Thirty-Eight Hours Versus Sixteen Tons: Recapping Government-Spending Driven Economic Growth in World War II

Source: Inspiration

This blog is not about public engagement. It made an exception for the Canadian election, because, well, it's a Canadian blog. American elections are American business, and, besides, it's almost certainly moot at this point.

However, this blog's cute-as-buttons niece was feeling the Bern hard when the blog had a birthday lunch with her three weeks ago -- three months late, but the blog can be that way, sometimes. So the blog feels some vicarious, avuncular enthusiasm. The Sanders campaign was in trouble --and this is also old news-- last week for taking all-too seriously Jerry Friedman's recent claim that a good dose of government spending, as promised by Democratic Presidential candidate Bernie Sanders would produce GDP growth rates which are deemed by others to be too high.

Obviously, the blog has no comment. The blog doesn't understand all the math-y bits in economics.The blog's "gentleman's D" in partial differential equations enjoins silence. That being said, economics also trades in facts, and facts happen in history, and history is the blog's wheelhouse. More specifically, the blog has done quite a bit about a period in history in which government spending had a pretty significant effect on the Anglo-American GDP, and the blog can certainly talk about that. And drop the fancy-pantsy third-person elocution while the blog is at it!

Also, something like that would be quick to write, and wouldn't require library time, which is the whole point of doing recapping posts. Who knows, it might even people who are not my bubbly, optimistic, 18-year-old niece with a bit of confidence in the future. It might give my niece a future where she can teach music theory and history instead of swotting her way through medical school.

An excuse for recycled images!

It's a forgotten moment, but it must have been a moment, that day in 1943 that Fortune reporters walked into the Jako and Heintz plant in St. Louis, Missouri, and tried to interview employees about the fines levied against the company for overpaying its employees for an average of 38 hours of overtime a week (84 hours was the average, but the work week had recently been raised to 48 hours), while an earlier article was read over the intercom to angry employees. Jako and Heintz, an electrical manufacturer are forgotten now, near as I can tell, along with a great deal of other evidence of the seedy side of America's wartime economic expansion.

On the other hand, there's the slow subsidence of the European (but, in this context, British) coal industry. If you click on the link in the title, you'll be taken to the Yale Spizzwinks singing Tennessee Ernie Ford's iconic "Sixteen Tons," and, really, what the heck can you do with that?

Oh, I know. 

Actually a militia band rather than "The Red Army sings Sixteen Tons." Still funny as hell.

The basic facts of the American economy in World War II are well known. America got into a war, America spent like a drunken sailor:

US Spending, WWII

Year	Federal Spending (billions of 1940 dollars)	Defence Spending
1940	9,47	1.66
1941	13,00	6.13
1942	30.18	22.05
1943	63.57	43.98
1944	72.62	62.95
1945	72.11	64.53

Some of this was paid for out of income tax:

I. Comparative Federal Income Taxes (Man, Wife, One Child) (Some old Fortune article: Ask for a reference in the comments!)

Net Income Before Exemptions	1928	1944
$2000	None	$145
6,000	24	1135
10,000	92	2,415
16,000	349	4,960
40,000	2,894	19,890
100,000	15,754	69,000

Some out of other capital gains taxes, including the excess profits tax.

American Incomes, Spending, Saving

	1939	1940	1941	1942	1943*
Income Payments to Individuals: Salaries and Wages	45.7	49.8	61.4	79.9	100.6
Relief	1.1	1.1	1.1	1.1	0.9
“Social Security Benefits, etc”	1.8	2.0	1.9	2.1	2.8
Dividends and Interest	8.9	9.2	9.7	9.3	9.8
Entrepeneurial Income, net rents and royalties	13.4	14.5	18.1	23.1	27.8
Disposal of Individual Incomes: Taxes	3.1	3.5	4.0	6.6	17.8
Consumption	61.7	65.7	74.6	82.0	90.5
Net Savings	6.0	7.5	13.7	26.9	33.6
Corporate Profits Before Taxes	5.3	7.4	14.4	19.o	22.8
After Taxes	4.1	4.8	7.3	7.4	8.2

(The Economist.)

But most of it came out from borrowing. The US national debt hit 120% of GDP in 1945. The result? 

