24 Jul 2012

The Myth of Wartime Prosperity

Economics, Foreign Policy, Krugman, Shameless Self-Promotion 136 Comments

This ran a while ago but I forgot to blog about it. Half of my piece is just the standard case against World War II “prosperity,” with a link to Steve Horwitz’s co-authored piece drawing on primary sources to show how tough things were on the homefront.

However, after that I take Krugman et al. head-on. I’m not saying I am the first to advance this particular argument, but I don’t think it gets stressed much when people like me typically take on the myth of wartime prosperity:

Yet the Keynesian case is weaker still. Suppose we accept, for the sake of argument, that $1 million of government spending is just as economically significant as $1 million of private investment or private consumer spending. Even so, the World War II era still doesn’t present a model for dealing with an economic depression.

Look again at the figure above. Even on the Keynesians’ own terms, private GDP—the share of the economy devoted to civilian purposes—was lower during the height of the war than during 1933, the very worst year of the Great Depression. When we take into account the increase in population during the decade in between, the impact on the homefront is even more astounding.

Let us suppose, then, that the government today did exactly what Paul Krugman recommends, and engaged in massive government purchases comparable to those during World War II. Yet rather than build tanks and bombers, instead the government today buys socially useful things (in Krugman’s vision) such as roads, bridges, parks, the services of additional police and firefighters, etc. If things turned out today the way they did during the war years, would Americans be happy with the result?

I suggest they would not; they would reject the bargain, even on Krugman’s own terms. Suppose people took today as equivalent to 1941, and then the country proceeded to have similar government spending and economic performance as the official statistics show happened during World War II. That means private economic output would fall a total of 55 percent between now and 2015, or at an annualized rate of about 24 percent per year. Does the average American household right now want to suffer a 24 percent annual drop in their private standard of living, for three years in a row? This would put their standard of living back to around 1984 levels (and again, I’m not even accounting for population changes). Would the average household’s answer be affected if we told them about how many potholes would be filled, and how many new schools would be built during those three years?

But wait, it gets worse. It’s not merely that there would be a 3-year period of extreme penury (in terms of private goods and services), in exchange for those things the government provides. After this burst of Keynesianism—again using World War II as the model, now by comparing 1941 to 1946—the federal government’s gross debt held by the public would have grown by a factor of five. Since the federal debt held by the public right now is about $10 trillion, that means mimicking the World War II experience would yield a federal debt of $50 trillion by 2017. This new fact is on top of the reversion to 1984 levels of private GDP. Again I ask: Is there any amount of new schoolteachers and bridges that would compensate for these two trends?

136 Responses to “The Myth of Wartime Prosperity”

  1. Major_Freedom says:

    Good post.

    ———————

    If everyone just thought like a “progressive socialized man”, by no longer listening to Ron Paul, the Koch brothers, the GOP, Conservatives, the Tea Party, and Obama haters, and instead listened to Krugman, Warren Buffet, the Democrats, progressives, the Occupy movement, and Bush haters, then there really will be a gain in utility from such progressive government projects. The government’s utility becomes the standard bearer for all things utility when progressives have control of the state’s finances, so that means the problem is when individuals have their separate interests not in line with the progressive’s interests. Those individuals are evil, and have to either be converted by Rev. Krugman, or ostracized. Their individual values are not important, for they conflict with the progressive state’s values. Therefore, the progressive statists have to keep fighting for more and more progressive statism, no matter what, until the evil is purged from society. Anything less is capitulating; a hand-off of the moral torch over to the evil people. Never stop calling for more progressive statism, especially in a depression when the evil people have the highest chance at acquiring more power over the good people. Give the good people more goodies so that they can compete against the evil people.

    There isn’t really a problem with progressive government projects. They can be slightly mismanaged, slightly badly run, and so on, but they are essentially good. You have to say they’re essentially good first, and then you are entitled to criticize the details. If not, then your criticisms are necessarily ideological and dogmatic. Your logic is wrong because your side is ideological (don’t laugh!).

  2. Kevin Donoghue says:

    When pressed for a “success story” of their policies, Keynesians point with pride to World War II. They claim that it is the perfect illustration of the ability of massive government spending to lift an economy out of the doldrums.

    So here’s Krugman, pointing with pride:

    …in the 1930s, as today, many wise heads insisted that unemployment was structural, that many of the unemployed could not be gainfully employed no matter how much demand increased. Then demand actually did increase….

    But please note what he’s pointing to. He’s not claiming there was an increase in welfare. He’s observing that there was an increase in output, which according to the “Treasury View”, should not have been possible. Keynesian economists know very well that GDP is not the same as well-being.

    • Bob Murphy says:

      Kevin the more you post here, the more I understand the title of your blog. (BOOM!)

      • Daniel Kuehn says:

        I don’t know – that was my first reaction to your article too (which admittedly I’ve only skimmed at this point – maybe you’ve addressed it).

        Keynesian theory doesn’t offer a theory of living standards – it offers a theory output. I don’t think anyone is under any other impression.

        Of course living standards languished during the war. Again – I think this is pretty common knowledge. Our grandparents tell us stories about how they couldn’t get basic commodities – not that they were living large! So they weren’t exactly fun years but let’s not jump from that to the argument that they rejected the deal they were getting. Most Americans, I would expect, were willing to make those sacrifices to defeat fascism.

        This is hardly an indictment of Keynesianism.

        • Sandre says:

          You are going off on a tangent with the fascism comment. That’s a debate for another time. That’s not the central point of RPM’s article.

          • Daniel Kuehn says:

            It’s not a tangent – it speaks to the standard of living point he raised. He’s trying to make the claim that Keynesianism did not raise the standard of living.

            There are two problems with this:

            1. It never claimed to do that, and
            2. You have to consider the prospect that people willingly traded a higher standard of living for something else…

            …something like fighting fascism.

            • Major_Freedom says:

              It never claimed to do that

              If Keynesianism was never meant to raise the standard of living of people, and was only meant to raise employment and output, then what’s the point of it from an individual’s perspective? From the perspective of an individual who wants to increase his standard of living? Is Keynesianism not for this person? Is Keynesianism solely for the statesmen, who benefit when more people are working and producing “output” in line with statesmen’s values?

              Is Keynesianism demanding that individuals value a lower standard of living over a higher standard of living? That is praxeologically impossible.

        • Blackadder says:

          Keynesian theory doesn’t offer a theory of living standards – it offers a theory output. I don’t think anyone is under any other impression.

          I would say lots of people are under other impressions. For example, suppose that in 2009 Obama had said “we need a giant stimulus to increase our nation’s output. Granted, the stimulus will cause living standards to crater. But that’s not important. The important thing is that it will increase output.” I’m guessing that this would not have persuaded many people.

          People support stimulus because they think it will actually improve people’s lives, not because it will maximize some abstract statistic. If it doesn’t do that, then what’s the point?

          • Silas Barta says:

            For once, Blackadder and I are in complete agreement!

          • Daniel Kuehn says:

            Cause living standard to crater? I don’t understand this comment, blackadder.

            • Major_Freedom says:

              Yes, ignore the main issue BA is raising. Focus on the semantics, and not the sentiment. It’s better that way. You don’t have to actually address it if you’re busy quibbling over grammar.

              I’m with Silas. First time I am in full agreement with BA too.

          • Daniel Kuehn says:

            I think you’re misunderstanding what we’re saying.

            Keynes offered a theory of why output might be lower than the full employment level of output and offered a solution to that problem.

            Presumably life around full employment is better than life below full employment, yes. But the level of a person’s standard of living is a function of productivity and the maturity of the economy. These are long run/Classical type concerns.

            And even putting all of that aside – even if Keynesianism was about living standards – you still need to remember that we were fighting a war! People democratically decided to trade standard of living for an earnest fight against fascism.

            That’s not much of a refutation of Keynesianism.

            • Major_Freedom says:

              The American people by and large did not want the state to enter either of the world wars.

              It’s why the US could only gain enough political support after FDR turned a blind eye to Pearl Harbor.

              —————-

              The debate here isn’t so much a “refutation” of Keynesianism, as it is an ideological cover to excuse profligate governments and to make it appear as politically palatable.

              By saying “Output is increased”, most people take that to mean higher living standards. Most Keynesians present higher output as higher living standards.

            • Blackadder says:

              That’s not much of a refutation of Keynesianism.

              The issue isn’t whether Keynesianism is refuted but whether it is relevant.

              Suppose I say that we should draft all able bodied men and put them to work making origami birds all day, as my theory shows this would increase the number of origami birds produced.

