ecomomics ww2

ecomomics ww2

The Economic Impact of World War II

1. War Expenditures and Government Debt

During this period, the federal government took non-interest expenditures from 9.2 percent of GNP in 1942 to 44 percent of GNP in 1945. This is an extraordinary growth considering that the national government had been restrained by low levels of spending that reflected a strong desire of the population to balance the budget. During 1920-1939, average non-interest operating expenditures were only 3.9 percent of GNP. Yet by 1945, there appeared to be little political or civil appetite to reduce the debt. On the contrary, with the addition of Truman to the Presidency, liberals were able to expand their social agenda with the Social Security Act of 1935 and successes in collective bargaining and were eager to get government-funded retirement plans, a full employment bill, universal health care, and a large federal job creation program.

The overall cost of the war for the United States was large. For the actual war years of 1942-1946, the Defense Department reports nearly $135 billion in outlays and a later estimate by Cuff and Keehn put the final accounted cost at about $149 billion. Both private and government expenditures on munitions, plus the actual building of the war plants, contributed to rapid economic growth during the war period. The defense outlays were borrowed, adding substantially to the accumulated public debt, which then rose from $51.4 billion (or 39.5 percent of GNP) to $269.4 billion (or 115 percent of GNP) by 1946. The need to buy Liberty Bonds and conservative lending by Americans left much of the debt in the hands of U.S. private investors. While the Federal Reserve capped interest rates on U.S. Government Securities in 1942, the effective interest rate on long-term government bonds was only 2.1 percent. As a result, the interest expense on the government debt was only 0.5 percent of GNP in 1942, rising to 2.5 percent of GNP by 1946.

2. Industrial Mobilization and Production

It is important to note some obvious and not so obvious limitations of our data. We have no measures of “quality” or cost. Japan’s wartime economy is structurally odd in that its domestic product data were distorted by the paramilitary units and state-owned enterprises. Making use of alternatives is not straightforward given the complexity and rapid changes state interventions during the war. In making products more cheaply or efficiently, potentially implying that our measures understate the extent of American success. Indeed, some scholars argue that simple output metrics of the sort we calculate understate the relative effectiveness of our policies as compared to those of Axis powers.

What were those goods? Here we present new data on industrial production drawn from primary government sources, updating earlier historical estimates. We find that US wartime production and the economic mobilization that supported it were crucial to producing a military victory. US national income more than doubled in the space of a few years. America turned from “a third-rate military power,” as General George Marshall put it in 1939, to the primary architect of victory in both theaters. Perhaps more importantly, relative to other combatants, America’s dominance grew over time.

Financial modernization generally and the Gramm-Leach-Bliley Act in particular eliminated the remaining New Deal regulation of financial institutions (the supply side). In agriculture, those who have land and capital gain from rising land prices.

Whittlesey, J.R. (2020). Economic Disparities. In Historical Dictionary of the Great Depression-Two Volumes. Greenwood, CA.

Gelman, V. and Ward, M.R. (2020). International policy coordination among A-list nations is vital now, but so is creative economic intervention. Proceedings of the National Academy of Sciences, 117(19): 10413-10415. (COVID-19 pandemic and economics) (Congressional testimony: 16 Dec 2020)

3. Labor Market and Employment Changes

Despite the large increase in the population during the war years, the number of people employed in civilian jobs actually declined by four million over the war years. The increase in employment in parts of the economy providing goods for the war, nearly five million, was more than offset by the drop in service jobs. The movement out of service jobs was largest for private household employees and food serving employees. This drop in employment led to substantial increases in incomes for women as women began filling the job vacancies left by men participating in the war effort. At the same time, black women were overrepresented in service jobs, so the loss of jobs for women due to the war was proportionally even less for them. Retiring women from civilian jobs and the lack of new entrants into the labor force as teenagers or young adults due to the war effort led to a large decrease in the teenage pregnancy rate during the war.

During the overall economic slowdown during the war years, there was also a large reshuffling of jobs from one sector to another. This large overall structural change in terms of the sectors that were growing compared to those that were declining is consistent with the view that it is the constraints which were imposed that lead to the large structural changes, much as it was World War II that led to the required changes during the Great Depression in the US.

4. Post-War Economic Recovery

Although both macroeconomic models and policymakers stress the importance of a swift recovery for economic stimulus after a large negative shock, the recovery from the 1945 recession was considerably less rapid than the recovery after the 1929 depression. The level of real GDP in 1945 was higher than in the same year in 1939, but only marginally so if one excludes the gross weapon production and net exports of the Permanent Five of the United Nations. In addition, the post-world trade tension transmission prevented the U.K. in 1946 from increasing its high level of welfare and purchasing power rather than 1939 and no earlier. It is the integration of new resources that causes investments to increase on average and capital on average and entrepreneurial goals to influence new research more than on average. Finally, in all the major countries, both the recession and inflation caused by domestic economic tensions slightly reduced the mean-per-capita-output (wealth) (especially non-capital stock produced in construction).

The balance of economic activity between the major states shifted significantly in the war. At the entry point for the U.S., U.K., and France (1942) and (1941) for Germany, Japan, and Italy, the ratio of foreign trade (relative to domestic output) decreased while the corresponding value of the U.S. increased. The manufacturing sector, which is more crucial for military output, witnessed a decline in the number of German, Italian, and Japanese manufacturing output, which did not occur in the U.S. or the U.K. As a result of military activities, all the major belligerents also experienced substantial changes in the demand for products coming from different sectors of the economy.

5. Long-Term Effects on Global Economy

5.2 The influence of the war on post-war government growth. Prior to the war, governments were much smaller, and so only a decade or so of modest growth was required to bring the world back to pre-war levels of debt sent. Also, after the war, a term of growth was all that was required to return the world to the debt levels of the 1930s. The war had also sent a message to the right. That governments could grow very rapidly in both peacetime and wartime suggested that governments could also expand rapidly if economic conditions worsened. More practically, many politicians made careers by pointing out the various ills that had occurred in wartime, in part funded and orchestrated by a government that was free to increase its share of the economic pie at will. The war had also taught voters that increased government spending could lead to good economic times. Many of the growth-impatient voters were young men who did not remember the early years of the depression, where the full extent of the post-1929 collapse was hidden by strong agricultural production during the first part of the 30s downturn.

5.1 The growth of government. In Europe before the war, most governments were bankrupt. This was particularly true of Germany, where the pre-war government had printed so much money to pay for the war that, by the 1920s, the currency had collapsed. In the 1930s, most European governments had not anticipated or prepared for the depression, and so when it came, they rapidly headed toward bankruptcy. In wartime, governments can usually finance both increased spending and reduced revenues by increasing debt. Unlike in peacetime, this is usually not viewed as a cause for concern since income and production are also increasing rapidly at the same time.