Monday, September 13, 2010

World War II and the Broken Window Fallacy

Welcome to a new semester in the SWEET Scholars program everyone. Whether you're a grizzled veteran or a brand new member I'm looking forward to another semester of discussions and debates together.

We probably couldn't have started the Fall program with a more divisive subject to tackle though. How an economist feels about FDR's policies during the Great Depression is an ideological litmus test of sorts. Depending on which side of the political spectrum you lean FDR either saved the economy or destroyed it. From where I stand I can certainly see that there were aspects of the New Deal that hindered recovery, but I can't deny that others seemed to provide at least modest relief. The macroeconomic theories behind the causes and consequences of the Great Depression aren't really my area of expertise though, so I can't pretended to know enough about the New Deal to guess which programs did what for sure.

I will say two things about the debate though:

1) That macro-economists still can't reach a consensus about whether the New Deal ended or prolonged the Great Depression and that the divide between opinions on the matter are, at least in my experience, still divided primarily along ideological lines, hints at a fundemental dysfunction in the way macroeconomic problems are approached. I would like to think that economists could set aside their politics long enough to take a more objective look at what the New Deal did or didn't accomplish. But in a field as dominated by public policy prescriptions and partisan politics as macroeconomics is, I guess that's just asking too much.

2) Differing opinions on proper macro policy aside, Malamud's assertion that most economists would agree that World War II ended the Great Depression repeats what Russ Robert's recently, and rightly called "the biggest and most dangerous economic myth of all time", i.e. the idea that war is somehow good for the economy. That's an idea I think stands as one of the most persistent, and dangerous of all Broken Window Fallacies. Not even Nobel laureates are safe from confusing unprecedented levels of government spending on instruments of death and destruction with productive investment in true economic development and growth.

Did the War achieve full employment? Probably, but of course forced conscription tends to do that. Were those 10 million people that were drafted for military service made better off as a result? Malamud seems to think so, but I would argue that even in the midst of a Depression labor would prefer remain idle than dead. Malamud seems to think that employment is employment, and that stimulus is stimulus, end of story. Whether people are employed manufacturing cars or tanks, or whether the stimulus pays for building hospitals or blowing them up seems to be irrelevant in his crude Keynesian model.

Now I'm probably not so hostile towards the General Theory to deny, as Reed does, that government spending can have no positive stimulative effect. But to praise WWII for achieving full employment is like praising a tsunami for leveling a city that has to be rebuilt.

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