Perhaps the most persistent and pernicious myth of economics is that the government can create a recovery in the private economy by taking over the economy, borrowing massive amounts of money and spending it drafting soldiers and building war materials. The Germans called this Zwangswirtshaft or “war socialism.” Economist and New York Times op-ed writer Paul Krugman likes to claim that the Keynesian “stimulus” of massive war spending during WWII pulled us out of the Great Depression.
The argument that rationing goods and services to the citizenry and borrowing more than the GDP to finance slaughtering a quarter million Americans and destroying billions of dollars of gross domestic product in war materials on battlefields across the world is an economic plan we should emulate is morally obscene and factually wrong. In fact, WWII deepened and prolonged the Great Depression and the American private economy did not full recover until the late 1940s.
In a long overdue article for the Weekly Standard entitled “The Ultimate Stimulus,” Arthur Herman notes:
* Under Keynesian economic theory, for every $1.00 the government borrows and spends, the GDP is supposed to grow by $1.50 or more. During WWII, the United States GDP grew less than the increase in military purchases because the private economy was forced into a recession to redirect production to build war goods.
* The over twenty million men and women drafted into the armed services produced nothing of value to the economy and instead were paid with borrowed money to destroy war goods bought with borrowed money to lay waste to the economies of former trading partners.
* It was only after our nearly insolvent government sharply reduced government spending after WWII that the American private GDP rebounded and absorbed over 10 million new workers returning from military service. Under Keynesian theory, the reduction of government borrowing and spending should have slowed down economic growth and increased unemployment.
* Keynesians have theorized that post-WWII economic growth was driven by Americans spending their wartime savings. In fact, savings increased from $151 billion in 1945 to $168.5 billion in 1948 as the “Greatest Generation” scarred by a 16 year depression socked away money against the return of that long rainy day.
Government borrowing and spending used to direct the economy did not create economic growth during wartime and is not doing so today.