War as Military Keynesianism; the increase in government

Topic: BusinessEnergy
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Last updated: May 11, 2019

War is something many see as anunavoidable conflict every nation faces; consequently, research showsthroughout 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 inorder to maintain a constant flow of assets, such as soldiers, equipment, andfinancial support. Examining certain effects which after war allows economists toprescribe policies that will allow a country to develop instead of slip into adepression after a war; this is drastically important, especially for thenation that loses the war.

When focusing on World War II, many ask how theUnited States and Germany avoided an economic collapse following the short-runperiod after World War II, and what economic policies were instilled to avoid adrastic depression in both countries? In order to measure the postwar economiesresearchers examine several key aspects that kept the United States and Germanyout of a post war depression, and allowed employment to increase rather thandecrease. This is a crucial subject to consider after a war because it allowseconomists and nations to understand short-term effects of war on the jobmarket and economic growth, and it also allows them to feasibly apply positiveeconomic statements to the situation. Moreover, countries see the potential tohave economic booms or busts after a war.

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During war, several countries begin churningout land, labor, and capital in order to fulfill the militia’s needs. This typeof economic boom ended the Great Depression in the United States and isreferred to as Military Keynesianism;the increase in government spending on the military in order to create majoreconomic growth. Even with all of this increased spending, when andwhere will it end? This is where countries face problems of unemployment andeconomic downfall. However, after WWII agreat economic boom occurred which began in 1945 and continued to the1950s and some long run effects can be seen in the 1970s. Many refer to this periodas The Postwar Economic Boom, TheLong Boom, and The Golden Age of Capitalism.

In summary,we are interested in how unemployment is affected by means of studying WorldWar II economies of Germany and the United States.First, research shows the UnitedStates seemed untouched by the plundering of WWII; and incidentally it was excludingPearl Harbor and the loss of working age men. However, this was all that wasseen 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 experiencedeconomic changes that placed them in a better fighting position. One of thesepolicies included increasing the number of children and women in the work forcein order to compensate for the men fighting overseas.

Increasing the number of childrenin the work force drastically hurt the educational advancement during this period,because the majority of those who joined the work force did not finish highschool. Other economic expenditures include the enormous increase in governmentspending. “U.S. federal government spending increased from $9 to $98.5 billionduring this time” (Seehorn).

Through the 1940s “personal income tax wasextended to all working Americans, and the method of deduction from paycheckswas instituted. This taxation was necessitated by the increase in governmentspending for the war effort” (Seehorn). Americans were pouring billions ofdollars into the economy, and this created a massive boom in production,output, and GDP. Moreover, the unemployment rate in the United States saw adrastic decrease in the time of war, and the US economy basically reached fullemployment.  ·        Source:Bureau of Labor StatisticsOn the other hand, as we examine Germanythe country was ruined thanks to Hitler’s Scorched-Earth Policy, destroyingnearly 20 percent of all buildings. Scorching-Earth is a military strategy, itrefers to burning and destroying anything that might be useful to the enemy asone advances through or leaves a location.

Similar to the Allied powers, Hitlerinstilled price controls and rations all across the country, creating vastshortages for all citizens. Food production was down 50 percent and industrialproduction was down to one third of its level in 1947 from 1938. Anotherconsequence that many overlook is the fact that Nazism had spread all acrossthe 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 thevast decrease in unemployment between 1933 and 1940 resulting from Hitler’smilitary Keynesianism and worker recruitment program.  ·        Conservatism Leads to Fascism, Source: Benjamin Studebaker Further research by David R. Henderson in his article, German Economic Miracle, showshow Germany was able to pull themselves out of troubled times in order tocreate one of the most envied economies of the twentieth century.

Hendersonclaims that currency reforms, reducing marginal tax rates, and abolishing pricecontrols set the country off on the right foot after the war. Before the end ofthe war “people had lived under price controls for twelve years and rationingfor nine years… In 1936 price controls were set so the government could buywar materials at artificially low prices” (Henderson). This policy causedinflation to skyrocket. Yet, since the Allied powers were in control of Germanyafter the war, they decided it would be best to keep some of Hitler’s economicprinciples in tact, such as the recruitment of citizens into the labor force.