Or, to put it another way:

Long-Run US and UK GDP (not GNP) trends. (From http://useconomy.about.com/od/GDP-by-Year/a/US-GDP-History.htm; ww.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=1&isuri=1; www.bankofengland.co.uk/publications*; http://socialdemocracy21stcentury.blogspot.ca/2013/02/uk-unemployment-18701999.html)

Year	US GDP (nominal Dollars; chained 1937 dollars)	Inflation (where available)	UK GDP (£ millions, chained inflation 2006 £s)	UK Unemployment in Peace Years
1930	92.2	-6.4%	199,401	12.3%
1933	57.2	0.8%	196,582	15.4%
1935	74.3	3.0%	216,459	12.0%
1937	93.0	2.9%	234,975	8.5%
1938	87.4	-2.8%	236,530	10.1%
1939	93.5		247,514	8.5%
1940	102.9; 105.7		275,458
1941	129.4; 124.4	9.9%	300,924
1942	166.0; 147.9	9%	307,047
1943	203.1; 173.1	3%	312,539
1944	224.6; 186.9	2.3%	297,376
1945	228.2; 185.1		281,582
1946	227.8; 163.7	18.1%	273,320	2.0%
1947	249.8; 161.9	8.8%	269,723	1.4%
1948	274.8		279,589	1.6%
1949	272.8	-2.1%	289,269	1.6%
1950	300.2		298,626	1.7%
1951	347.3	6%	306,197	1.3%
1952	367.7		307,240	2.2%
1953	389.7		319,087	1.8%
1954	391.1	-0.7%	331,876	1.5%
1955	426.2		343,336	1.2%

This is not the easiest set of data series to unpack, given the disinclination of anyone in particular to settle on a particular measure (GDP? GNP?) and run an extended series of "constant dollar" numbers, but the outline of American national product across a bit more than two decades is clear enough: A big crash in 1929--31, a period of stagnation (1931--33), a recovery (1934--7), a crash (1938/9), a rocking recovery (1940-45), a check and a pause (1945--47), a long climb. (1948--55 and onwards.)

The British numbers are included, just for a laugh, as the overall trajectory is surprisingly similar given how differently the two wars were funded. 

Costs of War (The Economist, 12 August 1944)

	United States		United Kingdom
Resources derived from-	$billion	%	£billion	%
Increased Production	66.7	100.0	1.21	40
Reduced Consumption	-9.1	-13.6	0.87	29.0
Reduced provision for, or drafts on, capital	9.1	13.6	0.92	30.7
	66.7	100	3.0	100

This is a pretty weird chart, but the negative numbers are intended to indicate that Americans actually increased consumption in WWII. Americans. Undisciplined, self-indulgent, narcissistic, etc. 

We'll leave the fact that Geoffrey Crowther of The Economist was apparently a little butterball on the table. No need to get personal.

Of more relevance is the nine-day wonder story of the Turkey Crisis of Thanksgiving, 1943:

“'Misgiving on Thanksgiving' Looking back now two months to the story of turkey supply, it is clear that while the country did a good job of supplying the troops, far too many turkeys escaped civilian price and supply control to the black market. "(The Economist, 9 January 1944)

There were a lot of evanescent supply shortages in America during World War II. That's pretty much the price of having a command economy, and it falls far, far short of the cigaret shortage in the attention it attracted at the time. (It also doesn't feature a brand called "Strange Fruit" becoming popular. What is this I can't even) How can you control the supply of turkeys? 

Rubber,sure? It either comes in off the docks or from a factory.  

No, it's not actually that relevant. I just like this ad.

But you can raise turkeys everywhere. 

This is odd, in the sense that the received version of World War II is that one of the reasons why the American national product could rise so far is that employment in the United States was still depressed in 1939, and was artificially high in 1943, as people who in practically any other circumstances would be out of the workforce came into it.

Employment in America

http://wiki.dickinson.edu/index.php/File:Table1_copy.jpg)

		1940	1941	1942	1943	1944	1945
All Non-Institutional Individuals	(millions)	99,480	99,900	98,640	94,640	93,220	94,090
Civilian Labour Force		55,640	55,910	56,410	55,540	54,603	53,860
Employed		47,520	50,350	53,750	54,470	53,960	52,810
Unemployed		8,120	5,560	2,660	1,070	670	1,040

The much-bandied about number was "a work force of 62 million," (you  have to add Service members to the above figures) or half the population, and, of course, the dominant story is of women getting out into the work force, becoming independent, fending for themselves, etc.

That being said, it is also a story of delayed retirements, retired people returning to the work force, teenagers 

Bobby-Soxers with clipboards!

Mexicans, etc.