              You might reply by pointing out all the negative consequences this would have. I could respond that you haven’t refuted my theory. And you would be right! But the real question is why anyone should care. Sure, forcing people to make origami would increase production of origami, but that’s not a compelling reason to do so.

              Likewise, perhaps Keynesian theory is right that increased government spending could boost output. That sounds great. But if you add the caveat that the theory says nothing about what would happen to living standards (and in fact stimulus might cause them to go down) then we are back at the question: even if Keynes was right, who cares?

        • Silas Barta says:

          Oh, okay, so there are no normative implications for “output”, and therefore there’s nothing (per Keynesianism) wrong with leaving Keynesian-defined output to stagnate in recognition of how it’s not intended to correspond to welfare (or if it is, it’s very wrong)?

        • Major_Freedom says:

          Keynesian theory doesn’t offer a theory of living standards – it offers a theory output.

          Why would anyone be concerned with output rather than living standards, such that they adhere to a theory of output rather than a theory of living standards?

          Why would anyone in their right mind advocate for actions that result in higher output but lower living standards?

          I like it how you keep inadvertently putting the final nails into the coffin of Keynesianism. There’s been a zillion of them already, and it is amazing to me how many more can be added.

          • KP says:

            “Why would anyone in their right mind advocate for actions that result in higher output but lower living standards?”

            To fight fascism, duh.

            • Silas Barta says:

              No, to hire 5% more teachers.

            • Major_Freedom says:

              So that explains post-WW2 Keynesianism. It’s been to fight fascism all along.

              • gienek says:

                By introducing a “more sophisticated” type of it, let’s not forget.

              • Tel says:

                Makes you wonder why we are slowly but surely losing that fight.

          • Daniel Kuehn says:

            Explain to me how there can be a zillion “final” nails.

            • Major_Freedom says:

              That’s the joke.

              • Daniel Kuehn says:

                I get the joke, I was highlighting that because I wasn’t sure you were in on it.

              • Major_Freedom says:

                You’re not sure if I was in on the joke….that I myself contributed?

                Wow.

              • Daniel Kuehn says:

                Dude – do I have to spoon feed this to you.

                I thought you said something contradictory, that was funny, that you didn’t pick up on.

                You write so much on here, and given the quality of most of it I don’t always assume you’re processing what you’re writing.

              • Major_Freedom says:

                I thought you said something contradictory, that was funny, that you didn’t pick up on.

                But then that’s a DIFFERENT joke. You said you got “the” joke, you just wasn’t sure if I was in on it. That means you must have been referring to my joke.

                You can’t say you got “the” joke I was telling, and then ask if I was in on it, and then pretend that you were talking about your joke, which wasn’t my joke, the “the” joke you referred to.

                Speaking of being spoonfed.

                And what’s this? A jab at the quality of my posts? Is that what you call correcting your errors? Posts of questionable quality? OK, my posts are of questionable quality then.

                I am processing what I am writing just fine, thank you. I have shown that you are not processing what you are writing. You’re too busy trying to reconcile an impossibly inconsistent position.

        • Dyspeptic says:

          “Of course living standards languished during the war. Again – I think this is pretty common knowledge.”

          Daniel, you assume way too much about Americans common knowledge. I bet if you went out and asked the first 1000 people you met when WWII occurred most couldn’t tell you. They probably could tell you who the new judge on American Idol is though.

          “Keynesian theory doesn’t offer a theory of living standards – it offers a theory output”. I don’t think anyone is under any other impression.”

          You’re very fast and loose with your unrealistic assumptions today. Do you really think Keynesianism isn’t equated with a better national standard of living by it’s proponents, especially politicians? Herr Krugman is always touting the moral superiority of Keynesianism by virtue of it’s greater “humaneness” and compassion. So Keynesian policy is morally superior but not because it increases living standards? What’s the point of government make work projects if employment doesn’t improve living standards?

          “Most Americans, I would expect, were willing to make those sacrifices to defeat fascism.”

          My uncle made a sacrifice in living standards. He stopped living when his B-24 fell 20,000 feet and crashed on what would shortly become East German soil to make the world safe for Stalinism. The WWII generation was wrong to make that choice (Stalinism over Nazism), but what does that have to do with Dr. Murphy’s point?

          “This is hardly an indictment of Keynesianism.”

          I get the impression that you don’t think an indictment of Keynesianism is possible. Notwithstanding that, it is an indictment of the common Keynesian boast that World War II ended the misery of The Great Depression and constituted a wildly successful Keynesian stimulus program. It’s exactly why Herr Krugman wants another 5 or 6 trillion in deficit spending to get the debt to GDP ratio up around 120%.

    • Bob Murphy says:

      Kevin Donoghue wrote:

      But please note what [Krugman’s] pointing to. He’s not claiming there was an increase in welfare. He’s observing that there was an increase in output, which according to the “Treasury View”, should not have been possible. Keynesian economists know very well that GDP is not the same as well-being.

      And yet, over at Steve Landsburg’s blog, here’s what Kevin wrote:

      Bob Murphy gets it. The Keynesian claim is that increasing aggregate demand in a slump is a Pareto improvement.

      • Kevin Donoghue says:

        Okay, I wasn’t thinking about wars when I wrote that. Of course a slump, unless it is resulting in mass starvation or the like, is clearly preferable to even a small war. A more careful statement would have to specify the nature of the aggregate demand increase. Also, distributional effects need to be taken into account. But whatever his faults I’m pretty sure Steven Landsburg gets that. What he’s missing is that a Keynesian equilibrium differs from a Walrasian equilibrium in that a Pareto improvement is always possible. That follows from the fact that unemployment is involuntary in Keynes’s sense.

        • Bob Murphy says:

          KD wrote: Okay, I wasn’t thinking about wars when I wrote that. Of course a slump, unless it is resulting in mass starvation or the like, is clearly preferable to even a small war. A more careful statement would have to specify the nature of the aggregate demand increase.

          Kevin Donoghue, first–and I’m being serious–I appreciate that you at least backed down a bit, and recognized the total contradiction there between your two statements. I think I’ve got Daniel Kuehn in a similar conundrum, and he keeps raising the pot. (“People told me about rationing in high school! Who the heck would ever think Krugman meant it would be good to get a recovery? Why in the world would ‘end this depression’ be conflated with ‘help the American people’??”)

          But I really do think you just gave away the whole game, and you don’t seem to realize it. It’s such that I want to do a follow-up post. So, do you want to amend your above response in any way, maybe add more nuance or something? Or should I just quote it as-is and unleash hell, as Gladiator would say?

          • Major_Freedom says:

            This cat is as sharp as a tack.

          • Major_Freedom says:

            “The Keynesian claim is that increasing aggregate demand in a slump is a Pareto improvement.”

            Murphy, this claim isn’t even a true claim. Maybe you can make your post one of a contradiction between two claims, with one being a false claim.

            Central bank increasing aggregate demand cannot be a Pareto improvement because it ultimately rests on coercion, which always creates exploiters and exploitees, and via the Cantillon Effect those who receive the new money last always incur the costs of the gains of those who receive the new money first.

          • Kevin Donoghue says:

            If I was to get into all the nuances I’d have to write an essay about James Tobin’s wisecrack (“it takes a heap of Harberger triangles to fill an Okun gap”). Life’s too short. Fire away; words ought to be a little wild, as the great man said.

            • Major_Freedom says:

              The devil is the details, as another wise man once said.

          • Daniel Kuehn says:

            I don’t know what conundrum you think I’m in. It was good to get a recovery.

            [being fully employed, Europe’s doing A-OK so you live pleasantly through the 40s] >> [being fully employed and rationing yourself to end fascism in Europe] >> [being well below full employment and letting fascism run roughshod over Europe]

            Unfortunately the best option isn’t one we had.

            “end this depression” would “help America”. It did “help America” in the 1940s because: [being fully employed and rationing yourself to end fascism in Europe] >> [being well below full employment and letting fascism run roughshod over Europe]

            Now, if all you’re are saying is that we’d be better off without fascism, I whole-heartedly agree (although I hear Mises was on the fence…)

            • Major_Freedom says:

              I don’t know what conundrum you think I’m in. It was good to get a recovery.

              Haha, by “good” you are imparting a normative, subjective value judgment. If it was good in your mind, then that means it raised your own standard of living in terms of thinking about the fact that there were more tanks and bombers and thus more output all else equal.

              How can you not see the conundrum here?

