Our frequent visitors from the left like to cite economist and New York Times columnist Paul Krugman in their advocacy of more and more government spending. This is Dr Krugman’s column today:
By Paul Krugman
Here’s the situation: The U.S. economy has been crippled by a financial crisis. The president’s policies have limited the damage, but they were too cautious, and unemployment remains disastrously high. More action is clearly needed. Yet the public has soured on government activism, and seems poised to deal Democrats a severe defeat in the midterm elections.
The president in question is Franklin Delano Roosevelt; the year is 1938. Within a few years, of course, the Great Depression was over. But it’s both instructive and discouraging to look at the state of America circa 1938 — instructive because the nature of the recovery that followed refutes the arguments dominating today’s public debate, discouraging because it’s hard to see anything like the miracle of the 1940s happening again.
You know the deal: fair use guidelines restrict the amount I can quote, but you can read the entire article if you follow the link.
Dr Krugman holds to the conventional wisdom that President Roosevelt prolonged the Depression by cutting back on deficit spending in 1937, and that the voters, in 1938, voted a great number of Democrats out of office: 70 in the House and 7 in the Senate.
Dr Krugman then describes the miracle of the 1940s as a wave of deficit spending due to World War II.
That’s true enough, but it ignores some rather important points:
- In 1938, the United States was, even in recessionary times, the major industrial producer in the world;
- In 1938, the United States was a major oil producing nation, and an oil exporter;
- In 1938, the United States was the leading producer of steel in the world; and
- In 1938, the United States was still a creditor nation, not a debtor.
The huge deficit spending caused by World War II certainly stimulated our economy, but a major reason for that was that the deficit spending was spent here! When industrial goods were purchased by that deficit spending, they were manufactured here.
World War II also produced a huge economic boom in the United States because of the types of products made: large volumes of industrial goods which would be rapidly expended, and requiring continual replacement. The “market” was self-generating, and we can thank Adolf Hitler and Hideki Tojo for finally getting us out of the Depression.
Further, while we were building new industrial plants to produce the stuff of war, our industrial competitors across the world were busily engaged in blowing up each others’. By the end of the war, the United States had roughly 45% of the world’s industrial capacity, because we were the only major industrial nation on whose soil the war was not fought.
Germany, despite its economic woes from the Weimar Republic days, was a major industrial producer, aided by the fact that World War I had been fought primarily beyond Germany’s borders. The new Chancellor installed in 1933 had begun a massive public works and economic stimulus program himself, and Germany was surging ahead economically by the late 1930s, building roads, to be sure, but also fighter planes and bombers and ships and submarines. I’m not certain that Dr Krugman would really want to follow der Führer’s economic model.
If we were to follow Dr Krugman’s suggestions concerning a second, much larger, stimulus program, the different conditions of today would lead to some different results. No longer being a creditor nation, but a debtor, we’d be borrowing a lot from foreign countries; when borrowing financed World War II, we were borrowing from ourselves, and the debt instruments being repaid were repaid primarily within the United States. Debt repayment moved money around, but it didn’t transfer American productivity abroad.
Further, since we are now a major industrial importer, and manufacture too-few things ourselves, as we borrow and spend, a good chunk of that borrowed money spent winds up going overseas; we might be stimulating the retail economy here, as more people have more dollars to spend at WalMart, but the retailers will be shipping part of that money to South Korea and Guatemala and the Philippines and Vietnam and China, where the goods sold on American shelves are now manufactured.
Ironically, World War II does have one major lesson here. We built up our economy to build war materiel, and the largest single industrial stimulus we could have domestically would still be war materiel: the major manufacturers which remain in the United States are disproportionately companies which manufacture (among other things) military hardware. I’m not certain why we’d really need to get Newport News Shipbuilding to build more than the six nuclear-powered aircraft carriers and 44 attack submarines the Obama Administration called for earlier this year. But I’m guessing that this isn’t where Dr Krugman thinks we should spend the money.
The lessons of 1938 simply aren’t the lessons for today, because we don’t live in 1938. The conditions we face are very, very different.
As 
