WEBVTT NOTE The Economics of the New Deal and World War II 1 00:00:00.000 --> 00:00:04.000 So today what I'd like to do with my 40-ish minutes is, 2 00:00:04.000 --> 00:00:06.000 and we'll see how long we have here, 3 00:00:06.000 --> 00:00:09.600 is to talk about Franklin Roosevelt's New Deal 4 00:00:09.600 --> 00:00:14.800 and then also talk about the issue of whether World War II, 5 00:00:14.800 --> 00:00:16.800 in fact, lifted the country out of the Depression. 6 00:00:16.800 --> 00:00:19.400 Because oftentimes people will say, 7 00:00:19.400 --> 00:00:22.100 all right, I admit that the New Deal in and of itself 8 00:00:22.100 --> 00:00:23.600 didn't lift the country out of the Depression, 9 00:00:23.600 --> 00:00:28.400 but the war did because of the economic stimulus it allegedly brought. 10 00:00:28.400 --> 00:00:33.400 So I want to evaluate that claim because there are more and more scholars today 11 00:00:33.400 --> 00:00:39.400 who are beginning to dispute that even though mainstream liberals and mainstream conservatives 12 00:00:39.400 --> 00:00:43.400 do still typically say that World War II was a great economic stimulus. 13 00:00:43.400 --> 00:00:47.400 There are a number of scholars who are disputing that and in fact arguing that the economy 14 00:00:47.400 --> 00:00:52.400 really only returned to full health in the wake of World War II rather than during it 15 00:00:52.400 --> 00:00:55.400 and I'll try to give some evidence for that. 16 00:00:55.400 --> 00:01:01.000 Well, this is a bit self-referential, this beginning here, but in May of last year, 17 00:01:01.000 --> 00:01:07.500 a historian named Ted Widmer warned in the New York Times, and I'm quoting him, 18 00:01:07.500 --> 00:01:13.600 that a recent spate of books from the right, including Jim Powell's FDR's Folly 19 00:01:13.600 --> 00:01:18.300 and Thomas E. Woods Jr.'s Politically Incorrect Guide to American History, 20 00:01:18.300 --> 00:01:22.400 have accused President Franklin D. Roosevelt of prolonging the Great Depression 21 00:01:22.400 --> 00:01:26.200 and generally screwing up America." 22 00:01:26.200 --> 00:01:30.280 Well, Widmer would have none of this crazy talk, of course. 23 00:01:30.280 --> 00:01:36.380 Quote, FDR embodied hope to a people consumed by despair, he hastened to remind us. 24 00:01:36.380 --> 00:01:38.760 And continuing to quote Widmer, 25 00:01:38.760 --> 00:01:42.240 Roosevelt reinvented the presidency during his first hundred days in office 26 00:01:42.240 --> 00:01:44.480 through bold policy innovations, 27 00:01:44.480 --> 00:01:48.240 brilliant speeches and broadcasts and a personal connection with the American 28 00:01:48.240 --> 00:01:50.880 people that has not been equaled since. 29 00:01:50.880 --> 00:01:56.280 Through his words, his improvisations and his effortless optimism, Roosevelt resuscitated 30 00:01:56.280 --> 00:02:03.120 American capitalism and in so doing may have saved democracy as well. 31 00:02:03.120 --> 00:02:08.520 Well this is prose and analysis fit for a freshman term paper or a fan club newsletter 32 00:02:08.520 --> 00:02:12.560 and yet these platitudes and cliches were written in the New York Times by what we are 33 00:02:12.560 --> 00:02:15.980 led to understand as a professional historian. 34 00:02:15.980 --> 00:02:22.460 Here once again we confront the model of president as demigod, restoring hope, saving democracy, 35 00:02:22.460 --> 00:02:28.420 taking bold action, all in all just oozing with brilliance. Biographies of Ilduche must 36 00:02:28.420 --> 00:02:33.820 read something like this. The impression Widmer leaves is that were it not for a few oddballs 37 00:02:33.820 --> 00:02:40.620 like Powell and Woods, Americans might once again be able to enjoy their undisturbed contemplation 38 00:02:40.620 --> 00:02:46.140 of the Greatness of Franklin Roosevelt, that there exists a vast and growing body of serious 39 00:02:46.140 --> 00:02:52.820 scholarship that debunks the Roosevelt myth is, as usual, left completely unmentioned. 40 00:02:52.820 --> 00:02:57.980 Now, Widmer aside, many on the mainstream left acknowledge that FDR's New Deal programs 41 00:02:57.980 --> 00:03:04.300 did not lift the country out of the Depression. According to Robert McIlvain, we have this 42 00:03:04.300 --> 00:03:08.700 statement, for all it did, for all it changed, the New Deal never succeeded in its primary 43 00:03:08.700 --> 00:03:18.700 Even Doris Kearns Goodwin, the serial plagiarist, who is Dean of the President as Demigod School of Historiography, concedes in her study of the period, 44 00:03:18.700 --> 00:03:24.700 the America over which Roosevelt presided in 1940 was in its eleventh year of depression. 45 00:03:24.700 --> 00:03:30.700 No decline in American history had been so deep, so lasting, so far-reaching. 46 00:03:30.700 --> 00:03:50.700 In 2004, the prestigious Journal of Political Economy, which may be the world's top academic economics journal, featured an article by Harold Cole and Lee Ohanian, demonstrating that the Depression persisted not in spite of the New Deal, but because of it. 47 00:03:50.700 --> 00:04:02.700 Well, what could this mean? Well, one of the legislative acts that Colin Ohanian criticized is the National Industrial Recovery Act, which created the National Recovery Administration, or NRA. 48 00:04:02.700 --> 00:04:15.700 This is not the National Rifle Association, I hasten to add. That act finally codified in law the kind of voluntary government-business partnerships that we talked about last time in the 1920s. 49 00:04:15.700 --> 00:04:25.700 New York Senator Robert Wagner said I do not think we will ever have industry in order until we have a nationally planned economy and this is the first step toward it. 50 00:04:25.700 --> 00:04:32.700 The act called for the organization of the various industries into trade associations that would draft production codes. 