              [being fully employed, Europe’s doing A-OK so you live pleasantly through the 40s] >> [being fully employed and rationing yourself to end fascism in Europe] >> [being well below full employment and letting fascism run roughshod over Europe]

              How do you know there would have been less than full employment without the war? If the US government totally abstained from interfering in the market throughout the 1920s and 1930s, if then there wouldn’t have been high unemployment in the first place.

              You can’t say that unemployment would have been high had it not been for WW2. For one can also say that unemployment would have been lower had it not been for the widespread government intervention throughout the 1920s (mostly in money), and throughout the 1930s (mostly in New Deal regulations).

              Unfortunately the best option isn’t one we had.

              Wrong. They had the option of removing government intervention. They had the choice. They could have done it. There was no historical necessity for it. There was no inevitability for it.

              “end this depression” would “help America”. It did “help America” in the 1940s because: [being fully employed and rationing yourself to end fascism in Europe] >> [being well below full employment and letting fascism run roughshod over Europe]

              You are again just imparting your personal subjective values and arrogating them to the status of objective values for everyone else. Why do you keep doing that? Because the power is democratic?

              Hitler enacted Keynesian policies. His power was not democratic. Does that mean Keynesian policies in Nazi Germany didn’t “help Germany”?

              Now, if all you’re are saying is that we’d be better off without fascism, I whole-heartedly agree (although I hear Mises was on the fence…)

              That’s not all they’re saying. They’re saying you are stuck with holding mutually exclusive positions.

              Oh, and BTW, did you hear that FDR modeled his New Deal policies after the fascism of Mussolini, whom FDR considered “that admirable man”?

              Did you hear that Keynes was a pro-eugenics, anti-semitic pederast?

              Did you hear that Mises was NOT on the fence about fascism at all, as he wrote:

              “Now it cannot be denied that the only way one can offer effective resistance to violent assaults is by violence. Against the weapons of the Bolsheviks, weapons must be used in reprisal, and it would be a mistake to display weakness before murderers. No liberal has ever called this into question. What distinguishes liberal from Fascist political tactics is not a difference of opinion in regard to the necessity of using armed force to resist armed attackers, but a difference in the fundamental estimation of the role of violence in a struggle for power. The great danger threatening domestic policy from the side of Fascism lies in its complete faith in the decisive power of violence.”

              and

              “Fascism can triumph today because universal indignation at the infamies committed by the socialists and communists has obtained for it the sympathies of wide circles. But when the fresh impression of the crimes of the Bolsheviks has paled, the socialist program will once again exercise its power of attraction on the masses. For Fascism does nothing to combat it except to suppress socialist ideas and to persecute the people who spread them. If it wanted really to combat socialism, it would have to oppose it with ideas. There is, however, only one idea that can be effectively opposed to socialism, viz., that of liberalism.”

              and

              “So much for the domestic policy of Fascism. That its foreign policy, based as it is on the avowed principle of force in international relations, cannot fail to give rise to an endless series of wars that must destroy all of modern civilization requires no further discussion. To maintain and further raise our present level of economic development, peace among nations must be assured. But they cannot live together in peace if the basic tenet of the ideology by which they are governed is the belief that one’s own nation can secure its place in the community of nations by force alone.”

              When Mises says “no further discussion”, he means he took a side and didn’t remain on the fence.

              Nice try at smearing Mises as partial to fascism. It really shows your true motivations, and they’re not honest.

              • Ken B says:

                Mises sounds pretty convinced of the merits of armed resistance in those quotes too. Actually he even sounds like he’d favour (gasp) alliances.

                This Mises guy sounds pretty sensible.

              • Major_Freedom says:

                I would “side” with the violence that a serial murdering rapist genocidal maniac elicits if the alternative is watching my family die and my life destroyed.

                Libertarians are not against armed resistance.

                Maybe you misunderstood the entire philosophy? I wouldn’t be surprised.

              • Daniel Kuehn says:

                To be fair, I said he was on the fence – not partial. I would never claim he’s partial to fascism. There’s no evidence for that at all.

              • Major_Freedom says:

                Well, when people say that someone is “on the fence”, it usually means they accept that there is some validity to both sides. Saying Mises was on the fence concerning fascism, is saying Mises thought there is some validity to it, as if he didn’t write “no further discussion”, which in the English language means he chose a side because he doesn’t accept there are valid arguments for fascism.

  3. Blackadder says:

    Good stuff.

    I find Krugman’s point about rationing a little perplexing. Sure, there was rationing during WWII. But why does Krugman think we had rationing in the first place? Does he think that, absent rationing, private spending would have shot up during WWII without harming the war effort?

    • Daniel Kuehn says:

      Yes, that’s the whole problem. Demand recovered very quickly with the beginning of the war. At that point, if government competed directly with consumers prosecuting the war would have been more costly and they would have had to do with much less. At full employment, spending crowds out other spending.

      So we democratically decided to channel productive capacity into defeating fascism.

      You may disagree with that democratic decision, but it was necessary, under full employment conditions, for mounting a full-scale resistance.

      • Major_Freedom says:

        I agree that Keynesianism is an intellectual cover for war.

      • Dyspeptic says:

        “So we democratically decided to channel productive capacity into defeating fascism.”

        Democracies do lot’s of stupid and immoral things. That’s why The Founders went to considerable trouble to attempt to limit democratic impulses with Republican structures like enumerated powers, antagonistic branches of government, state sovereignty and other measures meant to suppress majoritarian foolishness.

        “You may disagree with that democratic decision, but it was necessary, under full employment conditions, for mounting a full-scale resistance.”

        Resistance to what? That scheming bastard FDR illegally and surreptitiously put us on a wartime footing several years before he maneuvered the Japanese Empire into attacking us. The Anglophilic Wilson did the same thing during WWI. Both of these demogogic weasels repeatedly proclaimed the virtues of peaceful “isolationism” and neutrality while they plotted to involve us in European wars. Is it really self evident as you seem to think that resisting fascism while supporting an even more dangerous form of totalitarian socialism was “necessary”.

        • Major_Freedom says:

          I think the Russians would have beaten the Germans anyway without US involvement in Europe. At best, I think the US government during the 1940s can claim to have stopped Japan from taking over eastern China.

          None of this was a threat to America. This fear mongering that Hitler would have taken over the whole world is the same crap the bureaucrats and corporatists in the military industrial congressional complex pulled with Saddam. Saddam would have taken over the entire middle east and held the US’s oil interests hostage!

    • Silas Barta says:

      In the absence of rationing, more entrepreneurs would have looked for ways to cash in on the higher prices by bringing more of such goods to market. Good private spending — the kind we care about — would have definitely gone up, as more people gained the option to trade their money (rather than ration coupons) for the extra goods brought to market.

  4. CP says:

    I wonder how history books are able to make a seemingly compelling case for wartime prosperity (or at least improvement), even with rationing? I don’t think it’s just bias, it’s not like trying to explain the causes of the Depression. They also base it on interviews and reactions at the time.

    • Daniel Kuehn says:

      Could you cite a history book that said people were prosperous during the war.

      I always remember hearing that everyone had a job – that’s true.

      But I also always remember hearing that times were lean because of the contributions to the war effort.

      Did I get a completely different history education than everyone else here? Do I have completely atypical grandparents?

      I’m a little surprised at some of the comments on this.

  5. Ken B says:

    Even on the Keynesians’ own terms, private GDP—the share of the economy devoted to civilian purposes—was lower during the height of the war than during 1933, the very worst year of the Great Depression. When we take into account the increase in population during the decade in between, the impact on the homefront is even more astounding.

    If you want to add numbers this way you need to toss in all those fed, housed, and clothed at government expense during the height of the war.

    I agree with DK. I was never told stories of war time prosperity by my grand-parents. Nor have I read histories claiming that people bought war bonds because they were sick of champagne and lobster and needed to do something, anything, with that pesky money.

  6. Bob Murphy says:

    Daniel and Ken B., Krugman and others have constantly cited WW2 as an example of how the government could solve our current crisis in 6 months. Do you deny that he has done so?

    OK, so is it really so outrageous for me to point out, that few people today would swap their current position, with those of people living during World War 2?

    Krugman has attempted to deal with this, by saying that back then the gov’t spent money on bombs, whereas today gov’t would be spending the money on bridges and schoolteacher salaries. So my “contribution” in this article was to take him at face value, and say, “OK, private output down 55%, and we have totally smooth roads and safe bridges. Nobody would take that deal.”

