Would no WWI mean no Great Depression?

[Julia Augusta]

If you are going to teach economics and call the other person stupid you should at least get the definition of "overall output" vs "opportunity cost" correct which is something even first year undergrad should know.

I agree, but "overall output" implies GDP here

I'm glad that you admit that you were wrong in your previous post there. But right now you are making the argument of the lost opportunity cost of military spending and that military spending isn't the most efficient way of government spending (which I agree with), but your claim that "overall output fell" is simply and blatantly wrong.


Actually fiscal multiplier is not a constant but varies with regards to propensity to consume, your GDP formula actually look like this

Is actually

Y = C0 + C1(Y-T) + G + I + NX

Therefore:

Y = (C0 -C1*T + G + I + NX)/(1-C1)

When the propensity to consume is low (as they are during depressions) one additional unit of tax cuts has a low multiplier effect and it produces the effect of

(C1*T - G) / (1-C1), 0< C1 < 1

You really don't understand what you are talking about. Oppurtunity Cost is what I was always talking about. I figured that it was obvious that I was talking about how the money spent on the war caused GDP to fall lower than it should have been. But I have learned my lesson and and will not presume that other people can understand what I am writing, as if I am talking to them.

And the fiscal Multiplier is not just determined by the marginal propensity to consume. That is so simplistic that it is just plain wrong. Which is why did not mention that.

In order to properly determine the fiscal multiplier, you have to consider where the money is going and where it came from, along with a variety of other factors. If you take a dollar from a poor person and give it to a rich person, the dollar is less likely to get spent than if it happened vice versa.

When you are rationing everything due to the war, does it not make sense that consumer spending, and investment sending would fall enough to offset any increases in GDP.

Actually, rereading some old papers, I have found something that might indicate WW2 helped end the great depression. According to some papers I have re-read, Capital inflights form europe to america helped the recovery as they expanded the money supply.

Edit:
Also, look at your Graph, the growth rates pre WW2 huge spending don't look that different from post ww2 spending.

 

[Carl Schwamberger]

Actually, rereading some old papers, I have found something that might indicate WW2 helped end the great depression. According to some papers I have re-read, Capital inflights form europe to america helped the recovery as they expanded the money supply.

Any indication in those how much 'money' this amounted to? I have seen a few numbers for the quantity of raw materials & weapons the French & British ordered up, and were paying cash for 1939-40. Not a trivial amount. 1800 aircraft were scheduled for delivery to France in 1940 & orders for 3000+ more were being negotiated for 1941. A US company, possiblly Glenn Martin, had set up a aircraft assemblly site in Morroco & was setting up a maintiance depot in Algeria.

The Brits were working hard to blockade Germany, so the cash flow in theory was declining in the that direction, but what the Germans still obtained they paid a premium for. Probablly be woth someones time to do a academic grade study on just what the 'war purchases' brought to the US in terms of capitol & related effects.

 

[Deleted member 1487]

Any indication in those how much 'money' this amounted to? I have seen a few numbers for the quantity of raw materials & weapons the French & British ordered up, and were paying cash for 1939-40. Not a trivial amount. 1800 aircraft were scheduled for delivery to France in 1940 & orders for 3000+ more were being negotiated for 1941. A US company, possiblly Glenn Martin, had set up a aircraft assemblly site in Morroco & was setting up a maintiance depot in Algeria.

The Brits were working hard to blockade Germany, so the cash flow in theory was declining in the that direction, but what the Germans still obtained they paid a premium for. Probablly be woth someones time to do a academic grade study on just what the 'war purchases' brought to the US in terms of capitol & related effects.

http://www.jstor.org/discover/10.2307/3638495?uid=2&uid=4&sid=21101678770337
Here is an article about WW1 that has the same subject to a degree; it might offer some interesting information to can help you form a basis for analyzing the WW2 effect of purchases.

