War as Military Keynesianism; the increase in government

War is something many see as an
unavoidable conflict every nation faces; consequently, research shows
throughout the past 3,500 years there has only been 230 years of true peace.
Accordingly, both sides fighting must have a strong economy backing them in
order to maintain a constant flow of assets, such as soldiers, equipment, and
financial support. Examining certain effects which after war allows economists to
prescribe policies that will allow a country to develop instead of slip into a
depression after a war; this is drastically important, especially for the
nation that loses the war. When focusing on World War II, many ask how the
United States and Germany avoided an economic collapse following the short-run
period after World War II, and what economic policies were instilled to avoid a
drastic depression in both countries? In order to measure the postwar economies
researchers examine several key aspects that kept the United States and Germany
out of a post war depression, and allowed employment to increase rather than
decrease. This is a crucial subject to consider after a war because it allows
economists and nations to understand short-term effects of war on the job
market and economic growth, and it also allows them to feasibly apply positive
economic statements to the situation. Moreover, countries see the potential to
have economic booms or busts after a war. During war, several countries begin churning
out land, labor, and capital in order to fulfill the militia’s needs. This type
of economic boom ended the Great Depression in the United States and is
referred to as Military Keynesianism;
the increase in government spending on the military in order to create major
economic growth. Even with all of this increased spending, when and
where will it end? This is where countries face problems of unemployment and
economic downfall. However, after WWII a
great economic boom occurred which began in 1945 and continued to the
1950s and some long run effects can be seen in the 1970s. Many refer to this period
as The Postwar Economic Boom, The
Long Boom, and The Golden Age of Capitalism. In summary,
we are interested in how unemployment is affected by means of studying World
War II economies of Germany and the United States.

First, research shows the United
States seemed untouched by the plundering of WWII; and incidentally it was excluding
Pearl Harbor and the loss of working age men. However, this was all that was
seen looking from the outside in. Economically speaking during the war the U.S.
had numerous issues that had to be immediately resolved. American families had experienced
economic changes that placed them in a better fighting position. One of these
policies included increasing the number of children and women in the work force
in order to compensate for the men fighting overseas. Increasing the number of children
in the work force drastically hurt the educational advancement during this period,
because the majority of those who joined the work force did not finish high
school. Other economic expenditures include the enormous increase in government
spending. “U.S. federal government spending increased from $9 to $98.5 billion
during this time” (Seehorn). Through the 1940s “personal income tax was
extended to all working Americans, and the method of deduction from paychecks
was instituted. This taxation was necessitated by the increase in government
spending for the war effort” (Seehorn). Americans were pouring billions of
dollars into the economy, and this created a massive boom in production,
output, and GDP. Moreover, the unemployment rate in the United States saw a
drastic decrease in the time of war, and the US economy basically reached full
employment.

 

·        
Source:
Bureau of Labor Statistics

On the other hand, as we examine Germany
the country was ruined thanks to Hitler’s Scorched-Earth Policy, destroying
nearly 20 percent of all buildings. Scorching-Earth is a military strategy, it
refers to burning and destroying anything that might be useful to the enemy as
one advances through or leaves a location. Similar to the Allied powers, Hitler
instilled price controls and rations all across the country, creating vast
shortages for all citizens. Food production was down 50 percent and industrial
production was down to one third of its level in 1947 from 1938. Another
consequence that many overlook is the fact that Nazism had spread all across
the country. Moreover, Germany was the leading Axis power during the war;
therefore many thought economic downfall of the country was inevitable.
Incidentally, the graph below shows Germany’s unemployment before WWII and the
vast decrease in unemployment between 1933 and 1940 resulting from Hitler’s
military Keynesianism and worker recruitment program.