    As usual, Keynesians are pointing to a “success” story that was actually awful, As with the Obama stimulus, they have to argue, “Sure it was bad in absolute terms, but relative to what otherwise would have happened…”

    In case you’re not seeing it: Krugman is effectively saying, “Sure, in practice massive government expenditures during 1940s went hand in hand with worse living standards than at the depths of the Great Depression. But–trust me on this–if we didn’t have rationing, and we didn’t have expenditures on bombs, then those people would have been living large. Hence, we can see with our own eyes how great deficit spending is. The war years prove this empirically. What more do you ideologues need to see, before you will agree with me on the benefits of deficit spending?”

    • Major_Freedom says:

      In case you’re not seeing it: Krugman is effectively saying, “Sure, in practice massive government expenditures during 1940s went hand in hand with worse living standards than at the depths of the Great Depression. But–trust me on this–if we didn’t have rationing, and we didn’t have expenditures on bombs, then those people would have been living large. Hence, we can see with our own eyes how great deficit spending is. The war years prove this empirically. What more do you ideologues need to see, before you will agree with me on the benefits of deficit spending?”

      That sums it up.

    • Daniel Kuehn says:

      re: “OK, so is it really so outrageous for me to point out, that few people today would swap their current position, with those of people living during World War 2?”

      But WHY? Because of Keynes or Adolf Hitler?

      The problem is you make it sound like people have claimed the early forties were just a lovely time to live. It’s a strawman.

      You cite standard of living rather than output. That’s datamining and departure from the relevant theory.

      • Silas Barta says:

        But WHY? Because of Keynes or Adolf Hitler?

        How do their economic policies differ?

        • Major_Freedom says:

          Just because Hitler utilized Keynesian policies, it doesn’t meanOH WHO BELIEVES THIS NONSENSE.

    • Daniel Kuehn says:

      And you also need to grapple with the point that the reason for lower standards of living was a voluntary democratic choice. You can’t have your cake and eat it too. You can see a dramatic rise in output and then claim it doesn’t count because the polity made a decision to spend it on something you and Higgs don’t think it should have been spent on.

      Keynesianism didn’t dictate how that was split, of course. Free Americans did. Second guessing their preferences doesn’t change the path of output in the early forties, which is what Keynesianism does speak to.

      • Blackadder says:

        Dan,

        The argument here is about the economic effects of the WWII stimulus, not whether it was a good idea to fight Hitler. Spending the money to fight Hitler would have been worth it even if the multiplier was zero (I assume you agree with this). So the fact that the spending was for a good cause or was decided democratically is a red herring.

        • Daniel Kuehn says:

          Right but the decision to fight Hitler is crucial thing to bring in when interpreting the data.

          • Blackadder says:

            Right but the decision to fight Hitler is crucial thing to bring in when interpreting the data.

            How so? Would the multiplier have been different if we had decided to join the war on the side of the Axis?

            • Daniel Kuehn says:

              If we stuck to multipliers in the WWII period, I’m sure Bob would find what others have found before him.

              Fighting Hitler matters if we’re going to try to read into the meaning of lower living standards.

              • Blackadder says:

                Fighting Hitler matters if we’re going to try to read into the meaning of lower living standards.

                If the question is: “was the increase in output during WWII worth the decline in living standards?” then the fact the increased output was used to fight Hitler is relevant.

                Krugman, however, wants to use the WWII example to show that we should have lots of fiscal stimulus now. But increased output today isn’t going to go towards fighting Hitler (he’s dead). So it’s not clear why we today should want increased output at the expense of lower living standards.

              • Daniel Kuehn says:

                Blackadder – this is not about Krugman this is about Bob. Bob’s the one that brought up living standards as a mark against Keynes. Krugman has always been very upfront about what personal consumption was like during the war.

                Anyway – we seem to have converged on a common point regardless of how you want to spin it: if we are talking about output and employment impacts, one need not talk about hitler. If you want to talk about living standards the guy needs to come in somehow.

              • Blackadder says:

                Blackadder – this is not about Krugman this is about Bob. Bob’s the one that brought up living standards as a mark against Keynes.

                If Keynesian stimulus results in lower living standards, then that is a mark against Keynesianism.

                Saying “Keynesians never claimed their policies would increase living standards” is not an adequate response.

                Saying “there are historical cases where the increase in output was worth the lower living standards because we were fighting Hitler” is not an adequate response.

                An adequate response would have to show that we would want to adopt some sort of Keynesian policy *now.*

              • Bob Murphy says:

                DK wrote:

                If we stuck to multipliers in the WWII period, I’m sure Bob would find what others have found before him.

                I’m not being sarcastic. The discussion I’ve seen is that Robert Barro showed there wasn’t a very high multiplier during WW2, and then Krugman said, “Oh my gosh, there was rationing. Of course we wouldn’t expect to see a high multiplier. Who the heck ever pointed at WW2 as a model for what things would do nowadays if we tried stimulus?”

                So again, this fits the pattern I’m talking about. When you look at what actually happened, it didn’t seem to work. But the Keynesians can come up with explanations for why the success really is there, buried under some other things that we will make sure don’t happen *this* time.

                (I am being a little cheeky here but not much.)

              • Daniel Kuehn says:

                Which Barro analysis are you talking about exactly?

              • Major_Freedom says:

                Krugman, however, wants to use the WWII example to show that we should have lots of fiscal stimulus now. But increased output today isn’t going to go towards fighting Hitler (he’s dead). So it’s not clear why we today should want increased output at the expense of lower living standards.

                BA gets it.

          • Dyspeptic says:

            “Right but the decision to fight Hitler is crucial thing to bring in when interpreting the data.”

            Why? The decision FDR made to fight Hitler was at the same time a decision to save his erstwhile ally Stalin. You make it sound as if WWII was the ultimate battle of good vs. evil. That’s just childish warmongering pabulum. You sound like an MGM propaganda film narrator circa 1940.

            Someone of your obvious intelligence and professional achievement has no excuse for holding these ignorant and simplistic opinions about major historical events. When smart people have to make stupid and irrelevant arguments out of desperation maybe they should just throw in the towel.

            • Ken B says:

              See? I did say some here think talking about 6 million is rude.

      • Bob Murphy says:

        Let me step back for a minute, Daniel, and ask: What would the data have to look like, in order to “refute Keynesianism” as you say? I hope you don’t say, “Well, if they ran a stimulus package and nominal GDP actually fell, then that would be a pretty damning blow,” since that’s of course what happened in 2009.

        In case after case, Keynesian solutions go hand in hand with awful economies. If you want to constantly explain them away, and say there are all these mitigating factors that hide the true benefits of Keynesian policies, OK fine. But Krugman keeps pointing to them as evidence that he’s right.

        • Daniel Kuehn says:

          WWII is tremendous evidence in favor of Keynesianism. Output, employment, and interest responded exactly how they were expected to. Americans made a choice, based on their preferences, about what to do with that output and employment, and they chose to fight fascism. But the economy responded exactly how Keynesian theory would predict.

          This is what we saw in the fifties and sixties as well. This is what the empirical evidence has turned up.

          re: “I hope you don’t say, “Well, if they ran a stimulus package and nominal GDP actually fell, then that would be a pretty damning blow,” since that’s of course what happened in 2009.”

          You have to remember Bastiat – the seen and the unseen. Counterfactuals, yadda yadda. We all know the script for this exchange don’t we?

          • A Human. says:

            You have angered me beyond measure so it is taking all my self control not to curse you up and down. The next time you think WW2 is evidence in favor of Keynesianism, you think about the conscripts that were sent to Europe and the Pacific to fight in rifle companies. They aren’t coming home. They didn’t have a choice. Your precious democracy is nonsense. Those boys were sent to fight a war that wasn’t necessary – at least for America.

            We didn’t elect to go a goddamn thing. Your precious FDR entered this country into a war and his serfs paid the dearest price. Those conscripts didn’t choose a thing. They were sent to war. Do you get that? I don’t think you do, nor will you ever until you hear a shot fired in anger.

            I’m disgusted beyond belief by the utter lack of humanity you and your warmongering statist ilk display.

          • Dan says:

            So why did Krugman think the threat of an alien invasion would be a good thing? If Krugman understands why WWII type stimulus caused living standards to drop, why would he think doing that again would be a good thing? Does Krugman think sacrificing living standards by fighting an imaginary Hitler is the right thing to do?

      • Dan (DD5) says:

        There you have it, … when he’s cornered, he takes out the infamous statist “get out of jail card” – Democracy is freedom. Democracy is voluntary choice.

      • Bharat says:

        This isn’t a complete refutation of what you’re saying, but be aware that Roosevelt lied on his campaign promises. He was elected on keeping the troops out of war.

