Christopher Scales
American Economic History (Econ. 467)
Dr. Brian Stow
5-2-06
Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s
By Robert Higgs
The common historical belief is that the time between 1940 and 1945 was a time
of great prosperity in the United States. According to the orthodox account, World War
II got the economy out of the depression. One of the main pieces of evidence used to
back this theory is the drastic fall of the unemployment rate from 14.6% to 1.2%. Higgs
disputes the relevance of the fall in the unemployment rate because the majority of these
people were being employed by the armed forces. By 1945 the armed forces
encompassed more that 12 million people making it inevitable for an enormous fall in
unemployment. Of the 16 million who served in the armed forces during the course of
the war 10 million were conscripted, in Higgs opinion military jobs should not be
considered in the same realm as civilian jobs. Considering that the military provided
little pay, not to mention the mental and physical torment suffered by most soldiers, these
jobs should not be perceived as desirable. Especially when you look at the physical
causality rates of the war which include 405,399 dead and 670,846 wounded. To get a
more accurate look at the labor force Higgs suggests that one should examine the
percentage of the total labor force occupied (civilian plus military), which he calls the
labor force “residuum.” He uses this residuum rate to show the employment information
is skewed by military related jobs. During the early 40’s four-tenths of the total labor
force was not being used to produce consumer goods or capital capable of yielding
consumer goods in the future. After 1946 the residuum rate falls from 40.6 to 11.5
showing a genuine return to prosperity.
Higgs continues his argument by next attacking the high real gross national
product figures from 1940 to 1945. Higgs references studies done by Simon Kuzents,
who states that government spending should only be included in GNP if it pays for a flow
of goods to consumers or a flow to capital formation. He insisted that military spending
should only be included if the money spent contributed to military capital stock, that
being durables and construction that could be used for non-military uses. Not everyone
accepted this theory. William Nordhaus and James Tobin aimed there sights at
eliminating all activities from GNP that they deemed not to be sources of utility. This
included all national defense spending. Although they did not consider military spending
wasteful, they did classify is as a “necessary regrettable” expense and a intermediate
good. Other economist claimed that the index number used to derive the GNP were no
longer relevant. Mainly because much of the output during the war, especially weapons,
consisted of goods that did not exist before the war. Manufacturing of many important
consumer goods were outlawed because the material they required were needed for some
aspect in the war and/or were in short supply. Higgs went on to say that it would be
impossible to construct a price index of war products that would span both prewar and
war years because they did not exist.
The next aspect attacked by Higgs is the historical conception that real personal
consumption increased during the war. He argues that even thought income and savings
of workers went up drastically during this period they could not spend it on the goods
they desired because of the non-price rationing of many widely consumed goods. The
price indexes used by many historians and economists to derive these clams, according to
Higgs, is flawed because they understated the actual inflation during the war and
overstated the inflation during the immediate postwar period. More recently Rockoff and
Geofrey Mills (by using a different macroeconomic approach) have estimated an
alternative deflator for NNP during the war. This new approach shows that the official
deflator understated the price level by 2.3% in 1943 up to 4.8% in 1945.
According to Higgs the conditions were much worse for consumer during the war
than the data suggest. Even if the historical price indexes are correct consumers had to
content with other extraordinary welfare-diminishing changes during the war. To get
available goods, and jobs people had to move, many of them long distances, to centers of
war production. Not only were these people susceptible to bearing sustainable relocation
costs, once there they had to deal with poor/overcrowded housing, along with
transportation problems caused by car shortages. Any many places prices for goods were
increased dramatically because of the black markets that arouse from shortages. This is
made even more prevalent by the government slogan for the time, “use it up, wear it out,
make it do, or do with out.” In thousands of ways consumers lost their freedom of
choice due to war time policy.
During this period many teenagers left school, women left their homes, and older
people left retirement to work. The civilian employment of people 14 years of age or
older increased from 47.6% in 1940 to 57.9% in 1944. The average manufacturing work
week went from 38.1 hours in 1940 to 45.2 hours in 1944, in the bituminous coal mining
industry alone average work times increased by 50%. Night time shifts occupied a much
larger portion of the work force and disabling injuries per hour worked in manufacturing
rose by more than 30% between 1940 and the wartime peak of 1943. Higgs goes on to
say that it is hard to understand how working harder, longer, more inconveniently and
dangerously in return for a diminished flow of consumer goods supports the statement the
economically speaking, “Americans had never had it so good.”
The main reason the standard macroeconomic models employed to
account for the wartime experience do not do and acceptable job in they do not pertain to
a command economy. All standard macro models presume the existence of functioning
markets for commodities, factor services, and bonds. During this time period the
government controlled and regulated everyone one of these sectors with numerous price
controls, rationing, and in some cases the outright prohibition in the consumer goods
markets. Taxes were raised, many forms of production received subsidies, and credit
markets came under total control causing many restrictions. In summary the economy
during the war was the exact opposite of a free market system. Government had its hand
in every aspect of the economy and in most situations was highly regulated and
controlled. During the war real gross private domestic investment plunged by 64%.
In summary World War II got the US economy out of the Great
Depression but not in the way described by orthodox story. The war economy itself did
not get the economy out a depression nor did it produce a “carnival of consumption” or
an investment boom. But the war did manage to cause a build up in personal financial
wealth along with the transformation of expectations for the citizens of the country. So
when the war ended the real prosperity returned to the country when the control economy
was terminated and the free market system was allowed to become president once again.