I have an absolutely terrible chart of American employment by sectors, obtained by squinting at a lush Fortune graphic, and not guaranteed to be accurate at all:

Employment by Sectors, United States, 1943 and 1944

Employment by Sector (millions)	1943	1944
Armed Services	9.5	12
Federal War Agencies	2.5	3
Munitions	7	10
Other Manufacturing	8	7
Agriculture	9	8.5
Transportation, Utilities and Mining	4	4
Construction	3	2
Trades, Services and Other	27	26
Unemployment	3.5	0.5

And I have this chart from Britain, which, praise The Economist, is a little more helpful:

Labour

Employment, UK (000s)	Men	Women	Armed Forces, War Production	Balance Available for Other Work
August 1939	13,643	4,837	1,827	16,653
1943		Total: 21,428	10,257	11,944
Sept, 1945	14,531	6,245	7,853	13,051

The British case is interesting, in that government demand stimulus began with rearmament in 1937, and by late 1939, Britain was in an (alleged) full-employment state.

Here, by the way, is a much better synoptic view of British war finance than I was able to obtain from my notes for the American case:

British War Finance –Summary of Exchequer Returns since September 3 1939 in £ millions

	First Year	Second Year	Third Year	Fourth Year	Fifth Year
Expenditure on Interest on Debt	222.2	228.6	281.5	324.8	375.7
Total Expenditure	2,607.2	4,384.5	5,099.0	5,750.2	5,830,9
Revenue (taxation)	1,105.1	1,575.2	2,166.0	2,664.0	3,000.7
Revenue, all sources including Canadian subsidy	1,148.01	1,657.1	2,444.4	2,851.3	3,089.1
War Loans Raised and Floating Debt	2,728.1	4,497.6	5,107.2	5,751.2	6,147.2
Increase in National Debt					+12,588

Britain borrowed more than America, and started from a higher base, so that the national debt peaked at 180% of GDP, fifty percent higher than in America. This is certainly not good news, but in comparing the British economic trajectory from the prewar to the postwar era, it is pretty hard to make a case that it was unalloyed bad news, either. Unemployment down from a previous "full employment" of 8.5% to a new "recessionary" level of 2.2%? Note, too, the permanent increase in GDP from the 1939 prewar high of 247, 514 million pounds to the 1947 low of 269,763: an increase, measured from boom year to slump.

The permanent increase in GDP is one that seemed a bit more surprising to contemporaries than moderns, who take economic growth as rather more their right than our (great-)grandparents. That's because we have a clear narrative of steady productivity growth. Why? Well, technology, capital investment, or my favourite explanation, learning-by-doing. Whatever.  

The crucial point is that if the government spends lots of money, GDP will go up. It has to! The reason that contemporaries expected GDP to revert to prewar trends is that all that money was wasted. War is wasted. Where is all the useful capital investment?

Infrastrucutre doesn't have to be roads and bridges

Of course, it didn't happen that way. With barely a check, economic growth launched into a sustained boom. This is, more or less, what Mr. Friedman promised. So what happened?

Time for another adventure into the hinterlands with one of The Economist's occasional correspondents (I hope you will forgive the paraphrase. Let's just assume direct quotes around the extracts):

“American Banking in Wartime” Apparently, more people have gotten out of debt, and more people have gone into debt than at any other time in the history of the Republic. Money in circulation has now passed $19 billion, and bank deposits have increased largely, and, it is now supposed, will remain at this higher level in the future. Money is not being invested as much as it should be. Meanwhile, the public debt stands at $168 billion, up from $96 billion  a year ago, but spending is still only 10% higher than it was in 1916, and the projected deficit is down, for tax revenues have  been gigantic. “The reverse side of the national debt picture concerns the individual who is paying his share of the war costs, buying his share of the Government’s obligations, putting money in the bank, opening bank accounts at an unprecedented rate, and paying his debts. 

There is more! A Congressman supposed in public last month that people are borrowing to pay their income tax. Not only is this not true, but the most unlikely investment trusts are springing up to find homes for money once spent, on for, example, car loans. Americans might have a reputation for being terrible spendthrifts, but “total consumer installment loans” have fallen from 1,428 billion to 928, commercial loans to 281 from 521, small loans from 481 to 363, industrial from 253 to 170, credit union loans from 173 to 114. Even pawnbrokers are complaining!( The Economist, 11 December 1943)

