War and non-remembrance

As I’ve already pointed out,the prospect of a Keynesian stimulus is having a weird effect on conservative economists, as first-rate economists keep making truly boneheaded arguments against the effort.

The latest entry: Robert Barro argues that the multiplier on government spending is low because real GDP during World War II rose by less than military spending.

Actually, I’ve already taken that one on. But just to say it again: there was a war on. Consumer goods were rationed; people were urged to restrain their spending to make resources available for the war effort.

Oh, and the economy was at full employment — and then some. Rosie the Riveter, anyone?

I can’t quite imagine the mindset that leads someone to forget all this, and think that you can use World War II to estimate the multiplier that might prevail in an underemployed, rationing-free economy.

Update: I should also point out this, in Barro’s article:

John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall.

Is it too much to ask that someone criticizing Keynes actually, you know, read Keynes — at least enough to know that he devoted a whole chapter to explaining why a fall in wages would not expand employment? Or that someone commenting on contemporary policy at least be aware that the whole reason we’re talking about fiscal expansion is that monetary policy has run out of room?

Comments are no longer being accepted.

Of the full+ employment there were 10mill conscripted soldiers. Since it’s likely they weren’t employed in their most productive capacity that’s another factor. And most all of the soldiers (16 million+) weren’t really consumers, most of their needs were supplied for by the Gov’t directly.

Any port in a storm. Conservatives in general are witnessing the collapse of their most firmly held ideas. It will take them awhile to understand what has happened. Many will not live long enough to understand it.

Christopher Giuliana January 22, 2009 · 9:29 am

I live in a community that has a high proportion of residents who are retired and receiving Social Security, and major employers in the community are in medical and elder care. Our commmunity has taken its share of hits (e.g., condo boom/bust), but the twin supports of Social Security’s fixed income and Medicare’s payment of medical services has kept a recession from becoming a disaster. One thing about having a fixed income is that lower prices mean you can buy more and retiree spending has not slowed locally. And doctor’s appointments are not going down so Medicare dollars are still being spent. Yes, I live in Florida. Yet what puzzles me is that I’ve seen very little discussed about the actual effect in our current situation of these two continuing federal stimuli. Is there any data? Anyway, hats off to Roosevelt and Johnson for their vision.

Mr Krugman,

I think it doesn ‘t matter if the consume is for war efforts, to go to the cinema or to buy a new playstation to play a war game, consume is just that part of GDP that isn’t saved for building of new capital!

And I think that there isn’t no ontological distinction between the multiplier of the depression and that of the expansion. Multiplier is always working as far as the economy isn’t allways in the same level of output; it is that derivative we see in the models. The diference is between what does the “kick start” for the multiplier to start working; it is just a problem of the “impulse”, and the critical thing is give it the very right one.

Joseph O’Shaughnessy January 22, 2009 · 10:26 am

We have to stop debating how many angels can dance on the head of a pin and get out on the dance floor ourselves.

Great events call for people who live in their time. Mindful of past events but not paralyzed to to point of inaction because of excessive analysis, leaders make the best decision available at the time and order the troops to cross the channel. Now.

But Dr. Krugman, aren’t there two wars on right now? And apart from that don’t we have an enormous military machine and an empire of about 700 military bases to maintain, whether we are at war or not?

I’m not buying into the conservative argument against the stimulus. I am suggesting that, at best, it is not clear just what effect the additional monies spent by the government are going to have on our “guns and butter” economy.

Paul, are there some aress of investment which will have the most returns / multiplier effect? The multiplier effects I have seen range from 1.0 to 1.6. If we were at 2.0 (not sure if that is feasible), does it not imply that we are getting all the money back?

And what was the change in civilian and military employment during the 1940s? I’ve seen figures indicating that in 1940 the armed forced employed less than ½ million men and women; by 1945 the armed forces employed nearly 12 million. During the same period, the figures seem to suggest that civilian employment was essential flat—but unemployment was negligible.

So I’m mystified by the use Barro is trying to make of the WW2 example.

Right now consumers have lowered their demand for goods. In effect, they have a self-imposed rationing system akin to the WWII years. A government-spending stimulus (particularly one that has a finite and short time limit) will not substantially increase consumer demand for goods, such as cars, televisions, clothes, etc.

