Economics Questions

Re: A friend's quip about World War 2 Debt

EmperorNero — Tue, 19 Apr 2011 16:26:10 GMT

It is important to note that the post-war boom was one of the greatest historic verifications Austrians could wish for. Keynesians predicted that once war spending ended, aggregate demand would fall short and there would be a depression. But actually 1946 was like one of the best years ever. That the post-war era saw a 30-year boom rather than a drawn-out slump really shows that Austrians were right.

http://www.youtube.com/watch?v=6XbG6aIUlog

Re: A friend's quip about World War 2 Debt

John James — Fri, 15 Apr 2011 23:59:14 GMT

This is one we've all heard before. Let's go through that a bit...

"Today the debt-to-GDP isn't even close to [108.6%]"...Really?

1) The official debt: $14.298 Trillion. [1]

Estimated U.S. GDP: $14.119 Trillion. [2]

Debt-to-GDP ratio today: 101.3%

Not even close??

2) The "official" debt does not include the guaranteed debts of Fannie Mae and Freddy Mac (which are literally owed by the government). That's another $6 Trillion (roughly) right there.[3] That puts us up to 143.8%. Then we have to get to unfunded liabilities...like Social Security, Medicaid and Medicare...which according to the trustees reports are over 100 Trillion (inflation adjusted).[4] That's right. $100 Trillion dollars. Almost twice the global GDP. That would put us at about 859.1% debt-to-GDP. High enough yet?

And all this still doesn't include contingent liabilities (much of which the government will have to pay as well.)

3) GDP is meaningless. [5] [6]

4) We were actually increasing productive capacity back then. In other words, we were actually investing all that borrowed...not spending it on consumption.

Re: A friend's quip about World War 2 Debt

Merlin — Fri, 15 Apr 2011 23:54:31 GMT

Post hoc ergo propiter hoc, anyone?

Re: A friend's quip about World War 2 Debt

EmperorNero — Fri, 15 Apr 2011 20:22:58 GMT

Telpeurion:
that generation experienced the greatest prosperity in the country’s history—and maybe even in the history of humans.

Actually, even the rich back then had lower standards of living than most of those who are designated poor have today. He confuses a high growth rate with having great prosperity. The post-war boom certainly was a phase of fabulous growth, but it was far poorer than we are today. In a way the post-war boom was a continuation of the growth that humanity had witnessed until the progressive era. The world wars led to a temporary economic stagnation, when economic growth picked up again it was a return to normalcy after an interlude of socialism. In 1945 and 1946 Congress repealed the excess-profits tax, cut the corporate tax to a maximum 38 percent, and cut the top income tax rate to 86 percent. In 1948 Congress sliced the top marginal rate further, to 82 percent. And I think partially the post-war boom was a bubble that went bust in the seventies. The post-war boom also had a lot to do with cheap oil.

Re: A friend's quip about World War 2 Debt

Smiling Dave — Fri, 15 Apr 2011 19:27:52 GMT

Vaduka,

He is saying:

1. People claim that our high debt to GDP ratio spells disaster.

2. But that high GDP spells disaster is either always true, or never true.

3. After WW2, it was not true.

4. Therefore it is never true, by 2.

5. Therefore we are fine.

Seems to me that the only way to refute his argument is to tackle 2.

Re: A friend's quip about World War 2 Debt

vaduka — Fri, 15 Apr 2011 18:51:16 GMT

I do not see this to be any argument at all. His proposition is not even explicit, but implied in the statistics of GDP. And GDP means nothing to economic theory.

Re: A friend's quip about World War 2 Debt

Jonathan M. F. Catalán — Fri, 15 Apr 2011 18:01:22 GMT

That may be true, but the difference that I continue to underscore is that with the end of the war came an end to wartime spending. So, yes, if we were to suddenly cost spending the our current debt problems would not be as large as they will be if we continue to spend at the pace we do. Furthermore, it's important to realize the difference between temporary increases in spending (wartime expenditure) and spending programs which create 'long-term liabilities'. The issues of the former are nowhere near as great as those which revolve around the latter.

The notion that wartime debt stimulated the economy has been dealt with before. I would suggest reading Robert Higgs's work on the subject (most everyone else who argues similarly is just re-writing what Higgs already researched). What allowed for a return to prosperity was relative 'deregulation' and the end of wartime spending (which allowed the reorientation of capital goods to the private sector).

Re: A friend's quip about World War 2 Debt

Smiling Dave — Fri, 15 Apr 2011 17:55:18 GMT

I'm interested in your answer as well.

What I heard is that the govt cut spending by huge amounts right after WW2, which caused that great prosperity, and is not happening today.

Re: A friend's quip about World War 2 Debt

James — Fri, 15 Apr 2011 10:30:45 GMT

Hadn't most of the debt been bought by Americans themselves through war bonds and whatnot?

A friend's quip about World War 2 Debt

Telpeurion — Fri, 15 Apr 2011 09:46:22 GMT

A friend threw this at me to "shake me" from my Austrian position.

"in 1946, the country’s debt-to-gross domestic product ratio—meaning, how much we owed compared to how much we produced—was 108.6 percent. In other words, the adults living right after World War II were handed the greatest debt the country had ever had, but that generation experienced the greatest prosperity in the country’s history—and maybe even in the history of humans. Today, the debt-to-GDP ratio isn’t even close to that."

I already have a pretty good idea of how to refute his argument, but I want you guys to help so I can really hammer him. =]