Ideally, this was smart because it forces the citizens into the economy. “Thecost of living index in May 1948, computed at the controlled prices, was only31 percent above its level in 1938. Yet in 1947, the amount of money in theGerman economy—currency plus demand deposits—was five times its 1936 level”(Henderson). This high inflation of the currency caused shortages throughoutthe market, yet people were being recruited to work, which allowed the unemploymentrate to remain low similar to during and after the war. Consequently, the highinflation and price gauging caused food to be one of the largest items facing ashortage. People attempted to be self-sufficient and grow their own food;however, this failed and they were forced to travel hundreds of miles away insearch of food.

Henry Wallich explains, “each day, and particularly onweekends, vast hordes of people trekked out to the country to barter food fromthe farmers” (Wallich). Germany faced such high levels of poverty and shortagesthat instead of using currency for transactions they began trading goods forgoods. Despite all of these irrational setbacks the workforce maintainedstable, and unemployment levels remained low. Consequently, as the United Statesis analyzed, it is easy to see why the country boomed in the post warexpansion. Before the end of the war, the government was spending billions ofdollars in order to keep the economy going, yet all of this came to a slowhalt. Nonetheless, the American citizens made up this for this decreasespending. Numerous people had poured into the work force causing a practicallyfully employed work force.

Cecil Bohanon’s research on the post war economicrecovery explains, “In 1944, government spending at all levels accounted for 55percent of gross domestic product (GDP). By 1947, government spending haddropped 75 percent in real terms, or from 55 percent of GDP to just over 16percent of GDP… Real consumption rose by 22 percent between 1944 and 1947…Gross private investment rose by 223 percent in real terms…” (Bohanon). Inother words, the private sector of the economy began to boom while thegovernment spending decreased drastically. Initially following the end of thewar GDP fell, but the spending of consumers quickly dissolved this problem. Thisoccurred because of the high investment by the consumers and government intothe private sector.·        Source:Bureau of Economic Analysis, Interactive Data Tables, NIPA Tables, Table 1.1.6A As seen in the graph above, in 1944government spending in the United States was approaching 100 million dollarswhile in 1947 it had decreased to about 27 million dollars.

Comparingconsumption and investment, it increases by about 40 billion dollars form 1944to 1947. The graph also shows the drastic increase of private investments in1947. The graph illustrate the “massive, swift, and beneficial switch from awartime economy to peacetime prosperity; resources flowed quickly andefficiently from public uses to private ones” (Bohanon).

However, the factorsthat go into the economy having such a drastic turn are credited to a good workforce, an increase in the middle-class working Americans, and PresidentEisenhower’s administration. His administration also contributed to theexpansion of the economy by establishing Keynesianism policies across thecountry. The Counsel for Economic Advisors was created under his counsel, andthey worked to reduce taxes and create public works jobs. Above all we see thatthe government worked to establish job security and set standards to allowworkers and veterans job opportunities in the short run time period followingthe war.

Analyzing the two countries in apost war condition, it is easy to see how their economies made it out of warwithout facing a large depression. Germany followed Ludwig Erhard, as theyreduced taxes, stomped inflation, and did away with price controls, while atthe same time maintaining low unemployment. The United States on the other handapproached in a more Keynesianism style where the citizens and the privatesector boomed and kept unemployment low. I believe that Germany was in factlucky to have Erhard in charge of their economic policies because he wasanti-Nazi; therefore, he understood what it would take to rid the country ofits plague. The policies he instilled in the country worked perfectly torebuild a broken nation. Many historians believe that Marshall Law (the rulingof a nation by another nations militia) would have been the most effective wayto resolve Germany’s issues, yet they are wrong. A Marshall plan would haverestricted all of the free trade, reduced the amount of job opportunities, andreduced inflation within the country.

