How did Nazi fiscal policy work?

by on December 17, 2008 at 7:08 am in History | Permalink

Please do not think I am trying to call anyone, or any advocate of active fiscal policy, a Nazi.  The point is that Nazi fiscal policy did drive a recovery in measured gdp, so it is worth knowing how and why.  Robert J. Gordon has some answers (NBER; I don’t see an ungated copy):

Tooze confirms previous findings that relatively little of the
expansion in public expenditures took the form of public works like the
autobahns, while over 80 percent consisted of spending for rearmament.
Abelshauser (1998, p. 169) calls this “military Keynesianism on a large
scale.”

Furthermore real wages were falling not rising:

The previous literature has emphasized the Nazi policy of holding down real wages as a contribution to the rapid expansion of employment, the opposite of the perverse wage†increasing policies of Roosevelt’s NRA. Indeed, Barkai shows that the share of German wage income in national product declined from 64 to 59 percent between 1932 and 1936, while the increase in profits was “quite spectacular” (p. 196). Likewise, Abelshauser (p. 148) reports that the income share of the bottom half of the income distribution fell from 25 to 18 percent between 1928 and 1936.

In other words, Nazi fiscal policy boosted measured gdp rather than driving a recovery with higher real standards of living.  Even putting the brutality of the Nazi regime aside, this should not count as an example of successful fiscal policy.  I’ll look at some other historical examples soon but — at the risk of sounding like a broken record — I wish to stress my conclusion that the evidence in favor of government spending as effective fiscal policy is weak.

Addendum: On fiscal policy more generally, Mark Thoma has many comments.

Daniel Klein December 17, 2008 at 7:30 am

Higgs JEH 1992 finds similarly for the US WWII “recovery,” but more importantly emphasizes the meaningless of the data under such conditions.

dis December 17, 2008 at 8:42 am

doesn’t nazi fiscal policy describe pretty well the bush years?

flyerhawk December 17, 2008 at 9:52 am

I have to say I find the use of the word perverse to describe FDR’s policies very off when it is being contrasted with Nazi Party’s fascist policies.

Fiscal policy is not a panacea for general economic woes. But it can provide some help in retarding a recessionary period.

Certainly it is better when government money is spent creating some tangible benefit. New York’s decision to build the Erie Canal was of incalculable benefit to that state for 20 years both the building of the canal and the tangible benefits of having the canal.

The north’s economy catapulted into possibly the most powerful economy in the world after the Civil War.

Mr. Shelley,

How exactly does deficit stimulus spending on infrastructure crowd out private investment?

Carl Oberg December 17, 2008 at 10:25 am
Phil P December 17, 2008 at 10:40 am

I think Thoma is right. You need a deep depression with high unemployment for fiscal expansion to work without much crowding out, and so it’s hard to find historical examples, because in the postwar period we have thankfully not experienced many examples of depression-level unemployment. I do think there is one historical example of the efficacy of fiscal expansion, and that’s the military buildup in the U.S. that followed the Fall of France. Federal government spending went from 6.4% of GDP in 1940 to 14.2% in 1941, as defense spending went from 1.6% of GDP in 1939 to 2.5% in 1940 and 11.3% in 1941. Meanwhile real personal consumption expenditures went from a growth rate of 5.6% in 1939 and 5.2% in 1940 to 7.1% in 1941. Maybe this doesn’t seem like such an impressive acceleration of growth, and maybe the growth could be attributed to monetary expansion? Perhaps. But in fact the recovery showed signs of stalling out in early 1940. Personal income was flat in the first half of 1940 and industrial production actually declined slightly in early 1940. Why this was the case I don’t know. The whole period deserves closer analysis by someone more competent than myself. Nonetheless, I offer it to Tyler as one example of efficacious fiscal expansion.

Grant December 17, 2008 at 11:16 am

Tyler, isn’t this pretty similar to what happened to the US economy during WWII?

apostate December 17, 2008 at 12:17 pm

I’m sorry if I derail this thread, but why do people keep bringing up wartime spending as an example of increasing economic growth?