51 00:04:32.700 --> 00:04:43.700 All member firms of the industry would be expected to abide by the codes which would deal with minimum prices, minimum wages, hours of production and other aspects of the production process 52 00:04:43.700 --> 00:04:48.140 process, and in general tended to restrict production. 53 00:04:48.140 --> 00:04:52.600 The minimum price requirement, by the way, meant that you couldn't undersell your competitor 54 00:04:52.600 --> 00:04:56.820 too vigorously or you'd be in violation of the code. 55 00:04:56.820 --> 00:04:58.420 So that's how that worked. 56 00:04:58.420 --> 00:05:04.140 So it permitted the creation of industry-wide cartels throughout the economy. 57 00:05:04.140 --> 00:05:10.940 John T. Flynn was a liberal journalist of the 20s and 30s who slowly but surely became 58 00:05:10.940 --> 00:05:21.940 A critic of FDR and he observed that FDR's National Recovery Administration was simply a gentler example of the trade associations that Mussolini had established in Italy. 59 00:05:21.940 --> 00:05:23.940 And this is Flynn talking. 60 00:05:23.940 --> 00:05:26.940 What they liked particularly was his corporative system. 61 00:05:26.940 --> 00:05:33.940 He, meaning Mussolini, organized each trade or industrial group or professional group into a state supervised trade association. 62 00:05:33.940 --> 00:05:35.940 He called it a cooperative. 63 00:05:35.940 --> 00:05:43.940 These cooperatives operated under state supervision and could plan production, quality, prices, distribution, labor standards, etc. 64 00:05:43.940 --> 00:05:50.940 The NRA provided that in American industry each industry should be organized into a federally supervised trade association. 65 00:05:50.940 --> 00:05:55.940 It was not called a cooperative, it was called a code authority, but it was essentially the same thing. 66 00:05:55.940 --> 00:05:57.940 This was fascism. 67 00:05:57.940 --> 00:06:03.940 Well, if the word fascism seems over the top, consider that NRA head Hugh Johnson, 68 00:06:03.940 --> 00:06:12.940 who, by the way, once referred to the NRA as a holy thing, the greatest social advance since the days of Jesus Christ. 69 00:06:12.940 --> 00:06:20.940 Hugh Johnson gave Secretary of Labor Francis Perkins a copy of Raffaello Viglione's book, The Corporate State, 70 00:06:20.940 --> 00:06:24.940 a book that looked sympathetically on Mussolini's policies in Italy. 71 00:06:24.940 --> 00:06:31.940 Cole and Ohanian, writing in 2004, found that the NRA damaged the economy and argued that 72 00:06:31.940 --> 00:06:40.340 The New Deal cartelization policies are an important factor in accounting for the failure of the economy to recover back to trend. 73 00:06:40.340 --> 00:06:45.940 Later in the 1930s, after the NRA had been declared unconstitutional by the Supreme Court, 74 00:06:45.940 --> 00:06:56.640 but with some elements of cartelization still lingering, even FDR himself came to acknowledge that these cartelization policies had played a key role in prolonging the Depression. 75 00:06:56.640 --> 00:07:00.840 He said, the American economy has become a concealed cartel system. 76 00:07:00.840 --> 00:07:06.840 Disappearance of price competition is one of the primary causes of the present difficulties. 77 00:07:06.840 --> 00:07:11.840 Well, well-known pro-FDR historian William Lugtenberg conceded that the NRA, quote, 78 00:07:11.840 --> 00:07:19.840 did little to speed recovery and probably actually hindered it by its support of restrictionism and price raising. 79 00:07:19.840 --> 00:07:27.840 Six decades after the program was implemented, further research prompted the even more vigorous criticism of Cole and Ohanian, who concluded, 80 00:07:27.840 --> 00:07:34.840 New Deal labor and industrial policies did not lift the economy out of the depression, as President Roosevelt had hoped. 81 00:07:34.840 --> 00:07:42.840 Instead, the joint policies of increasing labor's bargaining power and linking collusion with paying high wages prevented a normal recovery. 82 00:07:42.840 --> 00:07:49.840 Not only did the adoption of these industrial and trade policies coincide with the persistence of depression throughout the late 1930s, 83 00:07:49.840 --> 00:07:56.840 but the subsequent abandonment of these policies coincided with the strong economic recovery of the 1940s. 84 00:07:56.840 --> 00:08:03.840 Well, many people assume that the minimum wages imposed by the NRA codes must have been a good thing. 85 00:08:03.840 --> 00:08:12.840 Minimum wages seem like a good thing to some people, but any minimum wage discourages employment to some degree if it's over the market clearing wage. 86 00:08:12.840 --> 00:08:15.840 But the NRA imposed wages did all the more. 87 00:08:15.840 --> 00:08:25.840 Compared to the minimum wages we know today, these were quite high minimum wages, averaging 90% of the average hourly wage in 1933. 88 00:08:25.840 --> 00:08:34.840 So, of course, it has the disemployment characteristics that I mentioned last time in about the 1920s and the voluntary wage hikes. 89 00:08:34.840 --> 00:08:42.840 The Agricultural Adjustment Act, about more of which you can see in the book, likewise worsened the position of the vast bulk of Americans, 90 00:08:42.840 --> 00:08:47.840 using tax revenues to pay farmers to reduce their acreage or to cease farming altogether. 91 00:08:47.840 --> 00:08:54.840 The artificial shortages thus created would increase farm incomes while, of course, making food more expensive for everyone. 92 00:08:54.840 --> 00:09:00.840 In 1933, 10 million acres of cotton and 6 million pigs were actually destroyed for this purpose. 93 00:09:00.840 --> 00:09:04.840 Not only was the non-farm population looted in order to support this program, 94 00:09:04.840 --> 00:09:08.840 but American farm workers suffered as well. With less farming being done, 95 00:09:08.840 --> 00:09:11.840 there was of course less for them to do and less need for their labor. 