When I began to teach U.S. economic history at the University of Washington in the late 1960s, I quickly realized that this tale of the wartime "Keynesian miracle" could not withstand critical scrutiny once one went beyond the barest account of it in terms of the elementary Keynesian model and the standard government macro measures, such as GDP, the consumer price index, and the rate of civilian unemployment. Almost immediately I saw that unemployment had disappeared during the war not because of the beautiful workings of a Keynesian multiplier, but entirely because about 20 percent of the labor force was forced, directly or indirectly, into the armed forces and a comparable number of employees set to work in factories, shipyards, and other facilities turning out war-relatedÂ "goods" the governmentÂ purchased only after forcing theÂ public to pay for them sooner (viaÂ wartime taxes and inflation) or later (via repayment ofÂ wartime borrowing). Thus, the great wartime "boom" consisted entirelyÂ of (1) some people's mass engagement in wreaking death and destructionÂ and (2)Â other people'sÂ employment in producing supplies for these warriors after the government's militaryÂ labor drain,Â turning outÂ "goods" never valued by consumers or private producers in voluntary transactions, butÂ rather ordered by government functionaries and priced completely arbitrarily in a command-and-control economy. In no sense was the allegedÂ "wartime prosperity" comparable to real, normal prosperity. TheÂ pervasive regimentation, rationing, price controls, direct governmentÂ resource allocations, and forbidden forms of production (e.g., civilian automobiles)Â should have served as a tip-off.
What is Robert Higgs talking about there? He's addressing essentially the following:
The next time someone argues that the New Deal failed, and only the Second World War ended the Depression, as 'proof' that government spending does not work, one can respond with the details of economic growth and unemployment reduction up to 1940, or one can ignore the claim and thank them for making your case for massive government spending in a deep, broad recession.
Right wing politicians are loathe to credit the New Deal with any success in hoisting the United States out of the Great Depression, but credit World War II for that achievement, believing that that somehow disproves Keynesian economic theory.
That claim, however, undermines their entire premise.
These two are speaking past each other.
Robert Higgs is being as narrow as he can be in terms of defining "Keynesianism" while Paul Abrams is applying what might be termed a wide canon, as in including the Apocrypha in the King James Version, which portion the Calvinists shun.
The debate for Abrams is government spending and employment and its direct result on the macro measures Higgs mentions: GDP, the consumer price index, and the rate of civilian unemployment. The fact is that government spending and direct employment did vastly improve the macro measures.
Now, Higgs may take exception to the effort that was violent warfare, which as he says, is wasteful. Well, fine. I take exception to that too.
The point though is that the same governmental effort could and should be extended in a different war effort, this one against scarcity itself and against waste and all the other things we rightfully hate.
If laissez-faire capitalism is better than government, per se, why did the war improve the macro measures so much? Why didn't the New Deal do more before the war, even though it did plenty (contrary to the false claims of people such as Higgs concerning it)?
The New Deal hadn't done better for exactly the reason Higgs stated that Keynesians cite, namely not enough. The Roosevelt administration was politically constrained by deficit and other hawks who managed for a bit to regain the rudder and swiftly worsen things. FDR took it back, and things started improving again. In other words, the hawks were wrong.
What's been wrong with the current downturn in terms of QE? It has been not enough, too late, and placed in exactly the wrong hands. It should have been about 4 or 5 times what it was. It should have been rolled out on immediate public employment having people do anything and everything that needs doing or could stand improving and not just on grandiose, long-term planning projects. What it should not have been was a handout to banksters (Wall Street investment or otherwise) who then parked the funds for a sort of internal US carry trade from the general population to those banksters.
The banksters have the money they borrowed at near zero from the Federal Reserve parked at the Federal Reserve earning higher interest ultimately paid for by the general population in taxes. This is all to "kick the toxic-asset cans down the road" and to supposedly keep inflation in check while the unemployed are simply kept "systemic" (so the rich can employ labor at ever cheaper rates so those rich may keep ever-larger slices of the pie for themselves and their spoiled brats).
It was all planned by the likes of Goldman Sachs and the two Paulsons. It's been the long-term plan of the greediest of the greedy — to destroy the lower and middle class so the rich may once again be feudal lords.
So, there you have it.
What should be done even now? We should axe the Federal Reserve. We should issue only United States Notes, interest-and-tax free. We should self-employ everyone who is unemployed by having our government (that's what it is supposed to be: ours) hire the unemployed directly. We should use those USN to pay off the national debt. We should supply the people, the economy, with the exact right amount of USN to avoid both inflation and deflation while paying for everything, and I mean everything, "We The People" need and even want (so long as it's healthy).
What we definitely should not do is concern ourselves for a moment with the whining of the rich who will see their leg-up on everyone they hold down disappear.
There is zero reason for anyone to be stuck in poverty anywhere. Yes, I know what Jesus said; but he was speaking to that generation when he said the poor would always be with them. Jesus was not speaking about forever because Jesus promised and promises Heaven. There is zero poverty in Heaven, by definition. Consider it. Bring forth. Thy kingdom come. It's that simple.