The Keynesian-Krugman Problem of War

As most of us has heard, there is an ongoing debate about Keynesian economics and whether it is in fact a good idea for the government to run deficits pursuing fiscal stimuli. In a previous article, I wrote what the economic reasoning is behind all of this. Upon further research, I have discovered an important untold part of the Keynesian viewpoint. That is which is illustrated best by Dr. Paul Krugman in his recent article discussing “What will stop the pain?”:

“What, then, will actually end the slump?

Well, the Great Depression did eventually come to an end, but that was thanks to an enormous war, something we’d rather not emulate.”

If you ask even some normal people, you will receive the answer that World War II caused us to get out of the Great Depression. This is inherently false. In fact Cullen and Fishback at NBER made this observation, ” [They] find that in the longer term counties receiving more war spending per capita during the war experienced extensive growth due to increases in population but not intensive growth, as the war spending had very small impacts on per capita measures of economic activity.”

How could this be? Most people when they think of productivity they think of labor and employment. If this was the case then World War II would be a great success. In fact, war times in general would bring a large boost to any economy, as they are a fiscal dream. Why is this not true? The fact is that the goods that they are producing are purely military and are being sent off to be destroyed. This is called the broken window fallacy, which Krugman violated after 9/11 when he said:

“…the attack opens the door to some sensible recession-fighting measures. For the last few weeks there has been a heated debate among liberals over whether to advocate the classic Keynesian response to economic slowdown, a temporary burst of public spending. There were plausible economic arguments in favor of such a move, but it was questionable whether Congress could agree on how to spend the money in time to be of any use — and there was also the certainty that conservatives would refuse to accept any such move unless it were tied to another round of irresponsible long-term tax cuts. Now it seems that we will indeed get a quick burst of public spending, however tragic the reasons.”

It is obvious here that Krugman along with other Keynesians secretly (or not so secretly) find war and destruction to be a good thing for our economy. This begs the question, why doesn’t Dr. Krugman’s plan involve increasing production of anything and blowing it up in the desert? This would be no more productive than World War II. It would just avoid all the pain and suffering.

To simplify things a bit, imagine an economy where they go to war and the factories switch from cars and tractors to tanks. While these tanks are going off to Europe to be destroyed, the prices of cars are going through the roof as supply has stopped. Sure, the inflationary wartime spending has caused people to go to work but they cannot buy anything as prices skyrocket. We have to remember the three ways that you can raise money for this. They are higher taxes, borrowing money, or inflation. Let’s not forget FDR’s ban on gold thus setting up inflation, which Truman inherited. This just acts as a tax and causes a very unstable currency. The other possible method was borrowing, which is just future tax increases. This will not create productive growth.

Many uneducated people on the right cling to this explanation because they feel it’s the only argument they have against the liberals saying it was the New Deal. Both of these groups should wake up and smell the free-market roses. It is ridiculous to think that a centrally planned economy (war-time economy) where massive amounts of people (human capital) along with materials (physical capital) is being destroy and very little non-military goods were being produced (not to mention there was rationing), somehow “stimulated” us out of a recession.

~PCCapitalist

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Published in: on February 23, 2009 at 2:32 pm  Leave a Comment  
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