96 00:09:11.840 --> 00:09:19.840 In fact, the 1936 article in the Atlantic observed that some 2 million people had been thrown out of work by this program alone. 97 00:09:19.840 --> 00:09:28.840 Beneath the surface of most New Deal programs was the assumption that purchasing power needed to be restored if the economy were to return to normal. 98 00:09:28.840 --> 00:09:34.840 The magazine of Wall Street exposed this fallacy by suggesting as follows. 99 00:09:34.840 --> 00:09:41.840 Since the president believes that reducing the work week and raising wages would help the economy by boosting purchasing power, 100 00:09:41.840 --> 00:09:47.840 why not swell purchasing power still more by establishing a 10-hour week and quadrupling wages? 101 00:09:47.840 --> 00:09:53.160 or why not have a ten-minute week and raise wages by a hundred times if it's that easy. 102 00:09:53.160 --> 00:09:58.640 Each New Deal program had its negative effects but the collective effect was also substantial. 103 00:09:58.640 --> 00:10:03.800 I mentioned last time Ohio University economist Richard Vetter and Lowell Galloway 104 00:10:03.800 --> 00:10:10.400 who argue as follows, the Great Depression was very significantly prolonged in both its duration and its magnitude 105 00:10:10.400 --> 00:10:13.080 by the impact of New Deal programs. 106 00:10:13.080 --> 00:10:17.400 Similarly, economist Benjamin Anderson who's got credentials coming out his ears 107 00:10:17.400 --> 00:10:19.720 who lived at the time, wrote, 108 00:10:47.400 --> 00:10:55.400 and how early signs of recovery in the midst of so great a disorder is an amazing demonstration of the vitality of private enterprise. 109 00:10:56.400 --> 00:11:05.400 Well Anderson's point that the Roosevelt administration's arbitrariness and hostility undermine business confidence is reflected in polling data compiled at the time. 110 00:11:05.400 --> 00:11:16.400 It was only in the late 30s that organized polling began and in 1939 American businessmen were first polled about their views on the American economy's present and future. 111 00:11:16.400 --> 00:11:19.920 When asked by the American Institute of Public Opinion whether they thought the Roosevelt 112 00:11:19.920 --> 00:11:24.360 administration's attitude toward business was responsible for delaying the recovery of 113 00:11:24.360 --> 00:11:31.200 the private sector, 54% of businessmen polled said yes, 26% no, with the rest no opinion. 114 00:11:31.200 --> 00:11:36.320 Some 56% expected the American economy a decade hence to be saddled with more government 115 00:11:36.320 --> 00:11:39.880 control with 22% expecting less. 116 00:11:39.880 --> 00:11:44.460 In another 1939 poll, Fortune magazine received much the same answers. 117 00:11:44.460 --> 00:11:49.460 The magazine asked executives, with which of these statements do you come closest to agreeing? 118 00:11:49.460 --> 00:11:56.460 One, the policies of the administration have so affected the confidence of businessmen that recovery has been seriously held back. 119 00:11:56.460 --> 00:12:02.460 Or two, businessmen generally have been unjustly blaming the administration for their troubles. 120 00:12:02.460 --> 00:12:07.460 Nearly two-thirds agreed with the first statement and only a quarter with the second. 121 00:12:07.460 --> 00:12:12.460 Robert Higgs, a great economic historian, calls this phenomenon regime uncertainty 122 00:12:12.460 --> 00:12:18.460 and argues that it bears a substantial share of the blame for why the Great Depression lasted as long as it did. 123 00:12:18.460 --> 00:12:25.460 He concludes that given the unparalleled outpouring of business-threatening laws, regulations, and court decisions, 124 00:12:25.460 --> 00:12:30.460 the oft-stated hostility of President Roosevelt and his lieutenants toward investors as a class, 125 00:12:30.460 --> 00:12:38.460 and the character of the anti-business zealots who composed the strategists and administrators of the New Deal from 1935 to 1941, 126 00:12:38.460 --> 00:12:46.460 In 1931, the political climate could hardly have failed to discourage some investors from making fresh long-term commitments. 127 00:12:46.460 --> 00:12:53.460 Well, we know from investment data compiled from the period that long-term investment, the kind that's needed for recovery, 128 00:12:53.460 --> 00:12:57.460 was precisely what uncertain businessmen were moving away from. 129 00:12:57.460 --> 00:13:05.460 Long-term bonds carried a substantial risk premium, indicating that businesses were uncertain about the future. 130 00:13:05.460 --> 00:13:10.500 Mr. Higgs' polling data from the 1930s suggests that this uncertainty about the future boiled 131 00:13:10.500 --> 00:13:14.540 down to uncertainty about future government policy. 132 00:13:14.540 --> 00:13:18.820 Businessmen took seriously the threats and denunciations that ceaselessly issued forth 133 00:13:18.820 --> 00:13:20.400 from the White House. 134 00:13:20.400 --> 00:13:25.100 The Illinois Manufacturers Association, for example, in a statement forwarded to Roosevelt 135 00:13:25.100 --> 00:13:29.980 via the Commerce Secretary, cautioned that the principal obstacle to business revival 136 00:13:29.980 --> 00:13:34.620 with accompanying increase in unemployment is the almost universal attitude of uncertainty 137 00:13:34.620 --> 00:13:43.620 and Apprehension on the part of business executives regarding the future policies of the federal government on issues directly affecting the welfare of private enterprise. 138 00:13:43.620 --> 00:13:46.620 Many similar statements were forthcoming. 