        This could easily escalate into a conversation about “oh we were attacked by the Japanese!” and then I’d say “he was provoking them and selling arms to the Allies!” but let’s avoid that. Just pointing out the American people weren’t fully behind the war, or at the very least, the provocations that took place before it.

      • Silas Barta says:

        Wait, so does that mean you believe that the current recession is a result of democratically choosing not to do (as big) a stimulus? So why should we *want* to get out of it, if it’s what the people have chosen, just as they chose to sacrifice living standards to fight (differently named) fascism in the 40s (and coincidentally get a stimulus)?

        • Daniel Kuehn says:

          Just as there are some people who try to persuade that WWII was actually the wrong choice, I’ll try to persuade that forgoing stimulus is the wrong choice.

          I don’t think we should valorize democratic choices.

          The point is just that WWII clearly had an impact on output and employment. If you want to talk about how that was divvied up you need to look elsewhere for an explanation.

          • Silas Barta says:

            I don’t think we should valorize democratic choices.

            Then … stop?

            The point is just that WWII clearly had an impact on output and employment. If you want to talk about how that was divvied up you need to look elsewhere for an explanation.

            And if you want to keep equivocating between “good stuff”, “output”, and “employment”, keep reading Keynesians. [Italics formatting fixed–I think?–by RPM.]

            • Major_Freedom says:

              Italics formatting fixed–I think?–by RPM.

              That was gracious of you.

          • Major_Freedom says:

            Just as there are some people who try to persuade that WWII was actually the wrong choice, I’ll try to persuade that forgoing stimulus is the wrong choice.

            Based on what standard?

            How can you convince anyone that they should support something that will greet them with greater costs than benefits?

            The point is just that WWII clearly had an impact on output and employment.

            Clearly by what standard? What if output and employment would have been even higher without the war, and without all the government intervention during the 1930s?

    • Ken B says:

      Bob, I was not commenting on your overall argument, just pointing out two errors. Say in 1940 we each have $10 and spend $8 on food. In 1944 we each have $4 but the gov’t gives us the same food. You cannot sensibly say we are worse off because ‘private spending’ has declined from $10 to $4.

      I agree the conventional wisdom is that WWII ended the depression. And that Krugman says so. That’s not the same thing as saying the early 40s were a time of milk and honey. There were essentially no new civilian cars during the war, and most people know this.

      I do not know which theory is correct. For one thing I am not familiar with any of the numbers from that era. (OK, I do know the most important number, 6 million, but pacifists seem to find citing it rude)

  7. Bob Murphy says:

    Daniel, I think I have the stamina for just one more question on this one. When you get a chance, please explain (as others have brought up) what Krugman was doing with his alien invasion example. It sounded to me like he was saying he ranks outcomes (in terms of social welfare) in the following:

    Best: US government spends an extra $2 trillion on roads, teachers, unemployment checks, and space exploration.

    2nd best: US government spends an extra $2 trillion on gearing up for an alien invasion that turns out to be bogus.

    3rd best: Status quo in which Paul Ryan scares us into cutting spending.

    Are you denying that the above is what Krugman has been telling people are the “obvious” lessons to draw from the World War II experience? If you don’t deny that, then can you at least see why the actual WW2 experience is a bit problematic for the middle choice?

    • Daniel Kuehn says:

      I would hope nobody slots the second best in between the 1st and 3rd as actual policy proposals. The point was such a thing would restore full employment.

      I do not think Krugman thinks it’s desirable to convincingly terrify people. I think Krugman was making a point about aggregate demand.

      For this, I’m sure I’ll be tarred as some wild-eyed, crazy, apologist for Krugman. Probably not by you. Probably by MF I’m guessing.

      OK, I’ve got a single question for you: do you agree that WWII spending restored output and employment to full employment levels (and probably overshot)?

      • Bob Murphy says:

        DK wrote:

        OK, I’ve got a single question for you: do you agree that WWII spending restored output and employment to full employment levels (and probably overshot)?

        I’m not sure how much of it was the spending and how much was the draft. I am not dogmatically opposed to the possibility of government spending making the official unemployment rate go to 1%, but I am pointing out that World War II isn’t a clean test of this policy tool.

      • Bob Murphy says:

        DK wrote:

        I would hope nobody slots the second best in between the 1st and 3rd as actual policy proposals. The point was such a thing would restore full employment.

        I do not think Krugman thinks it’s desirable to convincingly terrify people. I think Krugman was making a point about aggregate demand.

        OK so you think Krugman would say the American people would be worse off in that fake alien invasion scenario? I (or MF or someone) will go and look up the actual transcript of what he said, but before doing that, I want you to be crystal clear: You are actually saying that Krugman was telling the viewers that it would make Americans worse off if the government solved the depression by deficit-spending to fend off a bogus alien invasion?

        Please please please, do not tell me, “But Bob, Krugman actually wants the government to spend money on useful things like R&D and job training.” Right, we get that. But many of us are claiming that in order to illustrate his point, he was saying the status quo is so bad, that spending $2 trillion gearing up to fight off a bogus invasion, would be better than nothing.

      • Silas Barta says:

        Do you agree that …

        a) conscripting every unemployed person to work in mines for the Divine Leader would reduce unemployment?

        b) in such a situation, the relationship between “reduced unemployment” and “goodness” as broken down?

        c) that any analysis that casually mentions the reduced unemployment in a) while not also mentioning the (enormous) drawbacks is extremely misleading?

        d) that a) differs from natural disasters and some pubic works programs only in degree?

        • Daniel Kuehn says:

          I agree with a, b, and c. I entirely disagree with d so long as we’re talking about public works in a liberal democracy that is not relying on conscripts.

          Obviously if you’re enslaving people then I agree with d.

          If you’re offering them a job, I tend not to.

          • Silas Barta says:

            If you agree with a-c, you should vociferously object to Krugman-style “we just need to increase output” recommendations on exactly those bases!

            And on d, note that I said “some”. Surely you don’t think all public work projects are productive simply on the basis that a democracy approved them?

            And surely you aren’t trying to raise your blood pressure by attributing normative value to democratic decisions right after claiming you don’t valorize them?

            • Major_Freedom says:

              And surely you aren’t trying to raise your blood pressure by attributing normative value to democratic decisions right after claiming you don’t valorize them?

              I chuckled.

              • Silas Barta says:

                Bah. I meant to say “raise *my* blood pressure”, because it’s really frustrating when Daniel_Kuehn flips directions like that.

              • Major_Freedom says:

                I have come to expect it.

                Internally contradictory philosophies always manifest themselves in flip flops.

                I just have fun with it at this point.

              • Daniel Kuehn says:

                If you think I flipped you misunderstood my claim… which is something I’ve noticed you doing a lot…

              • Major_Freedom says:

                I think you flipped because I understood your claim. Your defense makes it clear you flipped.

          • Silas Barta says:

            By the way, I like how you focus on how a person was “offered” a job, but not on how the *payment* for that job came from “an offer they can’t refuse” (i.e., the taxpayers).

            • Major_Freedom says:

              Silas is on a roll.

          • Major_Freedom says:

            What if I offered an unemployed person a job by externalizing the costs of that on others, by force if they would rather do something else with their money/wealth?

            Could this job “offer” be the same as one where the costs are incurred by only willing participants?

      • Richie says:


        OK, I’ve got a single question for you: do you agree that WWII spending restored output and employment to full employment levels (and probably overshot)?

        How much of that output was destroyed in the war? How many of the unemployed that became employed died in the war? Hm, seems like increasing two metrics had devastating consequences.

        • Major_Freedom says:

          This reminds me of the joke against Keynesianism which says we should build a whole fleet of ships and airplanes and other war machines, then go into the middle of the Pacific, sink them all, after which all the sailors and pilots go back home.

          Oh, don’t be obtuse, Keynesian theory never promised higher standards of living, nor uses of resources that benefit the voluntary consumer. When they say “get us out of a depression”, they only meant more physical stuff and more labor making more physical stuff.

  8. rob says:

    I think that DK is right that WW2 should be judged as a model for fighting wars not as a model for economic recovery. But Bob’s point is that PK IS using it as a model for economic recovery and Keynesian’s are always saying things like “WW2 ended the depression by providing a boost to AD – of course we would rather that deficit spending was on something useful rather than war equipment”. But the facts that Bob presents here don’t seem to back up this version of the story.

    • Daniel Kuehn says:

      WWII is not a model for economic recovery insofar as we don’t want to start wars every time we need a recovery.

      It is a model of recovery in that it provides clear empirical evidence of the efficacy of fiscal policy in a depression.

      • Major_Freedom says:

        But it doesn’t provide empirical evidence of the “efficacy” of fiscal policy in a depression.