Likewise, an unemployed worker is purchasing resources that are counted in GDP. They use savings, unemployment benefits, food stamps, loans from relatives, friends and credit cards, or live with someone else who is purchasing the extra food, etc. Very little incremental spending will occur by a formerly unemployed individual who is now employed due to a short term, limited funded government stimulus package. It is unlikely they will increase consumer demand in the US economy.

You too quickly dismiss Barro’s comments and they are probably more relevant to the current economy than you realize or admit.

It is really stupid to be talking about “a multiplier” or “the multiplier” as if decisions should be based some number in a half-baked mathematical model.

Look at the results in the real world of massive government spending in WW II; everyone went back to work and the economy was generally booming for years afterward. Private enterprise was not permanently expropriated or crowded out, though it was partially co-opted during the war. A huge debt was generated but it was eventually repaid and/or dwarfed by economic growth. Who cares what “the multiplier” was? What proof is there that such numbers mean anything outside the bizarre world of academic economics?

Paul:

Rational expectations. If government expenditures are expected to rise, state and local governments, businesses, and households will reduce their expenditures. This assumes that federal expenditures “crowd out” other spending; and, perhaps rationally, the non-federal sector believes federal taxes will rise and this will crowd out non-federal spending. I’m not saying I believe this will happen, but it is theoretically elegant.

I agree. It’s Voodoo econometrics to estimate the multiplier for a time of high unemployment using data from periods of low unemployment! We all agree the multiplier is highly dependent on the level of unemployment, so how can he then turn around and ignore this when doing his numbers?

Plus, even if the multiplier with respect to real GDP were as low as 0.8, so what? That’s still saying 80 cents of every dollar is free of social opportunity cost. That’s an excellent deal, given the large benefits to be generated by the stimulus spending. Who wouldn’t buy things they need when offered at an 80%-off sale?

There were also price controls during WW II, rationing, and the top income tax level was 98%. It’s hard to find a comparable period since or before.

Applying results of any situation to any other situation (how ever simillar) should be taken with caution. As one would argue models are not real world but allows us some insights into the problem at hand without tinckering the problem. (Problems are grander usually and hence tinckering with problem can unleash a larger problem).

With this said, if world war II had multiplier effect of 0.8, what was the multiplier effect of Iraq war. Also saying Govt. spending = war spending is a big assumption and itself has some loss or gain of value.

Would it not be that we should model the problem to exact point. If obama team spent on a public transportation system for NJ or a doubling (top /bottom) the GSP (a highway running through) NJ (both much needed for NJ) what kind of effect we will see in 1 day, 1month, 6 month, 1 year and long term. Now if we had such model to use i would call it small apple to large apple.

Also what is this noise about bridge to nowhere, why are we saying that we will build road to nowhere. If Obama has taken responsibility he should also make sure that no single $$ spent on such activity. I’m sure evry state has needs to do some good work for the community (i don’t mean the state politician – i mean state).

My point i hope clear – model the problem correct and reduce the noise.

I have read the article from Robert Barro, and as one would expect, his arguments are not dellusional. Also, Dr. Kurgman’s critic is unfair, in the article R. Barro also mentions some estimates of the multiplier in peace time or in other wars where the rationing of resource wouldn’t be as big as in WW II. I think it’s a fair critic to the pure Keynesian view that Krugman propose. However R. Barro is not tsaking into account 2 things:

1) Externalities from goverment investment: Many nof the social investments made by the goverment may cause important externalities that would increase the value of the multiplier; specially on socila projects that the private sector may not realize by itself because of free rider problems (infraestructure is a pretty good case of this). However, the number of proyects that fall on this category are aqrgeably small.

2) Goverment spending as a tool to fight a liquidity trap: In fact this may be the biggest and most important characteristic that would justify an increase in goverment spending right now. The goverment, being the agent that is less prone to hoard money would be the perfect target of the FED to achieve a quantitative easing that can induce positive inflation. Of course, this would require the promise of the FED to be ‘irresponsible’, as Krugman himself has said before.

I think, however that professor Krugman shouldn’t be so partial while exposing and judging other economists arguments. The discussion of this arguments can provide a lot of development to the conomic science.

Since one can always find highly qualified economists on either side of a policy issue, is it possible to conclusively prove that one side is more subject ot political bias than another side? Alas, probably not. Uwe Reinhardt has written about the difficulty of getting economists to agree about how to weigh the evidence in support of their theories.