139 00:13:46.620 --> 00:13:59.620 In 1934, a meeting of more than a hundred business executives and financial experts in New York under the auspices of the American Management Association submitted a report to Roosevelt through Treasury Secretary Henry Morgenthau, 140 00:13:59.620 --> 00:14:06.620 concluding that uncertainties regarding the fiscal situation likely to result from the government's borrowing and spending activities 141 00:14:06.620 --> 00:14:13.620 with consequent effects upon monetary and revenue policies are retarding, re-employment and recovery. 142 00:14:13.620 --> 00:14:19.620 But those activities continued. In June 1935, Roosevelt proposed a series of tax increases 143 00:14:19.620 --> 00:14:26.620 that included higher inheritance taxes, gift taxes and personal income taxes, as well as a graduated scale of corporate income taxes. 144 00:14:26.620 --> 00:14:32.620 Walter Lippmann, who had once been a supporter of the New Deal, complained that the tax bill reflected, in his words, 145 00:14:32.620 --> 00:14:41.620 the absence of any plan and the lack of intellectual effort, the work of tired brains, relying on their wishes and their prejudices 146 00:14:41.620 --> 00:14:46.620 and throwing out casual suggestions which they are too hot and bothered to think about. 147 00:14:46.620 --> 00:14:50.620 The New Republic magazine observed, and the New Republic is a big supporter of FDR, 148 00:14:50.620 --> 00:14:58.620 The New Deal's admirers assure us that FDR's massive spending projects provided jobs and economic stimulus. 149 00:14:58.620 --> 00:15:03.620 Now it is true that government make-work jobs do benefit those who get the jobs, 150 00:15:03.620 --> 00:15:07.620 but we need to take the analysis further than this single obvious question. 151 00:15:07.620 --> 00:15:12.620 The New Deal's admirers assure us that FDR's massive spending projects provided jobs and economic stimulus. 152 00:15:12.620 --> 00:15:17.620 Now it is true that government make-work jobs do benefit those who get the jobs, 153 00:15:17.620 --> 00:15:21.620 But we need to take the analysis further than this single obvious step. 154 00:15:21.620 --> 00:15:25.620 When we consider the likely outcome of some economic policy, 155 00:15:25.620 --> 00:15:31.620 we cannot focus only on the short-run effects on some alleged beneficiary or some earmarked group. 156 00:15:31.620 --> 00:15:35.620 It is necessary to think about the long-term effects on the whole economy. 157 00:15:35.620 --> 00:15:40.620 We have a book for sale in the bookstore here called Economics in One Lesson by Henry Haslund. 158 00:15:40.620 --> 00:15:43.620 It's a classic. It's been in print for over half a century. 159 00:15:43.620 --> 00:15:51.220 And that's the one lesson, that if you want to evaluate an economic policy, you don't simply look at the short-term effects on some intended beneficiary. 160 00:15:51.220 --> 00:15:55.420 That's extremely superficial. You have to look at the long-run effects on the whole economy. 161 00:15:55.420 --> 00:16:01.220 And then in his entire book, each chapter consists of applying this important lesson. 162 00:16:01.220 --> 00:16:11.020 Well, economists John Joseph Wallace and Daniel K. Benjamin have estimated that the public sector jobs created by the New Deal's make-work programs 163 00:16:11.020 --> 00:16:15.420 either simply displaced or actually destroyed public sector jobs. 164 00:16:15.420 --> 00:16:17.020 How could this be? 165 00:16:17.020 --> 00:16:21.820 Well, if people are taxed, let's say, $10 million to fund some government project, 166 00:16:21.820 --> 00:16:25.820 they now have $10 million less to spend on things they need 167 00:16:25.820 --> 00:16:29.820 and that drop-off in spending will cost other people their jobs. 168 00:16:29.820 --> 00:16:32.920 So imagine, for instance, a government-funded bridge project. 169 00:16:32.920 --> 00:16:37.320 We can see the bridge being built and we can see the people doing the building. 170 00:16:37.320 --> 00:16:42.320 As Haslett writes, the employment argument of the government spenders becomes vivid 171 00:16:42.320 --> 00:16:46.320 and probably for most people convincing when you see the actual bridge being built 172 00:16:46.320 --> 00:16:48.320 and the people employed building it. 173 00:16:48.320 --> 00:16:52.320 But, says Haslett, there are other things that we do not see because, alas, 174 00:16:52.320 --> 00:16:55.320 they have never been permitted to come into existence. 175 00:16:55.320 --> 00:16:59.320 They are the jobs destroyed by the $10 million taken from the taxpayers. 176 00:16:59.320 --> 00:17:04.320 All that has happened at best is that there has been a diversion of jobs because of the project. 177 00:17:04.320 --> 00:17:10.320 More bridge builders, fewer automobile workers, television technicians, clothing workers, farmers. 178 00:17:10.320 --> 00:17:15.320 The very existence of the bridge, says Haslett, is usually enough to win the argument, 179 00:17:15.320 --> 00:17:20.320 with all those who cannot see beyond the immediate range of their physical eyes. 180 00:17:20.320 --> 00:17:24.320 They cannot see all the things that were never able to come into existence 181 00:17:24.320 --> 00:17:29.320 because the necessary resources were diverted to the bridge, 182 00:17:29.320 --> 00:17:34.720 like the unbuilt homes, the unmade cars and washing machines, the unmade dresses and coats, 183 00:17:34.720 --> 00:17:37.820 perhaps the ungrown and unsold foodstuffs. 184 00:17:37.820 --> 00:17:44.120 Someone who understands how to assess both the direct and the indirect consequences of government programs 185 00:17:44.120 --> 00:17:47.920 can indeed see these things in the eye of his imagination. 186 00:17:47.920 --> 00:17:54.920 But to see these uncreated things, says Hazlitt, requires a kind of imagination that not many people have. 187 00:17:54.920 --> 00:17:59.360 Now these programs did not simply divert jobs from some people to others, 188 00:17:59.360 --> 00:18:03.720 or capital from some projects to others, as in a zero-sum game. 189 00:18:03.720 --> 00:18:06.680 They actually, on net, destroyed wealth. 