The story is told of three scientists stuck at the bottom of a
deep well. The physicist is forced to admit that none of the laws
of physics will lift them out of the well. The engineer admits that
he, too, is at a loss because he has no tools or materials to work
with. Only the economist is undaunted. “Gentlemen,” he says, “let’s
begin with the assumption that we have a ladder.”
We now have the assumption that a huge fiscal stimulus, created
out of the illusory elements of massive public borrowing and
boundless money creation, will provide the ladder that allows us to
climb out of today’s economic crisis.
To listen to some prominent liberal economists who believe in
Keynesian-style “demand management,” the only thing wrong with this
confabulated ladder is that it should be even taller. And truly, if
money is no object, why not build it right up to the sky? Why stop
where we are now—with a federal deficit expected to reach 13.5
percent of GDP under the current stimulus package?
That question will take on real weight and urgency if the
economy continues to be mired in a deep recession entering 2010. At
the point, the cry will go out for higher deficits and
more spending. If there is a model of what a really robust
stimulus package should look like, the Nobel Prize– winning
economist Paul Krugman has argued, it is not the Depression-era New
Deal but the much bigger deal that followed it: World War II. “What
saved the economy,” he wrote in the New York Times, was
“the enormous public works project known as World War II, which
finally provided a fiscal stimulus adequate to the economy’s
needs.”
The U.S. did experience phenomenal growth during World War II,
and it is true that the federal deficit, which peaked during the
Depression at 5.9 percent of GDP in 1934 and fell to zero in 1937,
subsequently soared to 30.2 percent at the height of the war. That
said, the notion that it is within the power of a free-spending
peacetime government to replicate the dynamics of the greatest war
in human history— and to stimulate the economy in the same way that
the U.S. war effort did in the 1940s—is more than fanciful. It is
breathtakingly absurd. Here are some critical differences between
World War II and the 1930s and between World War II and today.
1) Contra Krugman, World War II was
not a huge public works project; it was an all-out war
against a deadly enemy. As such, it energized the nation and
focused the population’s attention on a single overriding objective
in a way no peacetime jobs-creation program possibly could.
War-related production skyrocketed from just 2 percent of U.S.
GNP at the outset of the war to 40 percent in 1943. In telling an
important part of that story in his book The American Aircraft
Factory in World War II (2006), Bill Yenne noted that
the U.S. became the “largest producer of airplanes the world had
ever seen, or will almost certainly ever see again.” Annual
production of military airplanes produced in the U.S. increased
from 921 in 1939 to 96,318 in 1944—a hundredfold increase in sheer
units, to say nothing of equally amazing advances in aircraft
performance. None of this immense (and immensely innovative)
production of planes, ships, tanks and other munitions bore the
taint of make-work silliness and pork barrel politics that
characterized many of the public works projects launched during the
1930s, and which are abundantly evident in many of the projects
included in today’s stimulus package.
In turning the U.S. into the “arsenal for democracy,” World War
II production played a critical role in winning the war. It was
integral to the tasks of preventing the slaughter of millions of
American and Allied soldiers in the field, overpowering a ruthless
and demonic enemy, and ensuring the survival of freedom and
democracy.
2) Though they expected to go their separate
ways after the war, government and the private sector were on the
same page during the war. Through a combination of forced and
voluntary austerity, people limited their purchases to necessities
during World War II, and companies refrained from making
investments not related to the war effort. There was a fundamental
unity of purpose. In supporting the war effort, the private sector
rose to new heights of innovation and productivity (which had the
hugely positive, if unintended, consequence of setting the stage
for the long postwar economic boom).
None of this applies in the present situation. In setting out to
borrow unprecedented sums of money, today’s government is seeking
not to restrict but to stimulate consumption. And in aiming to take
direct control of investment in many areas, through the
force-feeding of banks and auto companies and the encouragement of
“green” industries or technologies with negative rates of return,
the government is preempting the normal functioning of the
marketplace in ways that can only hurt productivity and discourage
the creation of real jobs and wealth.
3) The contrast between how the 1940s
government financed the war effort and how today’s government is
handling its spending bonanza is highly instructive.
As incomes rose during the war years, the government increased
income taxes through the ingenious device of a withholding tax on
payroll checks. From 1940 to 1945, there was a fivefold increase in
federal tax receipts from $8.2 billion to $41.5 billion. That still
left huge deficits, as there was an eightfold increase in federal
expenditures over the same period from $8.5 billion in 1940 to
$70.6 billion in 1945.
But here the government was able to tap the savings of the
American people. Despite rising incomes, the war years were a time
of real austerity marked by price controls, the rationing of many
consumer goods, and genuine frugality. People home-grew their
vegetables in “victory gardens” and accepted the removal from the
marketplace of consumer durables such as new cars and
refrigerators. Even with much higher levels of taxation, the
American people saved a phenomenal 20.5 percent of their disposable
personal income from 1941 through 1945.
As a result, the government was able to fill most of the
financing gap by borrowing money from the American people (or from
banks holding their deposits) through the sale of war bonds bearing
very low rates of interest and sold as patriotic investments in the
war effort. No one got rich on war bonds, but they were repaid in
postwar years, with fairly modest losses to bond holders due to the
effects of inflation.
In contrast, the U.S. savings rate has turned negative in recent
years. Proponents of a string of trillion-dollar Keynesian-style
deficits are content with the idea that the United States, as a
debtor nation, will be able to rely on the continued willingness
(and ability) of other nations, such as China, Japan, and Saudi
Arabia, to invest huge sums of money in low-yielding U.S.
Treasuries. That is a very large assumption that will be undone by
rapidly rising interest rates if foreign nations begin to doubt
U.S. solvency or our willingness to repay debt without resorting to
massive inflation.
4) It is worth citing some of Keynes’s own
words. Keynes famously spoke the importance of “animal spirits.” He
wrote: “If Enterprise is afoot, wealth accumulates whatever may be
happening to Thrift; and if Enterprise is asleep, wealth decays
whatever Thrift is doing.”
What happened to put Enterprise back on its feet in this country
at the end of the Depression? Clearly it was the rude awakening
provided by the bombing of Pearl Harbor and the threat to freedom
here and abroad. Certainly it wasn’t any public works project
dreamed up by geniuses in Washington, D.C.
Indeed, nothing captures Keynes’s notion of Enterprise asleep
any better than old pictures from Roosevelt’s WPA of writers, stock
brokers, and other white-collar types leaning on their shovels as
they pass the time of day in idle chatter.
Putting more shovels into the wrong hands through hastily
contrived, government-sponsored projects won’t do any more good
today than it did back in the 1930s.
To try to stimulate the economy in this way is truly to build a
ladder to nowhere.
