramped up to produce war machines to support those men.

Government money flooded the market which would increased consumer prices in a free market or produce an underground market in an era of government restrictions.

Another set of suppliers would come forward to fill the need of the undergound market.

Returning soldiers got college educations and the means to buy houses.

Perhaps the new deal helped, perhaps it didn't. But in no way was it the sole solution to ending the depression.

[iowan]

It is also worth noting that building tanks and airplanes actually does mobilize and organize industry and capital that, when freed up after the war, can satisfy consumer desires. Building sidewalks does not.

Amen to that!

[Pro Libertate]

I have a cunning plan.

[MikeP]

As cunning as a fox who's just been appointed Professor of Cunning at Oxford University?

[robc]

the programs that really ended the depression

None of the programs ended the depression. Not the New Deal, not WW2, not the GI Bill. The depression ended because ie ended. Its a frickin cycle. Its very possible that the New Deal and the war extended it though.

[Pro Libertate]

Yes, sir.

[joe]

Germany didn't lose an overseas empire.

Libertarian complaints about "welfare" ignore the difference between a lifer preserver and a sailboat.

A life preserver won't get you up and on your way; you need to climb back in the boat for that. But you aren't going to climb back in the boat if you drown.

Anyway, it's astounding what gets accepted as "just a fact" around here - the horrors of the New Deal, the negative effects of the minimum wage - despite the fact that debate rages among economists. It's the flip side of the denialism that certain people indulge in when it comes to issues like global warming and health care access.

[Pro Libertate]

joe,

And I'm astounded by your facts. Incidentally, thanks for breaking up the Blackadder party, you poxy git 🙂

[MikeP]

joe, the British Empire at present covers a quarter of the globe while the German Empire consists of a small sausage factory in Tanganyika.

[Cesar]

joe-

I didn't say anything about "horrors", but the simple fact is the business cycle in the 1930s did not emerge from depression.

[MikeP]

Yes, sir.

Well, I'm afraid it'll have to wait.

[MikeP]

iowan,

There doesn't seem to be much disagreement. I was simply having an anti-Keynesian reflexive reaction to the notion that inflation is either necessary or sufficient in achieving full employment.

It is, however, easier for the government to inflate the money supply than to procure existing money to spend on its desired end. So I suppose it will always be with us...

[Lamar]

History proves that the only reason America triumphed over communism is because the Marshall Plan gave our side such an overwhelming head start. The fact that communism failed proves my point.

What? You think your logic is better?

[Anonymo the Anonymous]

Anyway, it's astounding what gets accepted as "just a fact" around here - the horrors of the New Deal, the negative effects of the minimum wage - despite the fact that debate rages among economists.

How is this different than any political or ideological group taking a position on any issue? Debates rage about many subjects. Many groups stand with one side or another. That's how debates arise. What particular insight about libertarians do you claim to see here, other than "Libertarians hold positions I disagree with"?

[iowan]

There doesn't seem to be much disagreement.

Probably my fault. Dan T brings out the worst in me 😉

[Pro Libertate]

Sir, you forgot to add, "Whatever it was, I'm sure it was better than my plan to get out of this by pretending to be mad. I mean, who would have noticed another madman round here?"

Anyway, sir, as you charge off to your certain death, here's my cunning plan:

Fight a really big war against, say, Russia or China. Or maybe Europe. Because big wars are good for the economy. Right?

[joe]

It is also worth noting that building tanks and airplanes actually does mobilize and organize industry and capital that, when freed up after the war, can satisfy consumer desires. Building sidewalks does not.

Industrial capacity is not the only input that promotes growth. Transportation, communication, and even quality-of-life improvements can set the stage for more vibrant growth as well.

Of course, it's still a question of capital being invested into wealth-creating ventures that has to happen for the economy to improve but all of these things make it easier for capital to find its way to those ventures, and for those ventures to create additional wealth.

[frog]

Fight a really big war against, say, Russia or China. Or maybe Europe.

How about France? Can we just invade France? It won't do anything for our economy, but it would feel good.

[joe]

BTW, Mike P, whether the wealth produced by an expansion of the GDP satisfies consumer desires or some other goal is irrelevant to the question of whether the economy is growing.

If the economy grows by 4% per year, but all of that additional wealth is captured in military spending, it's still a growth period. Your point is a statement of values, not of economic phenomena.

Now, if you go back and put the horse in front of the cart, satisfying consumer desires is more likely to lead to economic growth than other uses of wealth, but that's a different matter.

[Dan T.]

How about France? Can we just invade France? It won't do anything for our economy, but it would feel good.

Plus, the destruction we cause might finally get our health-care system ranked above theirs'...

[joe]

Did Mike P just manage to merge the Blackadder theme with the topic of the thread?

Well done, old bean!

[MikeP]

"I mean, who would have noticed another madman round here?"

I was leaving that juicy bit for you.

[MikeP]

The credit goes to Pro Libertate.