        All empirical data must be interpreted and understood using an a priori theory. The data does not speak for itself.

        Even if we observed a temporal increase in “output” during “fiscal policy”, it doesn’t mean that we can’t say that “output” would have been even higher absent the fiscal policy!

        For you would only be insisting that of the two competing theories:

        A. Output increased DESPITE fiscal policy; and

        B. Output increased BECAUSE of fiscal policy.

        That B. is the correct theory. But you can’t get this from the empirical data, because BOTH theories are consistent with the empirical data. Therefore, you have to compare and contrast theories A and B against each other according to economic first principles that are grounded in non-observable conceptual truths.

        You typically get confused at this point, so you fall back on the fallacious claim that WW2 confirms Keynesian theory, when it cannot possibly do that since Keynesian theory is internally contradictory, and reality is not internally contradictory.

      • Silas Barta says:

        Of start alien invasion hoaxes every time we need a recovery…

  9. Simon says:

    I’m surprised you didn’t talk about price controls. Due to price controls and rationing the actual value of a dollar was presumably lower than suggested by the official GDP deflator figures, and so the actual real GDP was presumably lower than official figures suggest.

    • Bob Murphy says:

      Simon I’ve talked about that elsewhere. I ran out of space in this article, and didn’t want to overwhelm the reader. It sounds like we are cheating when we say, “Oh but the numbers are bogus!” My point in this article was that even if the numbers were totally legit, it wouldn’t prove what Krugman thinks it proves.

  10. Bob Murphy says:

    I couldn’t help myself. When I walk by a barrel teeming with fish, I just have to pull out my .22.

    Daniel Kuehn, here is how the Huffington Post described Krugman talking about alien invasions, and note in particular the actual quotes from Krugman in the story:

    Economist Paul Krugman has a simple solution to America’s economic woes: Prepare for an alien invasion.

    Arguing that the United States successfully ended the Great Depression with government spending, he provided an interesting idea about how to replicate that economic feat on Tuesday at the Take Back the American Dream conference in Washington, D.C.

    “If you actually look at what took us out of the Great Depression,” the Princeton University professor said in an interview with Chris Hayes of MSNBC. “It was Europe’s entry into World War II and the U.S. buildup that began in advance.”

    “So if we could get something that could cause the government to say, ‘Oh, never mind those budget things; let’s just spend and do a bunch of stuff.’ So my fake threat from space aliens is the other route,” Krugman said before a laughing crowd. “I’ve been proposing that.”

    The Princeton professor and New York Times columnist is a well-known fan of science fiction, which might explain his imaginative plan to spur an economic recovery.

    Krugman has offered up his space alien proposal before. Last year he told CNN about a “Twilight Zone” episode in which “scientists fake an alien threat in order to achieve world peace.” He told CNN, “Well, this time … we need it in order to get some fiscal stimulus.”

    OK so Daniel you are telling us:

    (1) The HuffPo writer is an idiot for calling it Krugman’s solution for our “economic woes.” Actually Krugman was telling us that it would solve the problem of unemployment, but it would increase our woes by doing so.

    (2) When Krugman said “we need [a fake alien threat] in order to get some fiscal stimulus,” he meant it in the same way he could have said, “We need to rob a bank to pay the mortgage.” Krugman was just making a positive policy statement here; he wasn’t actually saying it would be a good idea to get fiscal stimulus in this way. It would actually make us worse off. By the same token, it would be bad to get world peace in that way too. (Right?)

    • Daniel Kuehn says:

      1. I am not telling you the writer is an idiot. The writer seems to be on the same page as Krugman. We need an aggregate demand shock and an alien invasion would give us one. Obviously everyone knows it would bring problems with it, right? Just like WWII. But WWII and an alien invasion would both get us out of a depression. The problem in both cases is no longer economic depression: it’s the fact that we had to go fight Nazis. So we decided to use some output to do that and less of it for consumption.

      2. I think “making a positive policy statement” is probably even too charitable, given all the problems that would come with actually telling people that aliens were invading (just like the fact that paying your mortgage is a little meaningless if you’re in jail for robbing a bank). I think he is making a point about the need for a positive aggregate demand shock.

      • Bharat says:

        I think Keynesians need to give full disclosure every time they write articles about economics. It would say “increasing output is not to be confused with increases in living standards.” As an elementary/middle/high schooler (well, tbh, I don’t know when I first learned the history about the Great Depression), when my teachers told me “government spending got us out of the depression,” I erroneously conflated the following: getting out of the depression with higher living standards. I seriously doubt that more than a few individuals knew of the supposed discrepancy there when they were being taught at a young age.

        • Daniel Kuehn says:

          You didn’t learn about rationing for the war during high school???

          I think you are underestimating people.

          • Bharat says:

            Disclaimer* was the word I was looking for, but I guess “disclosure” works.

            Anyway, I don’t think rations served as contrary evidence for me at the time. “Sure there were rations but we got out of the depression right? People’s living standards must have improved.”

            I think you’re overestimating people. Most people conflate rising output with rising living standards and vice versa. Unless explicitly stated, it will not be assumed otherwise. I don’t know how it used to be, but these days kids study, not to learn, but to pass the test. They’re not going to reach a miraculous conclusion on their own on something like that.

  11. Bob Murphy says:

    Also, this should go without saying–but of course I need to say it–Daniel Kuehn, of COURSE Krugman is making a joke. He’s not literally proposing that we fake an alien invasion.

    But he’s illustrating a point that this is one way to get recovery and the needed fiscal stimulus.

    For an analogy, in my articles I am not “proposing” that we save more in order to eat more coconuts. But I am saying that it makes Robinson Crusoe better off in the hypothetical world I build in my anecdotes. The point of the story is to teach a lesson.

    If you think Krugman believes the fake alien invasion would spur an economic recovery, but that people would be collectively worse off in that recovery than during what Krugman now calls a depression, I think you are fooling yourself.

    In any event, why don’t you just email Krugman? Don’t mention my name though. Or email Brad DeLong and see what he thinks.

    How about this too: Ask DeLong what he thinks John Maynard Keynes thought of his idea to bury banknotes. Was Keynes saying this would boost employment, but he wasn’t sure if it would make the community better off in welfare-terms?

  12. Jonathan M.F. Catalán says:

    On output vs. living standards and Keynes, the latter considered the two nearly synonymous. Note, an increase in output in The General Theory is synonymous to an increase in income (Y). An increase in income allows the recipients to spend or save the net increase in income, which suggests that they have gained in their ability to enjoy the fruits of their labor. Keynes very much correlated output with the health of a nation’s economy, and therefore the status of the employed. But, the good news is that anybody who believes that Keynes’ theory of output is not a theory of well-being is beginning to transition over the “dark side.”

    • Daniel Kuehn says:

      I’m not sure that’s true. Income is aggregate income – it can go to defense contractors as easily as it could go to rocking chair manufacturers.

      One need look no further than Economic Possibilities for Our Grandchildren to see that Keynes thought the volume and the use of output were two quite separate questions.

      Obviously, though, holding all else equal more output is going to mean a higher standard of living. The whole problem here is that all else is not held equal. So what better explains the divergence between output and living standards: Keynes or Hitler? Bob acts like this is some kind of post-hoc rationalization. I would have thought it was a tremendously obvious point.

      • Major_Freedom says:

        Obviously, though, holding all else equal more output is going to mean a higher standard of living.

        And back and forth we go in contradiction land.

        • Daniel Kuehn says:

          Explain.

          Or better yet, read my next sentence and then decide if you still have something you want to explain.

          • Major_Freedom says:

            First you said higher output is not synonymous with higher standard of living, then you said higher output “all else equal” is synonymous with higher standard of living.

            Or better yet, read my next sentence and then decide if you still have something you want to explain.

            Please don’t misunderstand my quoting only the first part of that paragraph to mean I only read the first part of that paragraph.

            The second part, you said:

            “The whole problem here is that all else is not held equal. So what better explains the divergence between output and living standards: Keynes or Hitler? Bob acts like this is some kind of post-hoc rationalization. I would have thought it was a tremendously obvious point.”

            OK, the problem is not else is equal. But suppose “output” increases in the form of missiles and drones to be used on middle eastern families who are arrogant enough to live on oil fields that belong to the US empire.

            According to you, “all else equal” this output should increase standards of living.

            • Daniel Kuehn says:

              re: “First you said higher output is not synonymous with higher standard of living, then you said higher output “all else equal” is synonymous with higher standard of living.”

              Well that’s not contradictory, is it?