Obama has stated that he wants to keep what works, get rid of what doesn’t. In order to that, the plans he adopts should ultimately conform to a single vision, and not be a hodgepodge of competing ideas. That way, we have a better chance of being clear what succeeds and what doesn’t.

Bush did not compromise on his vision, we are all witness to the results. True there are those who will not concede the failure of their ideas. That is why it is important to steer clear of those ideas at this point in time. If Obama can achieve success, then we can get some solid evidence on what does work and what doesn’t.

Isn’t gov’t forced rationing the ultimate form of crowding out?

Voxi Heinrich Amavilah January 22, 2009 · 2:33 pm

“… the mindset that leads someone to forget all of this …” is an unwillingnes to accept that one’s ideology does affect one’s intellectual reasoning, an argument long made by Mill and restated beautifully by Gunnar Myrdal in his classic book Objectivity in Social Research (Pantheon Books, 1969).

Implicit “valuations, beliefs, and opinions” keep some economists overemphasizing the importance of the money economy at the expense of the real economy. They point to the Dow, for example, as a measure of the performance of the economy instead of just one of many indicators. Pre-Keynes Keynesians like Gunnar Myrdal and Mikel Kalecki have it correct that net real economic growth (ng) is the difference between the growth of the real economy (rg) and growth of the money economy (mg), i.e., ng = rg – mg. As rg – mg gets smaller, any expansion nears its peak at rg – mg = 0. For rg – mg < 0, a contraction enters, and increasing mg is no longer an effective solution, it may even be damaging. This pre-Keynes Keynesian insight may be primitive, but subsequent comments by Joan Robinson, Nick Kaldor, and even JR Hicks, surely show that , under specific conditions, there is room for fiscal policy as Keynes proper has suggested. Thus, opposition to the fiscal stimulus is just well … an indication that “People are interested in hiding their valuations and valuation conflicts or want at least to attempt to preserve an appearance of consistency and order in that sphere” (Myrdal, title above, p.19).

All of this stimulus looks to me to be targeted at banks and Wall Street, and not at Main Street. A friend has lost his job, he has a wife and two little kids—where is his pathway to safety — will billions given to banks and WS give him immediate help?

Seems the people don’t have an advocate, but the banks do.

While I agree with your argument about wartime estimates of the multiplier having little significance right now, you fail to note that Prof. Barro’s article states that his calculation for a peace time multiplier is actually lower, very close to 0 in fact.

In addition to your overwhelmingly obvious points, isn’t the war/military a piece of government spending? Plus, is that the right comparison, since the spending presumably was intended to stimulate non-military economic activities. Like now, the reference should be a comparison to doing nothing and watching as consumers and businesses curtail spending in the face of grim uncertainty.

When all sides let go of the reflex to create false dichotomies and simply deal with murky reality, we’ll have a better discourse. Keep on point and be persistent!

I don’t know what effect it had, but it would be remiss to forget that there was an excess profits tax in effect during WWI, WWII, and Korea.

And don’t forget that during WWII the huge War Bonds drives and sales. Instead of buying ‘stuff’, households put their discretionary income into War Bonds – quite the popular thing to buy bonds and support the war. So if the amount spent on war bonds is factored in as part of the WWII GDP, then there was a huge leap in the GDP. They weren’t spending it on cars or washers – they were lending it to the US government to spend on machine guns and planes.

During WWII, the Bracero program brought thousands of Mexican “guest workers” into our labor market, turning U.S. fields into some of the world’s most productive. It could not have hurt that they worked for substandard wages.

In Samuelson’s introductory book to economics Guns or Butter was one of its early chapters, meaning that wartime production does remove resources from other economic uses when spared capacity is not their. That’s why people are forced to save (the ration card and all kinds of shortages) even when they don’t want. What should be interesting it is to see what the figure for the multiplier was right at the beginning of the war, or even better, when America started rearming itself.

However, it must be said that it is possible to conceptualize a situation where any additional dollar of income that comes into the households and production sector is simply saved. For instance, through a real or or perceived need to reduce debt or starting to save and income being siphoned off by imports.

The global economy is conceptually a closed economy, a fact that renders it specially suitable for Keynesian policies in a time of crises. If the globalization process is not now dead in the water, maybe a new set of international institutions should be created with the capacity and the purpose of implementing anti-cyclical policies in a global scale.