[Pro Libertate]

frog,

At least we won't attack by way of Belgium. Gives the French a nice change of pace.

joe,

I was criticized in another thread for not pausing after my regular "I have a cunning plan" statements. So I paused. Kudos to MikeP, with whom thoreau agrees.

[joe]

Cesar,

That the business cycle didn't rise out of the Depression in the 1930s is not a controversial statement. Others have tossed off the assertion that it is "just a fact" that the New Deal worsened and lengthened the depression, or that the policies adopted under the New Deal have done nothing to stave off depressions. Those are extremely controversial statements among people who know history and economic history, yet I sometimes see them mentioned as the equivalent of "the sky is blue."

[Brian Courts]

Anyway, it's astounding what gets accepted as "just a fact" around here - the horrors of the New Deal

joe, that seems a rather strange criticism to me. What has largely been accepted as "just a fact" in the popular view of 20th century history, and no doubt gets accepted as "just a fact" with liberals, is that Roosevelt essentially rode in on a white horse and pulled America out of the depression with his New Deal. It is an interesting twist to turn taking a skeptical view of credulously accepted facts on its head and label that as the real uncritical acceptance.

[MikeP]

If the economy grows by 4% per year, but all of that additional wealth is captured in military spending, it's still a growth period. Your point is a statement of values, not of economic phenomena.

You simply can't put a valuation on wealth without the wealth being valued by someone. GDP numbers are always a statement of values at their root.

The best way to determine what the value of something is is to have someone buy it. If the government must outbid other interests to fund the war effort, then, yes, the valuation of the generated war material will be higher than alternate uses, and the higher value of the wealth will appear as higher GDP numbers, modulo inflation. If the government simply orders steel to go to war uses, then you can't tell how it would have been valued by the market and you can't really put a dollar value on it.

Alternatively, the government could employ the entire national population in digging ditches. If those ditches have zero value to anyone, your nation's GDP is $0. If those ditches have a value to someone 4% greater in year 2 than in year 1, your economy grew 4% year-to-year. If someone invents a better ditch digging machine, you might get a 10% growth in your GDP.

But if you never actually sold a ditch, how would you know what your ditch-digging GDP is?

[MikeP]

Industrial capacity is not the only input that promotes growth. Transportation, communication, and even quality-of-life improvements can set the stage for more vibrant growth as well.

Agreed. One could almost see a major disemployment event such as the Great Depression as an opportunity to employ labor in building long neglected or foreseen infrastructure for the future that for whatever reason the market did not provide.

That is, if one believed that the government could even come close to predicting what infrastructure is required in the future better than even a faulty market. Ha.

[Isaac Bartram]

Fight a really big war against, say, Russia or China.

I disagree. I think "the prerequisite for any battle...[should be}..that the enemy should under no circumstances carry guns'.

[Brian Courts]

All this discussion of what ended the depression seems hopeless without offering some theory of what caused the depression in the first place. After all, if your view of the cause is more in line with explanations offered by the Austrians, or monetarists, or Keynesians or whoever, then arguing what ended it with someone of a different view is going to be fruitless. The real disagreement stems from the underlying view of what happened in the first place.

[Pro Libertate]

Isaac,

Europe it is, then.

[joe]

Mike P,

I think you are conflating two different definitions of the word value, and resting your argument on that conflation.

Whatever you think is "best," the definition of depression does not rely on "goodness" or what people like. It is based on hard numbers related to GDP growth. Whether you, personally, think that growth is happening the right way is a question of values, not economics.

[MikeP]

joe,

If the entire economy were employed digging ditches that nobody wanted, what would the hard numbers of the GDP be?

[Isaac Bartram]

Isaac,

Europe it is, then.

...Chortle...

[Isaac Bartram]

Of course it would also be good to find a place full of men in skirts so we can shoot them and nick their country.

[Pro Libertate]

If you really want to torque my Scottish relatives, invade wielding the now-banned sword. Preferably a claymore.

[Isaac Bartram]

Damn, I forgot about the Scots. Not just no guns, not even any swords. And they wear skirts. 🙂

But would you really want their country?

[Pro Libertate]

They've got haggis and nice golf courses. And tasty salmon.

[joshua corning]

It sounds like the Marshall Plan is getting the New Deal treatment here - because no government program can work, the ones that did appear to work actually just prevented things from being even better.

YAY!!!

Reason has decided to differentiate its foreign policy analysis from what the left dishes out.

Good job...also someone should tell Weigel about the change.

[Cesar]

So Michael Young strikes you as left wing?

[jh]

The New Deal failed to lift the United States out of the Great Depression. Thats just a fact, it lasted until the outbreak of WWII.

Kind of depends on who you believe as to which government program lifted us out of the depression. War, on balance, is a destructive activity, not a creative one, so it's hard to see exactly how it could lift us out of a depression.