190 00:18:06.680 --> 00:18:12.440 In the private sector, resources have to be employed in line with consumer preferences. 191 00:18:12.440 --> 00:18:18.400 If entrepreneurs want to see a profit, if you want to make, for example, porcupine popsicles, 192 00:18:18.400 --> 00:18:21.080 you're not going to make a profit because nobody would want that. 193 00:18:21.080 --> 00:18:25.480 If you do not employ resources according to consumer desires you make losses 194 00:18:25.480 --> 00:18:30.640 and you either have to change your business plan or see your capital slip out of your hands. 195 00:18:30.640 --> 00:18:34.380 Government on the other hand lacks this crucial feedback mechanism 196 00:18:34.380 --> 00:18:37.780 since government earns its money not by satisfying consumers 197 00:18:37.780 --> 00:18:41.720 and then earning profits and knowing whether to expand or contract 198 00:18:41.720 --> 00:18:44.760 but by the coercive means of taxation. 199 00:18:44.760 --> 00:18:48.080 Without having to pass a profit and loss test it can never know 200 00:18:48.080 --> 00:18:53.080 How Relatively Efficient or Destructively Uneconomic its Projects Are, 201 00:18:53.480 --> 00:18:58.980 How Much of Something is Needed, Where Should it Go, What Materials Should be Used, etc., etc. 202 00:18:59.180 --> 00:19:02.780 Operating outside the realm of voluntary human relations 203 00:19:02.880 --> 00:19:07.080 and answering to no profit and loss tests to guide them in resource allocation, 204 00:19:07.380 --> 00:19:11.780 government is inherently unable to answer these and countless other questions, 205 00:19:12.080 --> 00:19:16.380 simply seizing resources from the private sector and employing them arbitrarily. 206 00:19:16.380 --> 00:19:22.380 During the downturn within the downturn that occurred from mid-1937 to mid-1938, 207 00:19:22.380 --> 00:19:24.380 one congressional representative confessed, 208 00:19:24.380 --> 00:19:31.380 We Democrats have to admit we are floundering. We are a confused, bewildered group of people. 209 00:19:31.380 --> 00:19:36.380 For all the talk of the brilliant leadership of Franklin Roosevelt and his advisors, 210 00:19:36.380 --> 00:19:40.380 this is a far truer assessment of the architects of the New Deal. 211 00:19:40.380 --> 00:19:44.380 Well, what about World War II? Didn't that create economic stimulus? 212 00:19:44.380 --> 00:20:01.380 Well consider, whenever an earthquake or a flood or a tornado strikes, you can always count on some reporter somewhere to tell us that on net this will boost the local economy, since the rebuilding effort will create jobs and increase business for local merchants. 213 00:20:01.380 --> 00:20:04.380 Similarly, and by the way, that happened in Katrina too. 214 00:20:04.380 --> 00:20:07.380 Sure, people's homes have been destroyed, the city's ruined, 215 00:20:07.380 --> 00:20:10.380 but think of the jobs we'll create putting people to work rebuilding. 216 00:20:10.380 --> 00:20:14.380 I mean, there are people who are perverse enough to actually think that's a logical argument. 217 00:20:14.380 --> 00:20:16.380 I'm going to try to address that. 218 00:20:16.380 --> 00:20:21.380 Likewise, whenever a war breaks out, you get the same reporter who will say, 219 00:20:21.380 --> 00:20:25.380 okay, sure, people are dying, buildings destroyed, disease, 220 00:20:25.380 --> 00:20:29.380 but think of the economic stimulus when we rebuild all these buildings. 221 00:20:29.380 --> 00:20:33.880 So it sort of makes you wonder, why shouldn't we start bombing our own cities in a war? 222 00:20:33.880 --> 00:20:36.880 Because think of the economic stimulus that it would provide. 223 00:20:36.880 --> 00:20:42.380 Well, as if on cue, in May 2004, the Washington Post published an article called, 224 00:20:42.380 --> 00:20:46.380 Across America, War Means Jobs. 225 00:20:46.380 --> 00:20:50.880 Well, the article, to its credit, acknowledged that the matter wasn't quite so simple. 226 00:20:50.880 --> 00:20:57.380 But the article nevertheless quoted a great many people who asserted that the war was a boon for the economy. 227 00:20:57.380 --> 00:21:02.620 If it wasn't for defense department contracting, said Brian Smith of Columbia Sewing Company, 228 00:21:02.620 --> 00:21:06.740 we would not be here and 200 people would be out of a job. 229 00:21:06.740 --> 00:21:11.440 The mayor of Roanoke was thrilled, saying these people have grown up sewing in textile 230 00:21:11.440 --> 00:21:13.580 plants and there are so few now. 231 00:21:13.580 --> 00:21:16.460 They were desperate to have jobs and it's going to expand again. 232 00:21:16.460 --> 00:21:18.660 I'm so grateful. 233 00:21:18.660 --> 00:21:23.420 Appliance salesman Gary Gayer told The Post, the economy is always helped by war, that's 234 00:21:23.420 --> 00:21:24.420 just a fact. 235 00:21:24.420 --> 00:21:27.420 Well, I can hardly think of a more dangerous view to hold. 236 00:21:27.420 --> 00:21:30.420 Well, you know, war is regrettable, but at least we'll have a job. 237 00:21:30.420 --> 00:21:33.420 War does stimulate certain sectors of the economy. 238 00:21:33.420 --> 00:21:37.420 The missile building sector of the economy does very well during war. 239 00:21:37.420 --> 00:21:41.420 But it is illogical to equate stimulus in certain sectors 240 00:21:41.420 --> 00:21:44.420 with prosperity for the American people as a whole. 241 00:21:44.420 --> 00:21:46.420 Again, remember the one lesson. 242 00:21:46.420 --> 00:21:50.420 It is not enough to concentrate on some earmarked sector of the economy. 243 00:21:50.420 --> 00:21:53.420 We must consider the effects on the economy at large. 244 00:21:53.420 --> 00:21:56.420 That is the whole point of economics. 