The Drumbeat

This morning Paul Krugman looks at the state of the economy, notes the long period of economic stagnation behind us and the likelihood of more of the same extending before us and urges us to go to war:

If you want to see what it really takes to boot the economy out of a debt trap, look at the large public works program, otherwise known as World War II, that ended the Great Depression. The war didn’t just lead to full employment. It also led to rapidly rising incomes and substantial inflation, all with virtually no borrowing by the private sector. By 1945 the government’s debt had soared, but the ratio of private-sector debt to G.D.P. was only half what it had been in 1940. And this low level of private debt helped set the stage for the great postwar boom.

I don’t think that Dr. Krugman is actually urging us to go to war. However, perhaps someone more knowledgeable than I can comment. How do you disaggregate the effects of the increased government expenditures that World War II represented from those of the forced saving and reduced private consumption that went along with those expenditures?

Additionally, in 1940 the public debt to GDP ratio was roughly 52.4%. Today it’s 80% and rising fast. Does that really make no difference? And does every incremental dollar of government expenditure produce as much (or more) stimulus effects than the last?

4 comments… add one
  • PD Shaw Link

    How also do you desegregate the reduction in employment caused by the war. My rough calculations are that 1.15% of the U.S. work force was killed in the war. That would be one way to tighten labor markets.

  • Kelly Link

    Here’s my take on that, PD:
    WW2 helped open up the economy in part because of the draft. Men were yanked out of the workforce and had to be replaced.
    (That’s not the only reason, of course.)
    That’s not gonna happen now, is it? The military is voluntary, no conscripts. No jobs will be vacated.

  • Jeff Link

    I think with this stimulus the federal deficit is likely to go even higher. I saw an interesting article, I think, on

    http://www.recessioninfocenter.com

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