The New Deal prolonged what should have been a short depression. The Great Depression ended after FDR died and WWII ended -- people in America had rotten standards of living during WWII, possibly even fewer consumer goods than during the 1930s, even though they had more employment. For example, you couldn't buy new cars after those factories converted to building tanks -- going from a few new cars being built to none being built is not a rise in prosperity. Prosperity comes from individuals having consumer goods, not from the government having armaments.

[joe]

Mike P,

The GDP numbers under that scenario would be quite strong, for a little while, based on the amount of fiat wealth that got pumped into the economy. It wouldn't last, however - it would just set us up for a decline later, as busywork that didn't produce genuine improvements in the conditions that foster wealth creation (digging ditches rather than building roads, for example) would generate lots of debt, without there being an economic uptick that allowed it to be paid off.

No hard-Keyenseian, I. See my life preserver/sailboat analogy.

[joe]

BTW, Mike P, since "the entire economy employed digging ditches" is such a silly exercise, I answered a better version of your question, "What if the government spent 10% of GDP paying the unemployed to dig ditches?"

[joe]

Prosperity comes from individuals having consumer goods, not from the government having armaments.

See this statement, Mike P? This is what I was talking about.

If economic growth is at 4%, economic growth is at 4%, and it doesn't matter how many armaments the government is buying WHEN YOU ARE ANSWERING THE QUESTION "ARE WE IN A DEPRESSION?"

jh's "prosperity" is a statement of values, of beliefs - it's a statement of ethics, an answer to the question "What is good?"

If GDP declined 1% per year, but the 3% (IIRC) we spend on the military was cut by 90%, there would be a net gain in jh's "prosperity." Nonetheless, we would be in a recession or depression.

[Son of a!]

I love it when someone comes in hours after a thread has died and writes several posts in a row that no one is around to rebut.

I, of course, will not rebut them, because I didn't bother to read them (nor most of the thread); I just like looking at the pattern of names. Also, I'm amazed and tickled to see Pro Libertate actually took my advice (not a criticism!) to set up a fat pitch once in a while.

[MikeP]

What if the government spent 10% of GDP paying the unemployed to dig ditches?

joe,

Under that scenario, the GDP is already significantly below where it would be with full employment. Paying people to dig useless ditches or, for that matter, to sit on their porches would add absolutely zero to the GDP.

A Keynesian may argue that giving the money to the unemployed using any excuse you can will at least increase perceived demand for things that poor people buy, and that such stimulus may collaterally provide opportunities to reemploy a steadily increasing share of those ditch diggers in jobs that are actually productive. But I expect that even the Keynesian would tell you that, as long as the unemployed are digging useless ditches, they are not contributing to the GDP.

If your GDP measurements show that the effectively unemployed are actively contributing to the GDP, you need revise how you figure your GDP.

[MikeP]

If GDP declined 1% per year, but the 3% (IIRC) we spend on the military was cut by 90%, there would be a net gain in jh's "prosperity." Nonetheless, we would be in a recession or depression.

joe,

You have set up the numbers to be a recession by definition! In actuality, cutting the 3% military budget by 90% would not lower the GDP except transiently. To assume a definite decline in GDP is to assume the recession you conclude.

Nonetheless, of course a 90% cut in military spending would induce a recession. But perhaps not for the reasons you think.

There would be a vast amount of real and human capital that was geared toward satisfying the military spending. That all isn't going to become redirected overnight. To find new uses for it takes time. To build up the equivalent productive base out of new capital to satisfy new demands takes time. That is what causes the recession. That is the recession.

Saying that the recession is caused by macroeconomic metrics like dollars on the demand side suddenly disappearing is mistaking an apparent side effect for the actual issue. The dollars did not disappear. They are right there in taxpayers' wallets where the government left them because it cut military spending so drastically. But the recession will still come, and it will stick around until the now unused capital is redirected or rebuilt to attract the dollars that now reside in consumers' wallets.

[jh]

joe, you're confusing government statistics about prosperity or the lack thereof, prepared for politicians seeking reelection, with actual prosperity. For example, if you go to

http://eh.net/hmit/gdp/

and look up real GPD per capita by year, it shows a peak in that figure in 1944, then a decline in the immediate post-war years, and a slow recovery, so that by 1959 the numbers finally reach the 1944 levels. This defies common sense -- does anyone in touch with reality actually believe that the privation of the war years exceeds the economic boom of the post-war years and the 50s? If you talk to people who actually lived through those times, they'll tell you they didn't actually have more bread and butter and cars and other consumer goods during the war years, they had rationing and shortages and a complete shutdown of many consumer goods manufactured.

Oh, but you trust the effing government, so you'll believe government statistics rather than the real world experience of people.

Prosperity returned when the government quit being so socialist in the post-war years.

[Isaac Bartram]

They've got haggis and nice golf courses. And tasty salmon.

You're quite right, of course. Bad joke.

Besides, that's pretty much where the English got started on its country-nicking habit, wasn't it?

[Attin]

I disagree with your views but thinking about it who
presents views that are acceptable to everyone. Keep posting your good
blogs.