245 00:21:56.420 --> 00:21:59.420 And it was with this point in mind that the great Frederic Bastiat, 246 00:21:59.420 --> 00:22:04.420 who was a great economist of the mid-19th century, a Frenchman, 247 00:22:04.420 --> 00:22:08.420 wrote about what he called the broken window fallacy, 248 00:22:08.420 --> 00:22:13.420 in which, perhaps you've heard this before, but the standard story goes as follows. 249 00:22:13.420 --> 00:22:20.420 Imagine a shop window that's broken by some careless boy who throws a ball through the window. 250 00:22:20.420 --> 00:22:26.420 A normal person would conclude this is a terrible tragedy because the shop owner now is without a window. 251 00:22:26.420 --> 00:22:30.420 But you get the modern economist, or let's say a Keynesian economist, coming along saying, 252 00:22:30.420 --> 00:22:33.420 no, no, no, no, actually this is a great boon, you see. 253 00:22:33.420 --> 00:22:38.420 Because then the glass repair man, the window repair man, will be put to work repairing it. 254 00:22:38.420 --> 00:22:42.420 So you see, you've neglected to see what a great stimulus to the economy this is. 255 00:22:42.420 --> 00:22:49.420 Well, what Bastiat argues is that we need to consider both what is seen and what is not seen. 256 00:22:49.420 --> 00:22:56.420 What is seen is the window repairman going to work and the money that he earns and the stimulus that that provides. 257 00:22:56.420 --> 00:23:03.420 But what is not seen is what could the shop owner have spent that money on if he hadn't had to spend it on repairing his window? 258 00:23:03.420 --> 00:23:10.420 He might have bought himself a new sweater, in which case he'd have both a sweater and a window if it hadn't been broken in the first place. 259 00:23:10.420 --> 00:23:17.420 But under this situation, in which his window is broken, he has to spend his sweater money on window repair, he has only a window. 260 00:23:17.420 --> 00:23:23.420 So it is a loss. It is a loss to him. It's not just a wash or a stimulus. It is a loss. 261 00:23:23.420 --> 00:23:30.420 And this is the lesson that Bastiat teaches us in his important writing, at least one of the lessons he teaches us. 262 00:23:30.420 --> 00:23:33.420 But we can apply this analysis to war as well. 263 00:23:33.420 --> 00:23:40.420 The jobs that are created to produce weapons and military equipment, as well as jobs in the armed forces, they are what is seen. 264 00:23:40.420 --> 00:23:43.420 We see those things and we say great stimulus. 265 00:23:43.420 --> 00:23:46.420 But they are paid for by taxing the private economy. 266 00:23:46.420 --> 00:23:54.420 Financing wartime activities diminishes private incomes and thus the ability of Americans to buy the goods they need. 267 00:23:54.420 --> 00:24:02.420 And because people and capital goods are now producing war-related items and services, fewer are available to produce goods for consumer needs. 268 00:24:02.420 --> 00:24:13.420 So those consumer goods that are not now being produced because the funds to produce them and to employ people in producing them have been siphoned off into war production, this is what is not seen. 269 00:24:13.420 --> 00:24:18.420 The fact that some high-profile jobs are created is only the beginning of the story. 270 00:24:18.420 --> 00:24:22.420 Other jobs that had once catered to the consumer have now been destroyed. 271 00:24:22.420 --> 00:24:28.420 Consumers, now with less disposable income because it's being taxed away to pay for war production, 272 00:24:28.420 --> 00:24:33.420 cannot spend what they used to and some private production must come to an end. 273 00:24:33.420 --> 00:24:37.420 Wartime economic conditions include other negative effects as well. 274 00:24:37.420 --> 00:24:44.420 Well, in extreme cases, the government rations certain crucial goods to ensure adequate supplies for the military. 275 00:24:44.420 --> 00:24:48.420 So during World War II, for example, consumers suffered from, among other things, 276 00:24:48.420 --> 00:24:53.420 the effects of the price controls and deprivation that accompany rationing. 277 00:24:53.420 --> 00:24:59.420 It was difficult to obtain adequate supplies of quality gasoline, rubber, meat, sugar and a great many other products, 278 00:24:59.420 --> 00:25:06.420 and altogether impossible to purchase new homes, cars or appliances since the government had banned their production. 279 00:25:06.420 --> 00:25:10.420 Quality deterioration was one way that manufacturers dealt with the controls. 280 00:25:10.420 --> 00:25:15.420 Fat was added to hamburger, says historian Jean Smiley. 281 00:25:15.420 --> 00:25:18.420 The butterfat content of milk was reduced. 282 00:25:18.420 --> 00:25:23.420 Cornstarch was added to spices. Coffee was stretched with fillers. 283 00:25:23.420 --> 00:25:29.420 Between 1939 and 1943, 19 out of 20 candy bars had been reduced in size, 284 00:25:29.420 --> 00:25:33.420 thereby concealing what was in effect a 23% price increase. 285 00:25:33.420 --> 00:25:35.420 Similar effects were felt in clothing. 286 00:25:35.420 --> 00:25:41.420 One official testified that quality deterioration took forms such as men's shorts made of cheese cloth 287 00:25:41.420 --> 00:25:45.420 with enough added sizing to give it form until washed once. 288 00:25:45.420 --> 00:25:49.420 Women's slips made of coarse, heavily sized muslin, 289 00:25:49.420 --> 00:25:55.420 water-resistant baby pants that allowed a third of a glass of water to drain through after being washed once, 290 00:25:55.420 --> 00:26:00.420 and cotton sweaters that were so loosely knit they could not hold their shape. 291 00:26:00.420 --> 00:26:06.420 Even when outright rationing is not undertaken, government purchases nevertheless distort the economy. 292 00:26:06.420 --> 00:26:15.420 For instance, large purchases of steel will lead to price increases, making it more difficult for private businesses that use steel to meet their competition in a global market. 