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Here is Keynesian economics taken to its logical end: government spending is so essential to restarting a stalled economy that a major war — with all its death and destruction — may be the only way to achieve the stimulation needed. It may go too far to say that Krugman and Feldstein would relish a war, but only by a little. They clearly believe that in the current circumstances, war is our only hope.
There is a superficial logic here. If you believe government spending stimulates an economy, then why not war? In a big war government taxes and borrows huge amounts of money in order to buy large quantities of things — airplanes, tanks, Humvees, bombs, guns, bullets, supplies, clothing, food. It also pays lots of people — bureaucrats, soldiers, sailors, pilots, engineers, manufacturing workers — to do things. In turn the recipients spend that money on the necessities of life. Hence, the jumpstart to the economy.
But of course war means death, injury, and destruction. How can making things that will be used to destroy other things, including lives, produce economic well-being? Are we really ready to accept the Orwellian notion that war is prosperity?
If we have reached the point of seeing war as a source of good things, it is time to check our premises. Right away we see that if the government pays people money to make war materiel, private entrepreneurs can’t pay them to make things consumers will want to buy. This is the “broken window” fallacy: being so distracted by the visible “benefits” of a government policy that one overlooks the unseen costs. Government doesn’t create resources; it only moves them around. When government taxes or borrows, it transfers scarce resources and labor from the productive sector to politicians and bureaucrats. The Keynesian will say that since the resources are idle, there is no cost and only benefits from the transfer. That is a shallow response.
War went not waged defensively only guarantees growth of the state.
War Does Not Produce Prosperity by Sheldon Richman
Well, WWII did. I don't know about any war since.
Did Korea?
War does not produce prosperity or wealth, it does create economic activity, and in the case of WW2 it hada large amount of pent up demand due to the supply restricitions on domestic consumption. So when the war ended you had people at home in the US with a reasonable amount of savings, soldiers coming home with a reasonable amount of savings and 3-4 years of pent up demand.
Combine the savings, the demand and the ability for the US industry to turn from war production to consumer production you end up with a boom.
I doubt that without the quotas during the war reducing consumer consumption, that after WW2 would have seen as much of an increase in economic activty
War tends to destroy wealth, not create it
The article correctly notes that there were widespread fears about a return to high unemployment after the reconversion from the war, but it propagates what many economists believe is a long-standing myth about how “pent-up demand” from American consumers helped the economy avoid a post-stimulus depression. Keynesian economists at the time scrambled to find a way to reconcile their model with the reality that massive cuts in government employment and spending–from a value that was 48% of gross domestic product in 1944 to less than 18% in 1946–were accompanied by full employment rather than economic Armageddon, as the Keynesian multiplier theory would suggest.
While pent-up demand from consumers was their response, in separate studies Richard Vedder, Lowell Gallaway (1993) and Robert Higgs (1999) showed that increases in consumer spending weren’t nearly large enough to have meaningfully offset the declines in government spending. Instead, they attribute the post-stimulus economic miracle to the power of the free market to adjust after nearly 15 years of poor government policies by the Hoover and Roosevelt administrations done in the spirit of economic stimulus.
What is the free market but people buying and selling things to each other?
If people are not buying, then business's are not selling, they would have no need or expectation to invest in new capital equipment.
Post war, people had more money to spend, and wanted to spend it, business had to invest in new capital equipment to produce the goods for the consumers, and to be able to export to Europe.
Generally people and business's were feeling optimistic, were relatively debt free and could both expand consumption and production to meet the consumption both domestically and internationally. The combined effects led to strong growth, allowing the government to reduce the deficit as a % of GDP
You're not addressing the contention. Consumer spending did not make up for the loss in government spending, so what gives? That should have lead to problems in the Keynesian explanation of things.
The multiplier effect, consumer spending drove the construction of stores, expansion of production and transportation facilities, which drover further job growth and more consumer spending
The multiplier effect only counts when it is done by private individuals, not government? Since when?
It works with both, how effective it is, depends on the overall debt loads of everyone involved
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