 

[RousseauX]

You really don't understand what you are talking about. Oppurtunity Cost is what I was always talking about. I figured that it was obvious that I was talking about how the money spent on the war caused GDP to fall lower than it should have been. But I have learned my lesson and and will not presume that other people can understand what I am writing, as if I am talking to them.

This is what you wrote:

When money was spent on the war, overall output of the economy shrank.

Sorry for interpreting "overall output of the economy shrank" as overall output of the economy shrank, stop blaming other people for your own failure to express your ideas clearly and then throwing up your hands and declare how smart you are.

And the fiscal Multiplier is not just determined by the marginal propensity to consume. That is so simplistic that it is just plain wrong. Which is why did not mention that.

No, instead you mentioned an even simpler model which doesn't even acknowledge that fiscal multipliers can be different for private spending as well.

In order to properly determine the fiscal multiplier, you have to consider where the money is going and where it came from, along with a variety of other factors. If you take a dollar from a poor person and give it to a rich person, the dollar is less likely to get spent than if it happened vice versa.

When you are rationing everything due to the war, does it not make sense that consumer spending, and investment sending would fall enough to offset any increases in GDP.

I'm not quite sure if I understand you correctly, consumer spending and investment spending are part of the GDP.

Actually, rereading some old papers, I have found something that might indicate WW2 helped end the great depression. According to some papers I have re-read, Capital inflights form europe to america helped the recovery as they expanded the money supply.

Yeah, that's probably true too, though it probably should be affecting growth more heavily in the 39-40 period than 41-45 period.

Edit:
Also, look at your Graph, the growth rates pre WW2 huge spending don't look that different from post ww2 spending.

Growth rates were particularly high during the war years.

 

[Carl Schwamberger]

http://www.jstor.org/discover/10.2307/3638495?uid=2&uid=4&sid=21101678770337
Here is an article about WW1 that has the same subject to a degree; it might offer some interesting information to can help you form a basis for analyzing the WW2 effect of purchases.

When I was a kid back in the 1960s there were still a few older folk ranting on about the same as in that article. When reading the literature of the post war disillusionment one can find frequent references to the bankers, industrialists, capitolists, or Jewish financiers who led the US into the war to further fill their pockets. nice to see there is still some scholarly study of the actual economics of this.

Thanks

 

[Carl Schwamberger]

Should we be alarmed the general trend since 1965 has been downward?

 

[Julia Augusta]

Should we be alarmed the general trend since 1965 has been downward?

Not particularly, we have picked the low hanging fruit and are now a first world nation. Growth has slowed down naturally.

And Rosseu 1941- 17.1%

1942- 18.5%

1943- 16.4%

We were already on track before ww2. The war started on Dec. 7 1941. We did not have the huge spending on the war till 42. We were recovering. I doubt we would have suddenly started having a smaller growth rate after 1941 without ww2. That seams implausible to say the least.

Yes they are part of gdp. Any increase in War spending , which would increase government spending was off set by the lowering of investment and consumer spending.

 

[Deleted member 1487]

Not particularly, we have picked the low hanging fruit and are now a first world nation. Growth has slowed down naturally.

And Rosseu 1941- 17.1%

1942- 18.5%

1943- 16.4%

We were already on track before ww2. The war started on Dec. 7 1941. We did not have the huge spending on the war till 42. We were recovering. I doubt we would have suddenly started having a smaller growth rate after 1941 without ww2. That seams implausible to say the least.

Yes they are part of gdp. Any increase in War spending , which would increase government spending was off set by the lowering of investment and consumer spending.

And what about the major military spending from 1940-1???

 

[Julia Augusta]

And what about the major military spending from 1940-1???

US was not in the war at the time. It was immensely lower than it was before.

A quick look says the amount spent( in millions) was

1940- 25,000

1941 - 93,000

1942- 338,000

1943- 808,000

1944 - 933,00 (growth rate 8.1%)

1945 - 958,000 (growth rate -1.1%)

Considering that, it seems silly to think that defense spending from before WW2 was what ended the great depression. If so, we should expect an increase in growth corresponding to the increase in spending, which was not the case.