293 00:26:15.420 --> 00:26:22.420 If the higher prices attract new producers of steel, this new production comes at the cost of abandoning other industries, 294 00:26:22.420 --> 00:26:28.420 thus further skewing the economy in favor of the government's preferences over those of the consumer. 295 00:26:28.420 --> 00:26:35.420 Fewer, dearer goods and less money with which to buy them. There is your wartime prosperity. 296 00:26:35.420 --> 00:26:38.420 And that is not to mention all the wealth that could have been produced 297 00:26:38.420 --> 00:26:43.420 if the requisite labor and material inputs had not been diverted into war production. 298 00:26:43.420 --> 00:26:47.420 Now it is no answer to say that the armed forces and the munitions are necessary 299 00:26:47.420 --> 00:26:50.420 in order to win whatever war it is. 300 00:26:50.420 --> 00:26:52.420 True as that may be, that's not the issue here. 301 00:26:52.420 --> 00:26:56.420 The issue is, does war make Americans more prosperous? 302 00:26:56.420 --> 00:27:05.420 Now, the view that war brings prosperity had until recently been entrenched as the conventional wisdom, particularly in historians' treatments of World War II. 303 00:27:05.420 --> 00:27:13.420 The war, we are told, lifted the country out of the Great Depression. Scholars on left and right alike can be found predictably repeating this claim. 304 00:27:13.420 --> 00:27:18.420 Seymour Melman, who is quite sound on most issues, nevertheless sums up the conventional view. 305 00:27:18.420 --> 00:27:24.420 He says, the economy was producing more guns and more butter. Americans never had it so good. 306 00:27:24.420 --> 00:27:43.420 Well, as late as 2004, I actually thought recent scholarship, which I'm going to share with you, had at last corrected this bizarre and dangerous misunderstanding of a central episode of our country's economic history, finally proving that the alleged wartime prosperity had been and logically had to be only an illusion. 307 00:27:43.420 --> 00:27:49.420 Then, in an appearance on a major radio program, it was Fox News Live with Alan Combs, 308 00:27:49.420 --> 00:27:55.420 that pitted me against a distinguished professor several decades my senior, it was Alan Lichtman. 309 00:27:55.420 --> 00:27:59.420 There was the myth all over again, that was the way he answered me. 310 00:27:59.420 --> 00:28:04.420 I explained why the idea of wartime prosperity was on the face of it obviously a fantasy, 311 00:28:04.420 --> 00:28:11.420 no different from the fallacies we hear all the time from the mainstream media about the jobs that earthquakes and floods will bring. 312 00:28:11.420 --> 00:28:19.420 But Professor Lichtman simply pointed to the national income statistics of the early 1940s, which reveal a tremendous economic boom. 313 00:28:19.420 --> 00:28:25.420 Well, a more egregious lack of acquaintance with modern scholarship can hardly be imagined. 314 00:28:25.420 --> 00:28:31.420 Since the 1990s, important scholarly work has completely undercut this fable. 315 00:28:31.420 --> 00:28:37.420 This scholarship has directly confronted these typical arguments, the wonderful GDP figures for the war, 316 00:28:37.420 --> 00:28:43.140 the incredible 20% annual growth rates from 1941 to 1943, and so on. 317 00:28:43.140 --> 00:28:47.540 Simply put, these statistics are completely meaningless. 318 00:28:47.540 --> 00:28:53.100 What do I mean by that? Well, let me cite the work again of Robert Higgs, who has been a pioneer in this. 319 00:28:53.100 --> 00:28:59.820 Higgs has suggested that it should have been obvious to us that something was wrong with these GDP figures. 320 00:28:59.820 --> 00:29:05.180 And he says this, he says, consider, consider all these peculiar aspects of these figures. 321 00:29:05.180 --> 00:29:12.780 Consider that between 1940 and 1944, real GDP increased at an average annual rate of 13%, 322 00:29:12.880 --> 00:29:17.280 a growth spurt wholly out of line with any experience before or since. 323 00:29:17.380 --> 00:29:24.280 Moreover, that extraordinary growth took place not withstanding the movement of some 16 million men, 324 00:29:24.380 --> 00:29:31.180 equivalent to 28.6% of the labor force in 1940, into the armed forces at some time during the war, 325 00:29:31.180 --> 00:29:39.180 And the replacement of those prime workers mainly by teenagers, women with little or no previous experience in the labor market and elderly men. 326 00:29:39.180 --> 00:29:46.180 Is it plausible that an economy subject to such severe and abruptly imposed human resource constraints 327 00:29:46.180 --> 00:29:52.180 could generate a growth spurt far greater than any other in its entire history? 328 00:29:52.180 --> 00:29:58.180 Further, is it plausible that when the great majority of the servicemen return to the civilian labor force, 329 00:29:58.180 --> 00:30:02.180 Some 9 million of them in the year following VJ Day. 330 00:30:02.180 --> 00:30:07.180 While millions of their relatively unproductive wartime replacements left the labor force, 331 00:30:07.180 --> 00:30:13.180 the economy's real output would fall by 22% from 1945 to 1947. 332 00:30:13.180 --> 00:30:18.180 That's pretty devastating to me. That does suggest, obviously, 333 00:30:18.180 --> 00:30:22.180 there's something very implausible about statistics that suggests great prosperity. 334 00:30:22.180 --> 00:30:25.180 So we'll get to what exactly really happened. 335 00:30:25.180 --> 00:30:29.180 Gene Smiley is, with Higgs, one of a small but growing number of dissenters, 336 00:30:29.180 --> 00:30:33.180 who concludes in his book, The American Economy in the 20th Century, 337 00:30:33.180 --> 00:30:37.180 the national income data showing such amazing prosperity during the war 338 00:30:37.180 --> 00:30:40.180 is simply not believable. 