“Midwestern Steel Town” Our Correspondent in Indiana writes that the 36,000 steelworkers of Gary, Indiana, are “partially or wholly producing more than 80 per cent as much steel as the whole of Japan.” This is far above what the Brookings Institution estimated might be possible a few years ago, and there is no intimation that this rate can be continued indefinitely. Steel production in Gary is up 75% over WWI, but has required double the workforce, and three times the average income. That is, $31.20 for a 40 hour week, but the average workweek is 50 ½ hours, and the time-and-a-half brings in another $12.28.  This income has had astonishing effects. OCI notes that saving funds have grown “astonishingly,” but that there is also much evidence of “foolish spending.” “the sale of cheap things has fallen off, while the demand for high-priced apparel can hardly be met. Jewellery stores are selling amazing quantities of costume jewellery.” Some think a terrible day of reckoning is coming for those who were so extravagant as to splurge on sheets and blankets (the example being an old Coloured woman who could never have afforded such things before), and those who note that there are 43,000 paid workers in Gary, and 30,000 savings depositers in Gary banks; but the tripling of currency in circulation since 1939 points to considerable cash-hoarding, as well.( The Economist, 5 August 1944)

Cash hoarding, certainly, but A Correspondent in Iowa is concerned:

“Thunder of a Distant Boom” Is another boom in agriculture in its incipient stages, asks a correspondent in Iowa? Probably! Just to clarify, this would be a bad thing, because booms threaten ownership by the men who work the farms. Farmland price appreciates and speculators and rich people buy it. And, yes there has been a sharp spike in the price of farmland, and an increase in rate of sale.  “Thousands of Iowa farmers sold out at boom prices last time –often to relatives—and retired to live in southern California on their incomes from mortgages, even though it made hard the lot of the next generation of farmers, thus burdened with the debt for grossly overcapitalised farms.” (The Economist, 13 November 1943)

Nothing could be worse than your parents selling you the farm and moving to L.A. Nothing.

We do not necessarily have as good a grip on the American economy as we think. It sure looks, from the numbers, as though productivity fell, and that is what you would anyways expect, but the way in which it fell is very broadly implied in the Jacko and Heintz story: firms are featherbedding. The question is: what are workers who are being paid not to be at work doing with their time? Raising turkeys, for sure, but that can only go so far. An informal building boom might also be suspected. Here's a link to a book describing one such boom, legal, in that it was happening on unincorporated land in Richmond, California. 

A focus on the legal economy probably understates the amount of saving and investment going on, pushing the numbers into the "consumption" column, and explaining how a rationed and price-controlled America could see such a dramatic increase in "consumption."

This is in line with John Maynard Keynes' prescriptions. In How to Pay for the War, he characterised forced spending as a means of levelling out the postwar crash resulting from the withdrawal of government stimulus in the form of munitions spending. (And, as it turns out, investment in "infrastructure" in the form of POL lines, etc.) "Levelling out," with reference to Mr. Friedman, is rather different from "extending the boom," though. Is this what the economics-talking guys call "hysteresis? While I cannot speak to what is going to happen, it is pretty clear that it is what did happen.

Speaking of hysteresis, it would be wrong to end a post so heavily dependent on The Economist on an optomistic note, so let's look at coal mining in Britain for a moment:

 Coal. Hysteresis?

	1938	1944	1st Qtr 1945	2nd Qtr 1945
Mined Salable Coal (000 tons)	22,993	184,098	45,497	43,687
No. employees on books	781,700	710,200	716,700	715,400
Voluntary absenteeism rate	6.4%	5.6%	6.3%	6.5%
Involuntary		8.0%	9.8%	8.6%
Output per wage-earner (tons)	290.4	259.2	262.4*	254*
Earnings per shift (s d)**	11 3	21 8	22 4	22 5.49
Average weekly earnings in Britain (men)	69 0	123 8	119 3
Total cost per ton	16 1	33 3	34 3	34 9.3

*Multiplied by 4 by your humble blogger to get an annualised rate, because it’s too hard for The Economist.

**The first number Is a unit that is 12 times bigger than the second. Or maybe 20? 60? Look, don’t blame me, I voted for Carloman.

It is clearly possible to throw money at an industry and still get diminishing returns. This probably reflects the fact that not enough money was thrown at the industry, and until corrected I am going to diagnose the industry's basic problem as an aging workforce. This is the flip side of the criticism of Mr. Friedman. The American (and larger British) economy could grow because it was demographically robust. Coal, no matter how much you raise wages, is still shackled by an aging workforce whose productivity declines mainly due to not being able to work as much as they used to do.

So, if we throw money at the American economy now, it won't grow, because everyone is old and has bad backs and is on Oxycontin, and in general it'll all end in tears.

On the other hand, I've just praised moonlighting in the American WWII case. (That is, I have presented it as an explanation for declining productivity and proposed that it led to productive investments which have not been properly valued, since they involved building houses for which no permits were issued.) I have no idea if moonlighting was an issue in the British coal fields, but the British economy is notably robust in the postwar era. Not that you could tell from popular culture, admittedly.