 

[phx1138]

Not particularly, we have picked the low hanging fruit

ISTM the policies haven't changed to reflect the changed realities...

Growth has slowed down naturally.

And Rosseu 1941- 17.1%

1942- 18.5%

1943- 16.4%

Scant surprise: in 1940-1, there was still enormous idle capacity in the U.S., & enormous numbers UE. By 1943, not so much.

 

[Julia Augusta]

ISTM the policies haven't changed to reflect the changed realities...

Honestly, we have no idea what the future will hold. Who knows what innovations will occur. We may be just on the cusp of some discovery that will spark a new revolution in the economy like the industrial revolution. We should have policies designed to accomdate the fact that the future is unknown, and we should not constrain it by policies designed to accomadate lower growth.

 

[phx1138]

Honestly, we have no idea what the future will hold. Who knows what innovations will occur. We may be just on the cusp of some discovery that will spark a new revolution in the economy like the industrial revolution. We should have policies designed to accomdate the fact that the future is unknown, and we should not constrain it by policies designed to accomadate lower growth.

I entirely agree. What ISTM is happening is, governments are protecting existing industries & ways of doing things, & not doing nearly enough to encourage discovery of new ways. To name just a couple: no (or little) support for ocean thermal & power satellites, yet continuing billions for fusion, which has produced not one watt of power in 50yr trying.

 

[Julia Augusta]

I entirely agree. What ISTM is happening is, governments are protecting existing industries & ways of doing things, & not doing nearly enough to encourage discovery of new ways. To name just a couple: no (or little) support for ocean thermal & power satellites, yet continuing billions for fusion, which has produced not one watt of power in 50yr trying.

Or the fact that if you want money for any project, you need to research something the military is interested in. Otherwise, well, money is often tighter.

 

[Gannt the chartist]

Whose Great Depression

Well the business cycle is going to happen and there will probably be a tech bubble in the late 20's, 30's and the dust bowl was waiting to happen but.

The initiating factors and a lot of the mythos of 'the Great Depression' referred to here is US centric. The Crossover and impact on world economics are because of the importance of $ post WW1 and the relative increase in dependency on US production elsewhere, as well as the impact of the war on population, production and skewing of manufacturing.

So some questions.

Absent the war why would the $ be the reserve currency not the £, a banking crash in a currency not the world reserve is a purely local phenomenon.

No WW1 presumably no Bolshevik revolution and crash industrialisation therefore the Russian grain, oil and mining industries are open to world trade and probably not feeding a 5 year plan and bribing the urban popn.

Without the considerable WW1 investment by the entente powers in US capacity is the US as important relatively to world trade, woudl for examppel there be larger French investment in France rather than the US.

and finally, the whol eof European politics with or without a depression wil be seen through a totally different perspective - no USSR, Monarchies in place, Multinational AH, no Poland, Finland, and a Turkish empire so nationalisms will be addressing different issues than claiming territory off a neighbour

 

[RousseauX]

Should we be alarmed the general trend since 1965 has been downward?

No, not really, the growth rates of the post-war period has always being exceptional rather than the rule. This is largely due to extensive growth (input of additional units of factors of production) and in Europe and America was accomplished by migration of rural population to cities.

At any given time economic growth are ultimately limited by technological levels and therefore economic growth always falls when GDP per capita increases barring significant technological breakthroughs. So in the post-war era, you had ex-farmers adopting "better" technology by moving to cities and getting factory jobs, but now that Europe and America have exhausted their supply of rural workforce, you need new technology to drive growth similar to levels seen in the 50s-60s.

 

[RousseauX]

And Rosseu 1941- 17.1%

1942- 18.5%

1943- 16.4%

We were already on track before ww2. The war started on Dec. 7 1941. We did not have the huge spending on the war till 42. We were recovering. I doubt we would have suddenly started having a smaller growth rate after 1941 without ww2. That seams implausible to say the least.