              Obviously there are some implicit points in there – assuming output growth is faster than population growth, holding all else equal (i.e. – preferences and the division of output), output growth is synonymous with increasing standard of living.

              But since all else is not held equal in the real world, you can’t just point to a declining standard of living and claim anything about a Keynesian theory of output.

              Maybe you could explain the problem you see , because I’m not getting it.

              • Major_Freedom says:

                Well that’s not contradictory, is it?

                It isn’t a contradiction? When you said output is not synonymous with standards of living, the “all else equal” is tacitly tied up in such a claim. All generalized claims are like this.

                For example, if I said “If I am hungry, then I eat.” The “all else equal” is tied in with that statement, because one could always add a caveat to it, for example “Suppose you’re getting shot at.” Then I might want to worry about not getting shot first, rather than eating, which would make my statement only a special case.

                But if we make a new statement, say “If I am hungry, then I eat, except when I am getting shot at”, then that claim too will have “all else equal” tied up with it, because we can always add another caveat, for example “Suppose the shooter is armed with a bubble making gun”. Then I will have to amend my statement again and say “If I am hungry, then I eat, except when I am getting shot at by real bullets”.

                The “all else equal” is again tied up with this statement.

                This can go on and on.

                Therefore, adding “all else equal” explicitly doesn’t change a generalized statement from what it was originally, to something else.

                This is why the claims are contradictory in my judgment.

                But since all else is not held equal in the real world, you can’t just point to a declining standard of living and claim anything about a Keynesian theory of output.

                Nice try, but I am talking about the original claims you made, not non-existent claims I never made.

                And I can turn your claim about output back at you. You cannot claim that should output increase over time after fiscal policy is enacted, that the fiscal policy caused the increase. For it is also possible that the increase in output over time occurred DESPITE the fiscal policy, and would have been even higher had the fiscal policy not taken place, but we can’t see it because it’s a counterfactual.

                So you’re going to have to prove a priori why fiscal policy increases output, and not only that, but you’re going to have to define what output is, and why they should have the value you are compelled to assume they have.

                For what if the “output” took the form of a pyramid on account of fiscal policy, as opposed to, say, a single ham sandwich on account of the market process?

                If I value the ham sandwich more than the pyramid, then you cannot say that output increased due to fiscal policy, just because the pyramid is greater in size and took more man hours to complete, and used up more resources. The entire project in terms of output would be lower than the single ham sandwich.

                In other words, Keynesians are totally ignoring the subjective value requirement for all things “output” related.

                Even a million tanks would represent a smaller output than a cracker, if individual subjective valuations value the cracker higher than the million tanks.

                No, you cannot point to the money prices associated with the tanks, because the state VIOLATES subjective valuations when it forces its own subjective values as replacement for individual subjective valuations in the market.

                It would be like saying a robber can bring about higher “output” by robbing a bank’s cash vault, and bringing about a higher demand and thus prices for whatever he spends the money on, even if they’re guns for more robberies.

            • Daniel Kuehn says:

              “According to you, “all else equal” this output should increase standards of living.”

              If output increases are disproportionately going to bombing the middle east (which is a political choice – not a macroeconomic necessity), then all else is not equal, obviously.

              You also have to remember that WWII is a special case. We overshot substantially. That’s why they needed rationing to keep inflation down and keep supplies flowing to the military. So an extra dose of federal spending after we overshot in the 40s is very different than an extra dose of federal spending today, which is likely to crowd in private investment and benefit private consumption.

              After 41 or so, we were fully employed. That’s a very different world.

              • Major_Freedom says:

                If output increases are disproportionately going to bombing the middle east (which is a political choice – not a macroeconomic necessity), then all else is not equal, obviously.

                Disproportionate according to what standard? You’re just making stuff up as you go, aren’t you?

                And what is this? “Which is a political choice, not a macroeconomic necessity”? ALL Keynesian policies are political choices.

                If output increases consist of bombs and tanks, then there is no subjective judgment allowed in Keynesian theory, because there is no distinguishing among various forms of “output.” There is just “output” and that’s it.

                WW2, despite the bombs, is supposed to be evidence that Keynesian theory of output is correct. Yet I don’t think EVERY bomb and tank produced went to uses I would consider subjectively valuable. War contains fighting bad guy soldiers AND killing good guy civilians. I do not value the killing of innocents just because there was a fight against fascists.

                At any rate, all else can never be equal if you approach it the way you are approaching it. That is not how “all else equal” works. All else equal is to isolate cause and effect phenomena, which by the way is praxeologically grounded, and cannot be observed. And even if it could be observed, it won’t show that the cause and effect phenomena is constant over time. The constancy of causation traces back to the logical constraints of action.

                ———————

                You also have to remember that WWII is a special case. We overshot substantially. That’s why they needed rationing to keep inflation down and keep supplies flowing to the military. So an extra dose of federal spending after we overshot in the 40s is very different than an extra dose of federal spending today, which is likely to crowd in private investment and benefit private consumption.

                Based on what theory? You do realize that government spending does not only affect idle resources and unemployed labor before it affects active resources and employed labor, right? Government spending PREDOMINANTLY affects active resources and employed workers, typically those who are politically connected and have a history of contracting with the state, BEFORE it affects idle resources and labor, IF IT DOES AT ALL.

                Even if you’re a positivist, you have to look at the extent of the unemployment and realize that they did not receive the new money from the government first. You have to look at the owners of idle resources and realize they did not receive the new money from the government first.

                You have to realize, in short, that government spending, at least every instance of it so far, has initially affected active resources and employed labor, thus it has historically crowded out private investment and private consumption.

                After 41 or so, we were fully employed. That’s a very different world.

                When much of the previously unemployed went to Europe and Japan to fight in a war, this “full employment” is equivalent to sending the current population of unemployed people to gulags and then claiming unemployment has fallen.

                No, I am not saying it’s a good idea, I am just doing the Keynesian thing and making a positive, descriptive statement. Sending the unemployed to work in the gulags will reduce unemployment. Keynesian theory is correct. It is not saying whether or not such a policy is a good idea in the normative sense.

                All this time we have been given the impression by Keynesians that their theory can increase standards of living and utility. But most people have been duped. It was never about that. It was always about sterile statistic management which benefits some at the expense of others.

                Where’s Roddis? He’ll have a field day with this.

              • Bob Roddis says:

                Where am I? I’m still high after being attacked by DK, LK and Callahan on the same post (for me suggesting that fractional reserve notes should have some warnings about their peculiar nature placed on the face of the notes).

                http://factsandotherstubbornthings.blogspot.com/2012/07/bob-roddis-makes-bad-argument.html

                Further, we know that money dilution can and does fund wars (like WWI as demonstrated by DK in his famous Krugman-approved paper on 1920) and can spur “output”. It will be the wrong “output” and will lead to a bust for reasons Keynesians refuse to comprehend.

                WWII didn’t get the economy “moving”. It did not give it “momentum” that carried on to the post-war period. The “economy” is not a wind up toy that needs to be “stimulated” to get it “moving”. Analogies to physics and chemistry are inappropriate.

      • Jonathan M.F. Catalán says:

        In Keynes’ macroeconomics, increasing output is synonymous to increasing wages, because output is measured in terms of employment (N). This suggests that nominal income will be re-distributed to workers, away from firms’ cash holdings. Keynes never distinguished between the kind of output, which is one of the greatest failings of his theory: what matters isn’t just nominal income, but what you can buy with it.

        I also agree with MF; or, you’ve misused the term “all else being equal.” According to you (and me), whether an increase in output is the same as an increase in standards of living depends on certain conditions — namely, what is being produced. This condition isn’t implied in the statement “an increase in output…”

        • Daniel Kuehn says:

          Given certain conditions – say a state of war or a state of peace – standard of living increases with output.

          I agree on the point about output and wages, but again – what are those wages spent on? Not always personal consumption. Sometimes war bonds. We’re really mixing two different questions.

          • Major_Freedom says:

            Given certain conditions – say a state of war or a state of peace – standard of living increases with output.

            See this is your problem. You use certain words and you semantically claim that the rules of logic and evidence no longer apply. Saying the magic word “war” is supposed to mean that output increases standards of living all else equal, even if it is an aggressive war that serves the interests of only some people at the expense of everyone else.

            If a state just unilaterally invades another country, aggressive style, such that the magic word “war” is used, that doesn’t mean higher output is “all else equal” synonymous with higher standards of living. It is still a detriment to standards of living, even if you label the actions as “war”, instead of “aggressive violence of some against others.”