339 00:30:40.180 --> 00:30:43.180 Again, Vedder and Galloway, I cite, warn that 340 00:30:43.180 --> 00:30:47.180 aggregate economic statistics need to be viewed with a skeptical eye, 341 00:30:47.180 --> 00:30:49.180 particularly in periods such as this 342 00:30:49.180 --> 00:30:53.180 where there are pronounced governmental interventions in markets. 343 00:30:53.180 --> 00:31:04.180 Well, a central problem is that there cannot be meaningful national product accounting without market prices and the U.S. economy during World War II did not generate real market prices. 344 00:31:04.180 --> 00:31:07.180 It was a command economy full of distorted prices. 345 00:31:07.180 --> 00:31:20.180 In a command economy, the fundamental accounting difficulty is that the authorities suppress and replace the only genuinely meaningful manifestation of people's valuations, namely free market prices. 346 00:31:20.180 --> 00:31:30.180 The prices the US government paid for the goods and services it bought were essentially arbitrary in that they had no foundation in consumer choice as all other prices do. 347 00:31:30.180 --> 00:31:44.180 When the government places more of the economy into the command system, with spillover effects on the nominally private economy that remains outside the government's immediate control, the resulting output figures become more and more tainted by arbitrariness. 348 00:31:44.180 --> 00:31:50.180 GDP figures are especially arbitrary during economic conditions like those of World War II, 349 00:31:50.180 --> 00:31:55.180 a time when at least two-fifths of national output was part of the war economy 350 00:31:55.180 --> 00:32:00.180 and large classes of the remainder were controlled in one way or another and thus arbitrarily priced. 351 00:32:00.180 --> 00:32:07.180 Adding up a whole bunch of arbitrary nonsense numbers yields nothing but a gigantic arbitrary nonsense number. 352 00:32:07.180 --> 00:32:12.180 And yet it is nonsense numbers like this, that is the GDP figures for the war years, 353 00:32:12.180 --> 00:32:22.180 One way economists estimate a country's capacity to produce is to draw a constant rate of growth line connecting the output produced in two benchmark years. 354 00:32:22.180 --> 00:32:32.180 Robert Higgs did exactly that for the years 1929 and 1948, drawing a line depicting the rate at which the U.S. economy would have grown in the absence of the unusual conditions prevailing during the Depression on the one hand, 355 00:32:32.180 --> 00:32:37.340 in 1949 and 1948, drawing a line depicting the rate at which the US economy would have 356 00:32:37.340 --> 00:32:42.020 grown in the absence of the unusual conditions prevailing during the Depression on the one 357 00:32:42.020 --> 00:32:43.880 hand and the war on the other. 358 00:32:43.880 --> 00:32:48.660 And not surprisingly he found that the United States produced well below its capacity during 359 00:32:48.660 --> 00:32:51.300 the 1930s, the decade of the Depression. 360 00:32:51.300 --> 00:32:56.180 But during the war years he found that the American economy produced far above its production 361 00:32:56.180 --> 00:33:01.900 capacity, a contradiction in terms, which is why Higgs contends that the apparent super 362 00:33:01.900 --> 00:33:09.900 The ever-trend wartime boom in output was nothing but an artifact of an unjustifiable accounting system. 363 00:33:09.900 --> 00:33:19.900 Another problem with taking these GDP statistics at their face value is that we are also forced to accept what they tell us about the extremely prosperous year of 1946. 364 00:33:19.900 --> 00:33:24.900 As the official statistics would have it, the US suffered a terrible depression in that year. 365 00:33:24.900 --> 00:33:30.900 Real GNP fell by more than 20% in 1946 alone, the worst single year downturn in American history. 366 00:33:30.900 --> 00:33:35.900 Real output fell by 22.7% from 1944 to 1947. 367 00:33:35.900 --> 00:33:44.900 But the Great Depression of 1946 is every bit as much a phantom as the wartime prosperity to which the same faulty statistics also point. 368 00:33:44.900 --> 00:33:50.900 Americans were fantastically prosperous and enjoyed low unemployment in 1946. 369 00:33:50.900 --> 00:33:53.900 If you accept one though, you must accept the other. 370 00:33:53.900 --> 00:33:56.900 Since there was no Great Depression of 1946, 371 00:33:56.900 --> 00:34:02.900 What GDP figures obscure is that the private economy performed extraordinarily well in 1946. 372 00:34:02.900 --> 00:34:06.900 Private output increased by 30% that year alone, 373 00:34:06.900 --> 00:34:11.900 by far the most extraordinary single-year jump in private output in American history. 374 00:34:11.900 --> 00:34:14.900 That is a measure of prosperity, not how much the government is spending, 375 00:34:14.900 --> 00:34:17.900 but how much the civilian economy is producing. 376 00:34:17.900 --> 00:34:20.900 That is where wealth is created in America. 377 00:34:20.900 --> 00:34:27.900 Well, as the official statistics would have it, World War II was a time of great prosperity, and 1946 was a time of depression. 378 00:34:27.900 --> 00:34:29.900 The truth is just the opposite. 379 00:34:29.900 --> 00:34:36.900 What these statistics really show is just how substantially government activity can distort the true economic picture. 380 00:34:36.900 --> 00:34:39.900 And they also show that common sense must also be distorted. 381 00:34:39.900 --> 00:34:42.900 And they also show that common sense must also be distorted. 382 00:34:42.900 --> 00:34:45.900 And they also show that common sense must also be distorted. 383 00:34:45.900 --> 00:34:51.900 Government activity can distort the true economic picture, and they also show that common sense must always prevail. 384 00:34:51.900 --> 00:34:58.900 Diverting wealth away from private use and taxing consumers to pay for the diversion is not how prosperity is created. 385 00:34:58.900 --> 00:35:02.900 Are we asking too much to expect our historians to grasp that point?