US rearmament started before the US joined the war though, both in terms of the size of US's own armed forces and in terms of material sold/given to the allies. In fact, if you use FDR's "arsenal of democracy" in Dec 1940 speech as the delimiter for when the US started rearming itself, then the US was already conducting military Keynesianism because of WWII in 1941 a year before Pearl Harbor. You can see this pretty clearly once you extend your dataset by 1 year to include 1940:

Year | GDP* | Growth Rate
1939 | $1,072,800 | 8.07%
1940 | $1,166,900 | 8.77%
1941 | $1,366,100 | 17.07%
1942 | $1,618,200 | 18.45%
1943 | $1,883,100 | 16.37%
1944 | $2,035,200 | 8.07%

It's obvious that GDP growth more than doubled upon the beginning of rearmament

Which is in fact, why the

Yes they are part of gdp. Any increase in War spending , which would increase government spending was off set by the lowering of investment and consumer spending.

Can you provide any data showing the standard of living in the US -fell- during the war?

I mean I agree with you that GDP is not necessarily an accurate way of measuring economical progress, but you need to provide more evidence here.

 

[Workable Goblin]

I entirely agree. What ISTM is happening is, governments are protecting existing industries & ways of doing things, & not doing nearly enough to encourage discovery of new ways. To name just a couple: no (or little) support for ocean thermal & power satellites, yet continuing billions for fusion, which has produced not one watt of power in 50yr trying.

That's as much because those aren't really exceptionally promising energy sources, unlike fusion. Ocean thermal has marginal efficiency and some fairly significant upkeep issues (although to be fair fusion has pretty hefty upkeep issues too unless you use an aneutronic fuel pair), solar power satellites have the disadvantage of being in space, which makes EVERYTHING expensive. You have to crack low launch costs for that to be worthwhile, and probably figure out a way to do without humans (or many humans, at least) as well, and both of those are pretty hard problems.

That and fusion is a natural research subject for the large nuclear research infrastructure that was created after World War II, whereas these other things are not.

 

[Carl Schwamberger]

At the risk of having stones hurled at me & a scarlett letter afixed to my clothing I will dare utter the name Kondratiev here

Students of that old Bolshivik, or the early 1970s MIT revival of the concept would place the economic malaise of the 1930s as inevitable, whatever the monetary policy. I would certainly not dismiss all the effects of the Great War as aggravating the stagnation & decline of the era.

All the items on the web on this subject I've looked are more or less snake oil sales. Wiki has a basic primer on the Kondratiev theory of long cycles.

http://en.wikipedia.org/wiki/Kondratiev_wave

...however for the gritty facts you need to search out some of the academic stuff aimed at supporting or disproving Kondratievs theory.

 

[Carl Schwamberger]

This did not attach to my previous post. Filched from Wiki. Not the best illustration I've seen but it will have to do

 

[Julia Augusta]

US rearmament started before the US joined the war though, both in terms of the size of US's own armed forces and in terms of material sold/given to the allies. In fact, if you use FDR's "arsenal of democracy" in Dec 1940 speech as the delimiter for when the US started rearming itself, then the US was already conducting military Keynesianism because of WWII in 1941 a year before Pearl Harbor. You can see this pretty clearly once you extend your dataset by 1 year to include 1940:

It's obvious that GDP growth more than doubled upon the beginning of rearmament

Can you provide any data showing the standard of living in the US -fell- during the war?

I mean I agree with you that GDP is not necessarily an accurate way of measuring economical progress, but you need to provide more evidence here.

1941 had a fairly small defense budget. As seen in my above post. Not nearly enough to claim that WW2 was the cause of the end of the great depression, as the magnitude of ww2 spending was much higher.

I actually listed the defense spendin 1940-1945.