I haven’t read the papers Barro refers to in his column in the Wall Street Journal. I assume they are well researched and well founded, but the column itself didn’t sit well with me.
Barro seems to be suggesting that WWII represents a good test case for the effect of government stimulus. I can see the motivation. Indeed, its common to point to WWII as the force that ended the Depression.
However, there seem to be some serious issues here, perhaps they are addressed in the paper but skipped over in the column. First, doesn’t war, especially WWII radically alter expectations? Indeed, the larger the war the more radical the effect on expectations.
Second, wasn’t it the case that WWII was also accompanied by an excess profits tax. The idea being that business was going to be directly asked to sacrifice for the war effort.
Third, aren’t war expenditures hard to value. Some of the expenditure is simply hiring soldiers, who are valued at their typically low salaries. Indeed, there was a draft suggesting that the military is paying well below what soldiers consider their reservation wage. Some of those soldier would have gotten higher paying jobs had they not be drafted.
Fourth, it seems to me that multipliers should be inversely proportional to the amount of stimulus. First, you employ the people who really have no options. Then the people who have options but don’t like any of them. Eventually, you’re eating into the people who are happy with what they’re doing.
Some of this seems to be captured by the unemployment rate, but aren’t we interested in some measure of cyclical unemployment. Which would probably have hit zero long before 1944’s 1% unemployment rate.
All in all it would seem that a massive increase in defense spending, much of which is on drafted soldiers and part of which is funded by an excess profits tax is a going to have a much lower multiplier than a more moderate stimulus that involves mainly cutting taxes, forgoing increases in state taxes, and providing funds for the short term unemployed.
3 comments
Comments feed for this article
Thursday ~ October 1st, 2009 at 5:28 pm
donthelibertariandemocrat
As well, what is seen as conspicuous consumption during years without wars, can be seen as treason during a war. Shared Sacrifice is an important concept during wartime. This is what bothered many people about the current wars, i.e., there didn’t seem to be any sense of shared sacrifice.
Also, if you remember Pres. Bush calling for spending as usual, presumably that was because war can alter expectations and consumption/spending patterns, and he was trying to counteract that possibility.
Finally, govt spending on infrastructure is justified as one part of a stimulus plan because it shows govt planning for the future, hiring workers, and providing much needed common goods. It is best viewed as an aid to QE, that helps signal recovery and inflation ahead. In that sense, it is the borrowing that is the real stimulus.
I actually agree with Barro about tax cuts and incentives, but infrastructure, as part of a total plan, does make sense. I have to say that the multiplier effect seems conditional on the premises used. My point is, again, that it makes sense as part of a borrowing/spending plan during a downturn. But I still think that the infrastructure projects should be self-justified and efficiently run. I don’t buy the idea of just spending for the sake of spending.
Friday ~ October 2nd, 2009 at 9:04 am
Lance
Barro includes estimates for 1950-2006 for the defense spending multiplier, in addition to other starting dates that are prior to WWII.
So, even if you analytically dismiss his other results, the 1950 onwards results are robust, and should be considered in the ongoing debate over stimulus.
Barro did not attempt to measure the non-defense spending multiplier due to the assorted problems (endogenous changes are important to consider for non-defense spending, e,g.) involved.
Monday ~ October 5th, 2009 at 10:34 am
crack
Does anyone know of any WWII analysis that looks at the effects of a radical realignment of productive capacity?
Pre WWII most industrial production is in Europe right? After it’s in Soviet Russia and the US.
Before everyone in Europe, and European Russia, had plenty of stuff, stoves, houses, cars, silverware, everything. After much had been consumed by destruction or scavenging for material.
The twin aspects of huge increase in demand and re-creation of European productive capacity has to at least partly account for the end of the Great Depression.