The Myth of US Prosperity During World War II

In my previous article, I laid out why war is not good for an economy generally. Yet, while many people admit that the resources used to fight the Vietnam War or either of the U.S. wars on Iraq could have been put to better use, they still have an almost romantic view of how good World War II was for the U.S. economy. I promised in my previous article to delve further into that issue.

The main reason most people, including economists, think that the U.S. entry into WWII was good for the economy is that they compare the economy during the war with the economy during the Great Depression, which began in 1929 and lasted until the U.S. entered into war. On its face, this reasoning is plausible. The U.S. was officially at war from Dec. 8, 1941, with its declaration of war on Japan, until Sept. 2, 1945, with the surrender of Japan's government. So, the unemployment rate for 1941, since it includes only three weeks of war, can be taken as an indicator of prewar peacetime unemployment. That rate averaged 9.9 percent for all of 1941. Unemployment fell dramatically throughout the war, reaching a low of 1.2 percent by 1944. Also, between 1941 and 1944 – the peak year of wartime spending – real gross national product rose by 37 percent. In short, World War II reduced unemployment and raised GNP; ergo, World War II was good for the U.S. economy. So goes the reasoning.

But let's look more carefully at those numbers, beginning with the unemployment rate. The U.S. government imposed military conscription in 1940 and got the draft machinery moving early in 1942. Between 1940 and 1944, the size of the military increased by almost 11 million people. Of the 16 million people who were in uniform at some time during World War II, fully 10 million were conscripted. (For more on this, see Robert Higgs, "Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s.") In other words, they had "jobs" because the alternative was jail. And many of the 6 million who volunteered were what military manpower economists call "draft-induced." One can hardly judge people to be better off, based on their having jobs, if they were forced into these jobs. The only way economists have, or anyone has, to figure out whether someone is better off having a job than being unemployed is to know that the person chose the job. But conscription is the antithesis of choice. And to put all this in numerical perspective, the civilian labor force during World War II was only 54 to 56 million. It's not hard to reduce unemployment by almost 7 million people if you use conscription to raise the size of the armed forces by almost 11 million people.

Still, didn't gross national product increase? Yes, but during World War II, GNP became a meaningless measure because of price controls and war production. Take price controls. Please. When the U.S. government entered the war, it did what many governments do – imposed price controls on a vast array of goods and put itself at the front of the line for those goods. Then it rationed what was left to the general population. The government imposed price controls on virtually all goods used in the war effort – gasoline, rubber, nylon, food and, through the draft, manpower. So when we look at the incomes of consumers and consider what they were able to buy with those incomes, we get an overstatement. Sure, it's great to be able to buy things cheap – if they're available. But price controls and rationing made them unavailable. It's like the old butcher joke:

Customer: How much is your filet mignon?

Butcher: Nine dollars a pound.

Customer: That's outrageous. I can go across the street and buy it for six dollars a pound.

Butcher: Then why don't you buy it across the street?

Customer: He doesn't have any.

Butcher: When I don't have any, I sell it at five dollars a pound.

I think about my parents in this context. The main stories they told me about privation were not about the depression preceding the war, but of the rationing of sugar and meat during the war. They were in Canada, but conditions were similar there, both before and during the war. One thing that stands out is a Feb. 4, 1945, entry in their guest book – just four months after their October 1944 wedding – in which a couple invited for dinner gave a complete listing of everything they'd eaten that weekend, presumably using up my parents' ration coupons for the week. The highlights: bacon, eggs, meat loaf, and cake. Why comment with that degree of detail if it wasn't special?

Probably more important, though, is the way the GNP figures distort in the area of war production. As economic historian Robert Higgs points out, the U.S. essentially had a command economy during World War II. Had he wanted to be less polite but equally accurate, he could have said that the U.S. had a fascist economy. The essence of fascism, as an economic system, is government dictation of what is produced, along with nominal private ownership. The 38 percent¹ of GNP that the federal government spent on war in fiscal year 1945 (from July 1, 1944, to June 30, 1945) actually understates the expenditure. The reason goes back to price controls. By putting itself in line for all the goodies, the government paid low prices. But because these prices were artificially low due to price controls, the goods were valued artificially low. It is highly likely that the government truly spent more than 40 percent of GNP on war that year.

But this spending on war still counts as GNP, doesn't it? Yes, in the sense that the government defined it that way. But not in the sense of being production that Americans valued for its usefulness in consumption or investment. All of those expenditures that went for guns, trucks, airplanes, tanks, gasoline, ships, uniforms, and labor were expenditures that were destroyed. Not just the goods, but even the millions of labor hours, were used up without creating value to consumers. It's true that they might have created value by saving America from invasion. Whatever your view on that possibility, that's a separate issue. The point is that it's not prosperity to produce things that government quickly destroys. So, if we factor out this 38 percent, we're left with virtually no increase in real gross national product per capita between 1940 and the last fiscal year of the war.

It's actually worse than that. Despite various policies of Franklin Roosevelt that extended the Great Depression, the economy was coming out of the Depression in the prewar years. The unemployment rate, which had reached 24.9 percent in 1933, the worst year of the Great Depression, had fallen to 17.2 percent in 1939, 14.6 percent in 1940, and, as mentioned, 9.9 percent in 1941. Relatively-free-market economies, as the U.S. economy was, even after eight years of FDR, tend to recover from recessions and depressions as businesses find valuable uses for previously unused resources. The odds are high, therefore, that the unemployment rate would have continued to fall, absent U.S. participation in World War II, possibly reaching as low as 6 or 7 percent by 1944. This means that GNP per person, properly measured to reflect consumers' values, would have been well above its actual level in 1944. Whatever the value of U.S. participation in the war, for Americans' standard of living, World War II was a bust.

1. I miscomputed this badly in my previous article. My apologies.