            Besides, there is no such thing as a “state of war” or a “state of peace.” There are only individual actions. I am not “at war” just because the sociopaths in Washington ordered obedient troops to go to war. I am not “at peace” just because the sociopaths in Washington are not ordering their troops to fight, while I am defending myself from a thief by beating him up.

            In every government war, there are many of people acting peacefully. In every government non-war, there are many people acting aggressively. There is no “state of war” or “state of peace” that overrules what is actually happening, what individuals are actually doing.

            I do not become hypnotized and my reason does not shut off just because someone said the magic word “war”, or “recession” for that matter.

            • Ken B says:

              Oh for pity’s sake MF have you declared war on partial derivatives now? DK’s meaning is perfectly plain.

              • Major_Freedom says:

                Some here might get it, but I don’t think you get it.

                What I am talking about is way over your head Ken B.

              • Ken B says:

                Enlighten me.

              • Major_Freedom says:

                Perhaps you are not aware of the perfectly plain meaning of “it’s over your head.”

            • Daniel Kuehn says:

              A state of war is when a government declares war.

              You already mangle economics – you don’t get to mangle he dictionary too, MF.

              There’s nothing “magic” about war. War will lower your standard of living. We all agree, right? Given that counterfactual lowered standard of living, if output increases in the context of a state of war your standard of living will then increase.

              But if war and output increases come together, as they did in WWII, you have to be careful about separating the causal chains.

              • Major_Freedom says:

                A state of war is when a government declares war.

                The government cannot “declare” an end to economic laws. They are not Gods. That is the principle that underlied my prior response.

                I know what is meant by “a state of war”. I was pointing out how your economics is being temporarily suspended when the context is war. That’s why I said “war” is like a magic word to you.

                You already mangle economics – you don’t get to mangle he dictionary too, MF.

                Is that what you call correcting your economic errors? OK, I “mangle” economics.

                There’s nothing “magic” about war.

                I realize that. You’re saying that as if I believe it myself, as if it wasn’t sarcasm on my part.

                My concern is with you and other Keynesians treating the word like it is a magic word. For only magic could overturn economic laws, and yet it is precisely overturning of economic laws that is being tacitly assumed here.

                War will lower your standard of living. We all agree, right?

                Nice attempt at again deflecting the focus of the discussion.

                The topic is standards of living as it pertains to Keynesian style fiscal policy, not war per se. It is trivial that war reduces standards of living.

                Keynesians however are using WW2 as empirical evidence that Keynesian fiscal policy works in peacetime, as if we’re supposed to ignore the lower standards of living DUE to Keynesian fiscal policy during the 1930s and 1940s, and pretend that it was all because the US government and their hired soldiers were fighting the Germans.

                As Murphy pointed out, Keynesian programs have historically occurred prior to lousy economies. As such, there are always excuses for why standards of living fell. For WW2, it’s because resources went into the war rather than civilian consumption.

                For some reason you’re not getting the obvious implication here that any time government uses force to direct resources into its preferred channels, and thus necessarily away from the preferences of individual consumers in voluntary buying and spending, then standards of living are lower “all else equal.” (See how that phrase was used? That’s how you use it).

                If I took your cash by force, but I purchased a computer for you, then if we ignore counter-factuals of what you could have done, then we might be tempted to say that you have been benefited, because look, you have a computer now! And, in general, we might be tempted into saying that “the economy” has been benefited (whatever the hell that means), because output increased, and employment in the computer industry was “stimulated”.

                We might also be tempted to saying that I didn’t crowd out anyone’s consumption, or your investment, because we can always refer to the fuzzy logic grounded concepts of idle resources and unemployment.

                Given that counterfactual lowered standard of living, if output increases in the context of a state of war your standard of living will then increase.

                This is one half of the contradictory position you have adopted. That higher output is synonymous with higher standards of living.

                However, initially you said that higher output is not synonymous with higher standards of living.

                Well, which is it?

                Even if the US government is “at war” with someone else, and output is increased by way of another bomber that will kill families living on oil, then you’re saying that this is synonymous with a higher standard of living? That is ridiculous.

                Even if those in the government are fighting other people, it still doesn’t mean that higher output is synonymous with higher standards of living.

                It doesn’t mean that for the exact same reason that higher output during peacetime doesn’t mean higher standards of living.

                This is what I meant when I said you are treating “war” as a magic word that seemingly overturns economic laws, as if a manufactured bomber in wartime that kills people represents a gain in standard of living because it is “output”.

                Value is subjective to the individual, DK. You cannot arrogate your own personal values to the status of objective value that everyone else agrees with. I happen to value a single potato more than a bomber plane, despite the fact that the bomber plane costed so much more and required so much more labor and capital to produce. You cannot know what others valued until you passively observe them making voluntary choices.

                Speaking of other magic words, you also use the magic word “democracy”, as if that magic word means it’s voluntary, as if we’re supposed to pretend that 79% of the population do not exist (I estimate 79%, because only 40% typically vote, which means we can only be sure that 40% even support democracy, and out of that 40%, the majority decides the outcomes. 51% of 40% is around 21%. That means at any given time, 79% are not supportive of those in government).

                But even if 90% of the people showed up at the polls, and even if 90% of those voted for the same political candidates, you still cannot call the government’s actions “voluntary”, since there would still be 10% of the population who didn’t vote, and everything the government does to them and their property would be involuntary, not voluntary.

                But if war and output increases come together, as they did in WWII, you have to be careful about separating the causal chains.

                OK, I’ve been careful. How is what you’re saying anything other than deserving of a correction?

                You’re mangling economic science by imputing the magic word “war.” When the word “war” is used, then we’re supposed to believe that higher output is synonymous with higher standards of living. As I shown that is false.

                You seem to be trying to cover for your initial claim that higher output is not synonymous with higher standards of living.

                Maybe after some thinking you’ll finally settle on a non-contradictory position. Right now you’re too blinded by trying to reconcile past errors.

              • Daniel Kuehn says:

                re: “The government cannot “declare” an end to economic laws. They are not Gods. “

                Finally you’ve said something sensible!

                A bit of a non sequitor, but we’ll work on that next.

                There is no way I’m reading the rest of that comment, though.

              • Major_Freedom says:

                Oh that’s OK, it’s more for everyone’s benefit than anything.

  13. Daniel Kuehn says:

    On Barro –
    So the WSJ article is, I believe, based on his 2011 QJE article with Redlick. I used to like this one… I like it less now. Even when I liked it there are caveats. He is averaging multipliers across the whole post-war period, so the broad multiplier estimate he gets is from good times and bad. That’s going to give you an underestimate of the multiplier during a recession. So even if you take Barro’s identification of the model for granted, you’re still looking at what is very much a lower bound estimate.

    Let’s take the multiplier he works out quickly in the WSJ article itself – it’s for 1943/44. We were at full employment by then and had been for a while. The multiplier is small. Are you surprised? Would you expect any Keynesian to tell you otherwise? Is the 1943-44 multiplier the best guide for policy in 2012? I would have thought the 1939-1940 or 1940-1941 multiplier would be better.

    The reason why I’ve soured on Barro and Redlick’s QJE paper lately is that war spending really isn’t the exogenous variation in the fiscal stance that they make it out to be. Armed conflict or even the threat of future armed conflict (such as Ramey’s index, which Barro and Redlick use) has a negative effect on economic activity, although its positively correlated with public spending. That means it’s going to bias your multiplier down.

    The best identification strategy I’m aware of is in the Romer and Romer analysis (unless anyone has reasons why we should doubt that).

  14. JFF says:

    And if the United States had “lost” the war, then what?

    Wait, I know, all of those windows to repair, right?

    • Major_Freedom says:

      And bodies to repair.

      Look on the bright side JFF, no matter how bad it gets, Keynesians can claim intellectual victory for the praxeologically derived knowledge that humans are naturally predisposed to improving their situations through goal oriented behavior.

      Every time Keynesian inspired politicians beat them down with declining standard of living fiscal policies, they’ll just keep getting back up and working like busy bees, earning money and paying taxes, so that those who want to feed like parasites on a host, rather than contribute productively, can continue to feed like parasites. They’re too good for being productive, you see. They “work” all day from 10:00 am to 3:00 pm, diligently choosing among all the alternative pork projects and which campaign financier to reward first.

      It’s a tough job, but someone’s got to do it.

  15. Daniel Hewitt says:

    You’re missing “the unseen” Bob. Namely a planned Nazi takeover of Winnipeg, from which they would have based their takeover of North America from.

    http://en.wikipedia.org/wiki/If_Day

    Good thing we got’em over there first…

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