 

·        
Conservatism Leads to Fascism, Source: Benjamin Studebaker

 

Further research by David R. Henderson in his article, German Economic Miracle, shows
how Germany was able to pull themselves out of troubled times in order to
create one of the most envied economies of the twentieth century. Henderson
claims that currency reforms, reducing marginal tax rates, and abolishing price
controls set the country off on the right foot after the war. Before the end of
the war “people had lived under price controls for twelve years and rationing
for nine years… In 1936 price controls were set so the government could buy
war materials at artificially low prices” (Henderson). This policy caused
inflation to skyrocket. Yet, since the Allied powers were in control of Germany
after the war, they decided it would be best to keep some of Hitler’s economic
principles in tact, such as the recruitment of citizens into the labor force.
Ideally, this was smart because it forces the citizens into the economy. “The
cost of living index in May 1948, computed at the controlled prices, was only
31 percent above its level in 1938. Yet in 1947, the amount of money in the
German economy—currency plus demand deposits—was five times its 1936 level”
(Henderson). This high inflation of the currency caused shortages throughout
the market, yet people were being recruited to work, which allowed the unemployment
rate to remain low similar to during and after the war. Consequently, the high
inflation and price gauging caused food to be one of the largest items facing a
shortage. People attempted to be self-sufficient and grow their own food;
however, this failed and they were forced to travel hundreds of miles away in
search of food. Henry Wallich explains, “each day, and particularly on
weekends, vast hordes of people trekked out to the country to barter food from
the farmers” (Wallich). Germany faced such high levels of poverty and shortages
that instead of using currency for transactions they began trading goods for
goods. Despite all of these irrational setbacks the workforce maintained
stable, and unemployment levels remained low.

Consequently, as the United States
is analyzed, it is easy to see why the country boomed in the post war
expansion. Before the end of the war, the government was spending billions of
dollars in order to keep the economy going, yet all of this came to a slow
halt. Nonetheless, the American citizens made up this for this decrease
spending. Numerous people had poured into the work force causing a practically
fully employed work force. Cecil Bohanon’s research on the post war economic
recovery explains, “In 1944, government spending at all levels accounted for 55
percent of gross domestic product (GDP). By 1947, government spending had
dropped 75 percent in real terms, or from 55 percent of GDP to just over 16
percent of GDP… Real consumption rose by 22 percent between 1944 and 1947…
Gross private investment rose by 223 percent in real terms…” (Bohanon). In
other words, the private sector of the economy began to boom while the
government spending decreased drastically. Initially following the end of the
war GDP fell, but the spending of consumers quickly dissolved this problem. This
occurred because of the high investment by the consumers and government into
the private sector.

·        
Source:
Bureau of Economic Analysis, Interactive Data Tables, NIPA Tables, Table 1.1.6A

 

As seen in the graph above, in 1944
government spending in the United States was approaching 100 million dollars
while in 1947 it had decreased to about 27 million dollars. Comparing
consumption and investment, it increases by about 40 billion dollars form 1944
to 1947. The graph also shows the drastic increase of private investments in
1947. The graph illustrate the “massive, swift, and beneficial switch from a
wartime economy to peacetime prosperity; resources flowed quickly and
efficiently from public uses to private ones” (Bohanon). However, the factors
that go into the economy having such a drastic turn are credited to a good work
force, an increase in the middle-class working Americans, and President
Eisenhower’s administration. His administration also contributed to the
expansion of the economy by establishing Keynesianism policies across the
country. The Counsel for Economic Advisors was created under his counsel, and
they worked to reduce taxes and create public works jobs. Above all we see that
the government worked to establish job security and set standards to allow
workers and veterans job opportunities in the short run time period following
the war.

Analyzing the two countries in a
post war condition, it is easy to see how their economies made it out of war
without facing a large depression. Germany followed Ludwig Erhard, as they
reduced taxes, stomped inflation, and did away with price controls, while at
the same time maintaining low unemployment. The United States on the other hand
approached in a more Keynesianism style where the citizens and the private
sector boomed and kept unemployment low. I believe that Germany was in fact
lucky to have Erhard in charge of their economic policies because he was
anti-Nazi; therefore, he understood what it would take to rid the country of
its plague. The policies he instilled in the country worked perfectly to
rebuild a broken nation. Many historians believe that Marshall Law (the ruling
of a nation by another nations militia) would have been the most effective way
to resolve Germany’s issues, yet they are wrong. A Marshall plan would have
restricted all of the free trade, reduced the amount of job opportunities, and
reduced inflation within the country. On the other hand, the United States
approached with a more “laisser-faire” mentality. They slowly began dialing
back products of war, and we saw the increase in spending in the private
sector. In the short run, both countries excelled in avoiding a great
depression.