On the other hand, the United Statesapproached with a more “laisser-faire” mentality. They slowly began dialingback products of war, and we saw the increase in spending in the privatesector. In the short run, both countries excelled in avoiding a greatdepression. One argument that opposes theresearch above is by Heidi Garrett-Peltier. She claims that it would be morebeneficially to take the war budget and use it to fund other sectors of thegovernment. Peltier goes as far as saying, “Clean energy and health carespending create 50 percent more jobs than the equivalent amount of spending onthe military. Education spending creates more than twice as many jobs”(Garrett-Peltier).

There are three reasons she makes these claims. First, theeducation and clean energy industries are more labor-intensive than themilitary, meaning there are more jobs available in these areas. Second, militarypersonnel are not in their country to spend their earnings, and overseas organizationsreceive a piece of the Pentagon’s paycheck. Finally, “wages and benefits arelower in those sectors than they are for military contractors and personnel onaverage, the same amount of money hires more people in those non-militarysectors” (Garrett-Peltier). Her key findings include the following (illustratedin the graph below): “First, $1 billion in military spending createsapproximately 11,200 jobs, compared with 26,700 in education, 16,800 in cleanenergy, and 17,200 in health care. The same amount of spending generates morejobs in certain non-military sectors because of differences in labor intensity,domestic investment, and wage levels.” Overall, she concludes by claiming thatif America had not fought wars for the past 13 years (from 2001-2014), bututilized its resources for other sectors of the government, then there wouldhave been between 1-3 billion jobs created.

I agree with her main points ofdiscussion, 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 itis more of a cutthroat viewpoint, because it would cost military personal,government workers, and civilian contractors their jobs as well. Studies fromthe Center for Economic and Policy Research conclude, “Military spending drainsresources from the productive economy. For this reason, it will typically leadto slower economic growth, less investment, higher trade deficits, and fewerjobs. It is important that the economic costs of military spending, such asthat associated with the war in Iraq, be recognized in assessing the policiesbeing debated.

While the economic costs may not be the primary factor indetermining policy, it is important that the public understand the economiccosts that they are likely to bear by a decision to engage in a war or anyother major increase in military spending” (Baker). Under these circumstances,it is easy to see why many people would establish the theory that war drivesunemployment rather than employing a country. Military spending will lead tofewer 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. Bakeralso makes the point that economic policy may not determine whether or not acountry goes to war; though, he warns that there may be economic consequencesto look out for.

  ·        Source:The Job Opportunity Cost of War byHeidi Garrett-Peltier In conclusion, how did the UnitedStates and Germany avoid high rates of unemployment following World War II?Analyzing the scenario we see that through numerous economic policies thecountries managed to create The Golden Age of Capitalism, and evade a depressionby increasing the number of job opportunities. Yet, what would Germany havedone if Marshall Law or the Social Democratic Party had come into power? Ibelieve the country would have seen stricter regulations preventing the naturaltrade in the market, causing an even worse situation for the citizens.Likewise, in the United States, I think the government could have instilledrestrictions on the private sector. Restrictions would have caused the economyto see an inflation of prices and high unemployment. At the end of the war theprevious funding for military operations was guided more toward the domesticagenda. Conversely, the ideas proposed by Garrett-Peltier suggest that theUnited States avoid conflict altogether.

If this were the case, then thegovernment would have been able to produce between 1 and 3 billion jobs between2001 and 2013. This may be the case ceterisparibus, but how would the American citizens felt after 9/11 if they hadnot invaded Iraq? One thing many forget is that war is not meaningless.Governments have their reasons behind fighting, and in the case of the UnitedStates they fight for freedom for all. Additional research that would be advantageousto this question would be studying the government policies instilled after awar, and which policies affected the economy as a whole. Furthermore, the studyof whether or not government and social reforms cause the boom of an economy ofthe natural business cycle does. Overall, I have seen the effects of war on thewinner and loser of a war, and how each country prescribed economic policy inorder to create job opportunities.

This is extremely helpful due to the factthat war is inevitable in the world, and if a country is not prepared for theeconomic consequences following a war, then they should attempt to remainisolated from the conflict. However, in this case due to good economic policiesboth countries were able to keep unemployment low and the economy moving. 


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