The U.S. Postwar Miracle
By David Henderson
In the Encyclopedia, I wrote about the German economic miracle. In this piece, “The U.S. Postwar Miracle,” just released by Mercatus, I write about the miracle that was right under our noses or, more exactly, right under our parents’ and grandparents’ noses. On this, I wrote:
According to official government data, the U.S. economy suffered its worst one-year recession in history in 1946. The official data show a 12-percent decline in real GNP after the war. A 12-percent decline in one year would fit anyone’s idea of not just a recession, but an outright depression. So, is the story about a postwar boom pure myth?
If you ask most people who were young adults in those years (a steadily diminishing number of people, so talk to them soon) about economic conditions after the war, they will talk about “the postwar boom.” They saw it as a time of prosperity.
It’s a pretty astounding story in which federal government spending on goods and services fell, in a period of two to three years, by over one third of GDP. That’s right: not by one third but by one third of GDP.
Here’s what Paul Samuelson anticipated in 1943:
Nor will the technical necessity for reconversion necessarily generate much investment outlay in the critical period under discussion whatever its later potentialities. The final conclusion to be drawn from our experience at the end of the last war is inescapable–were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties–then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced. [italics in original]
To be sure, the war didn’t end in the next 6 months: it took closer to 2 years. I also cite Gunnar Myrdal’s pessimistic predictions about what he and I both saw as a dramatic transition from a planned economy to a relatively free one.
I write further:
Although Samuelson held out hope for a smooth postwar transition, his hope was based on the idea that the U.S. government would “retain direct controls,” “taper off war production gradually,” and “undertake income maintenance in the form of dismissal pay for soldiers, unemployment compensation, direct and work relief expenditure.” As we shall see, the U.S. government did not retain direct controls after 1946, did not taper off war production gradually, and did not provide much work relief. The only item from Samuelson’s list that it did was provide unemployment compensation for out-of-work World War II veterans, and only a small percent of these veterans took advantage of this program. Moreover, the economy did not move from “astronomical deficits” to “the large deficits of the thirties,” but actually moved to surpluses, which, in Samuelson’s view, should have made the problem even worse.
Towards the end I deal with the standard arguments that are made today for why the demobilization and reconversion did not cause a recession: (1) Rosie the Riveter returning to the home, (2) the GI Bill putting many veterans in college, and (3) the pent-up demand for goods that people finally got to express by running down the savings they had accumulated during the war.