This weekend’s Wall Street Journal contains my op-ed “WWII Stimulus and the Postwar Boom.” The article takes issue with the received wisdom among many economists that WWII was a giant Keynesian stimulus, bringing an end to the Great Depression. The data about the WWII economy points in other directions.
During World War II, there was no investment in civilian infrastructure and the government placed severe restrictions on consumption. That meant significant portions of the massive government spending went toward saving and private debt repayment. Thrift restored personal balance sheets, ultimately setting the stage for the postwar boom.
During the war, roughly 11% of the workforce served in the military at low pay and little chance to consume. The civilian workforce actually shrank, but worked longer hours and take-home pay rose. But, despite the rise in disposable household incomes, consumption stayed at depression-era levels. During WWII, Americans saved an astounding 22% of their income, bulking up savings and paying down debt. By the war’s end, household debt had been lowered to levels not seen since 1924.
The article concludes:
The difficult truth is there is no easy cure for the present hangover. Myopic policies allowed credit to be pushed over its natural limit. Credit expansion shifts consumption from the future to the present, but the future has now arrived. Policies aimed at reigniting the credit-driven consumption boom of the last 25 years won’t work.
Instead of looking for a pre-election year pop, it would be wiser to focus on transitioning from credit-driven economic growth to growth that is, once again, driven by new productive investments. The key policy aims should be removing the tangle of tax, policy, regulatory and human-capital impediments to domestic private investment.