One argument that opposes the
research above is by Heidi Garrett-Peltier. She claims that it would be more
beneficially to take the war budget and use it to fund other sectors of the
government. Peltier goes as far as saying, “Clean energy and health care
spending create 50 percent more jobs than the equivalent amount of spending on
the military. Education spending creates more than twice as many jobs”
(Garrett-Peltier). There are three reasons she makes these claims. First, the
education and clean energy industries are more labor-intensive than the
military, meaning there are more jobs available in these areas. Second, military
personnel are not in their country to spend their earnings, and overseas organizations
receive a piece of the Pentagon’s paycheck. Finally, “wages and benefits are
lower in those sectors than they are for military contractors and personnel on
average, the same amount of money hires more people in those non-military
sectors” (Garrett-Peltier). Her key findings include the following (illustrated
in the graph below): “First, $1 billion in military spending creates
approximately 11,200 jobs, compared with 26,700 in education, 16,800 in clean
energy, and 17,200 in health care. The same amount of spending generates more
jobs in certain non-military sectors because of differences in labor intensity,
domestic investment, and wage levels.” Overall, she concludes by claiming that
if America had not fought wars for the past 13 years (from 2001-2014), but
utilized its resources for other sectors of the government, then there would
have been between 1-3 billion jobs created. I agree with her main points of
discussion, yet the problem with her argument is that it is extremely liberal.
All opinions aside, this is a good way for the economy to create jobs, but it
is more of a cutthroat viewpoint, because it would cost military personal,
government workers, and civilian contractors their jobs as well. Studies from
the Center for Economic and Policy Research conclude, “Military spending drains
resources from the productive economy. For this reason, it will typically lead
to slower economic growth, less investment, higher trade deficits, and fewer
jobs. It is important that the economic costs of military spending, such as
that associated with the war in Iraq, be recognized in assessing the policies
being debated. While the economic costs may not be the primary factor in
determining policy, it is important that the public understand the economic
costs that they are likely to bear by a decision to engage in a war or any
other major increase in military spending” (Baker). Under these circumstances,
it is easy to see why many people would establish the theory that war drives
unemployment rather than employing a country. Military spending will lead to
fewer jobs because the government will have high trade deficits, slower growth,
and less investing due to the fact that its assets are engaging in war. Baker
also makes the point that economic policy may not determine whether or not a
country goes to war; though, he warns that there may be economic consequences
to look out for.  

 

·        
Source:
The Job Opportunity Cost of War by
Heidi Garrett-Peltier

 

In conclusion, how did the United
States and Germany avoid high rates of unemployment following World War II?
Analyzing the scenario we see that through numerous economic policies the
countries managed to create The Golden Age of Capitalism, and evade a depression
by increasing the number of job opportunities. Yet, what would Germany have
done if Marshall Law or the Social Democratic Party had come into power? I
believe the country would have seen stricter regulations preventing the natural
trade in the market, causing an even worse situation for the citizens.
Likewise, in the United States, I think the government could have instilled
restrictions on the private sector. Restrictions would have caused the economy
to see an inflation of prices and high unemployment. At the end of the war the
previous funding for military operations was guided more toward the domestic
agenda. Conversely, the ideas proposed by Garrett-Peltier suggest that the
United States avoid conflict altogether. If this were the case, then the
government would have been able to produce between 1 and 3 billion jobs between
2001 and 2013. This may be the case ceteris
paribus, but how would the American citizens felt after 9/11 if they had
not invaded Iraq? One thing many forget is that war is not meaningless.
Governments have their reasons behind fighting, and in the case of the United
States they fight for freedom for all.

Additional research that would be advantageous
to this question would be studying the government policies instilled after a
war, and which policies affected the economy as a whole. Furthermore, the study
of whether or not government and social reforms cause the boom of an economy of
the natural business cycle does. Overall, I have seen the effects of war on the
winner and loser of a war, and how each country prescribed economic policy in
order to create job opportunities. This is extremely helpful due to the fact
that war is inevitable in the world, and if a country is not prepared for the
economic consequences following a war, then they should attempt to remain
isolated from the conflict. However, in this case due to good economic policies
both countries were able to keep unemployment low and the economy moving. 

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