When commentators continue to refer the most recent financial crisis as “the Great Recession”, they are obviously invoking the other crisis qualified by the adjective “great”, namely the one that began after the stock market crash of 1929. The intractable nature of the current slump has many economists invoking FDR’s New Deal even as the reality sank in long ago that Obama was much more like Herbert Hoover than FDR.
Now some economists—either professional or amateur like me—question whether the accouterments of the New Deal would have had any real impact at all. And one of them has dared to suggest how the Great Depression ended in terms conveyed to me as a new recruit to the Trotskyist movement in 1967, namely that it was WWII rather than the CCC, etc. that was responsible for the recovery. In a November 10, 2008 op-ed column titled “Franklin Delano Obama?”, Paul Krugman wrote:
What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.
Harry Magdoff made the same argument in an open letter to an economist whose article included a sentence that troubled him: “Today’s neo-liberal state is a different kind of capitalist class than the social-democratic, Keynesian interventionist state of the previous period.” In questioning the value of Keynesian interventions of the sort that are found on a daily basis in places like the Nation Magazine, Harry concurred with Krugman:
The onset of a marked recession [in 1937-38] after years of pump-priming startled Washington. Questions began to be raised about the possibility of stagnation in a mature capitalism, the retarding effect of monopolistic corporations, and other possible drags on business. These concerns faded as war orders flowed in from Europe, and eventually they disappeared when the United States went to war. The notion of the “Keynesian Welfare State” has tended to disguise the fact that what really turned the tide was not social welfare, Keynesian or otherwise, but war. In that sense, the whole concept of Keynesianism can be mystification.
Of course, America’s recovery after the start of WWII was in itself a perverse confirmation of the need to adopt Keynesian stimuli, which was the point of Krugman’s column. Liberal economists advocate deficit spending to stimulate the economy but prefer that it be used to build bridges rather than bomb them.
As Randolph Bourne put it during WWI, “war is the health of the state”. While he was writing about the ideological conformity that takes place during war, you might as well extend that to the health of the economy as well. For the entire 20th century and continuing into the 21st, military spending has served in a bastardized Keynesian fashion to keep the system afloat.
Indeed, the late Lynn Turgeon—a long-time subscriber to Michael Perelman’s PEN-L mailing list—wrote a book titled “Bastard Keynesianism: The Evolution of Economic Thinking and Policy-Making” in 1996 that had an introduction with the lead sentence: “The economics of World War II represented a thundering validation of Keynesian economics, as expounded in Keynes’s General Theory”. Indeed, it didn’t really matter which economist a war economy named as its chief guru, as long as it put into practice the kind of massive state spending that was synonymous with Keynes. As Michael Perelman once put it in a message to the post-Keynesian Economics mailing list (now defunct), “Like Lynn Turgeon, I was impressed with Silverman, Dan P. 1997. Hitler’s Economy: Nazi Work Creation Programs, 1933-1936 (Cambridge: Harvard University Press). The book suggests that, if you filter out the racist elements, Hitler’s economic policy were, in effect, a clearer version of the New Deal.”
Apologists for the capitalist system would obviously be troubled by any attempts to connect WWII with the end of the Great Depression since it leads to a political conclusion that condemns the very system they believe in. If it takes millions of dead soldiers and civilians to produce a recovery, isn’t that in and of itself an imperative to overthrow that system?
One strategy is to debunk the notion that the war did lead to a recovery. Two pillars of the establishment—Brad DeLong and Lawrence Summers—have made such an attempt in a 1988 Brookings Institution paper titled “How Does Macroeconomic Policy Affect Output?” They write:
By the time World War II began and the government began to exert command over the economy, more than five-sixths of the Depression decline in output relative to the trend had been made up. It is hard to attribute any of the pre-1942 catchup of the economy to the war. Neither the federal government’s fiscal deficit nor the surplus on trade account became an appreciable share of national product before Pearl Harbor.
Christine Romer, who was quoted in a new book to the effect that the Obama White house was a male chauvinist pig sty dominated by men like Lawrence Summers, agreed with DeLong and Summers in a 1991 paper titled “What Ended the Great Depression” that begins:
Between 1933 and 1937 real GNP in the United States grew at an average rate of over 8 percent per year; between 1938 and 1941 it grew at an average rate of over 10 percent per year. By any prewar or postwar metric these rates of growth are spectacular, even for an economy pulling out of a severe depression.
In the December 1994 Journal of Economic History, J.R. Vernon answers the claims of Summers, DeLong and Romer in a paper titled “World War II Fiscal Policies and the End of the Great Depression”. While no Marxist (and not even a radical by any appearances), Vernon makes some essential points. To start with, he stresses that more than half of the recovery took place between 1941 and 1942—in other words when war spending had geared up. Government purchase of goods and services ticked up by 54.7 percent in this one-year period and continued to increase as the actual war began. Furthermore, in examining Romer’s figures, he comes to the conclusion that by the fourth quarter of 1940, only 46 percent of the recovery had been accomplished.
In a way, all of this is moot for several reasons. To start with, even if Romer, Summers and DeLong were correct there is no possibility of a New Deal inspired recovery is in the works. If there is anything that the Obama presidency has demonstrated, it is that Herbert Hoover rather than the New Deal inspires it.
And if you take Krugman at his word that a world war could do the trick, it is precluded by the nuclear facts on the ground. American capitalism had no compunction about blowing up most of Germany and Japan in the course of preparing for postwar reconstruction led by American investments, but in the epoch of the hydrogen bomb only the cockroach will be left to do business.