The fundamental thing that these discussions neglect, at least from my point of view, is the concept of value. Economies should be about creating value and not just producing things to make more stuff. Humans are not hamsters that just need a big hamster wheel to keep them busy. Even if you could construct an ultra-efficient economy from on high, are you satisfying each individuals need for value?

We could of course employ everyone the way we did in WW2 and have them make tanks and planes and then dump them into the sea never to be seen again. If we wanted to be just like WW2 we could even have a draft and seal some poor schlub into each tank or plane as we roll it off the dock. Everybody’s working now. Everyone has a job. I bet the economic numbers would be great. But is this an economy anyone really wants? The few people who like making tanks might like it. The rest of us not so much.

While most government projects are rarely so ruinous they are very likely going to create little if any real value. Sure most people can agree that more roads are good to have. Unless of course you’re a telecommuter, or walk to work, or are a rail company. For those people they may not be getting any real value out of building additional roads. As they are helping to pay for it, either now or on “credit,” they will have obviously less money to create value for themselves or for others. To take that example further we could bring all our roads up the level quality of the Autobahn. That would generate a lot of work but what kind real value does that give us over the less expensive, if more pothole strewn, roads we already have?

To sum up, the point of an economy should be generating value for those individuals in it. Just providing something to keep people busy just generates a lot of numbers that to most indivduals is meaningless.

Michael Carroll December 17, 2008 at 12:51 pm

Brian Shelley’s premise that:

If the pool of investment dollars is relatively fixed the government is at best moving resources around…

Is totally wrong.

First of all the whole scenario takes place under conditions of deflation (remember this is a depression). That means that the value of hoarded wealth is not fixed but is growing relative to goods and services. Secondly, the money paid by government for goods and services doesn’t just vanish but it circulates around the economy through multiplier effects which operate to inflate the economy and employ factors of production which are by definition underutilized in a depression.

During deflation a rational entreprenuer would ALWAYS, ALWAYS, ALWAYS tap his hoarded wealth before borrowing to finance private enterprise because the burden of the debt would constantly be increasing (due to deflation) relative to whatever goods or services he obtained with the loan money.

It is only AFTER excess hoarded wealth is effectively exhausted that government spending can crowd out private investment!

Blackadder December 17, 2008 at 1:32 pm

I second apostate’s concerns and add the uncomfortable twist that it’s not clear what the “right” growth rate is. Why not transition our lives towards more leisure?

If you’re talking about your own life, who’s stopping you? If you’re talking about other people, then shouldn’t they get to decide whether they would prefer more leisure to a higher income?

Brian Shelley December 17, 2008 at 2:01 pm

Michael Carroll,

I don’t have a problem with your “first”, but your second is ignoring the multiplier effect of private investment and entrepreneurial consumption.

Also, the entrepreneur and the hoarder are not likely to be the same person. The hoarder hoards because he is extremely risk averse. The entrepreneur, by definition is willing to take risks. The hoarder has removed his assets from the investment pool, limiting the investment pool.

tom veil December 17, 2008 at 2:45 pm

Tyler, I think you’re drawing too general a conclusion. The Germany evidence only supports the conclusion that MILITARY spending fails to be an effective fiscal policy. This makes sense, because military spending is like Keynes’s famous example of digging a giant hole — there is no continued benefit once the hole’s built. A shiny new bridge, sewer, power line, or subway, by contrast, can spur business by removing bottlenecks or improving the quality of a needed good.

Noel Johnson December 17, 2008 at 4:16 pm

Tyler,

Regarding the effectiveness of fiscal policy, I’m sure you’ve taken a look at the work by Price Fishback, Shawn Cantor, and William Horace on New Deal expenditures (http://www.nber.org/papers/w8108). It is very carefully done. Their point is basically that the New Deal was multifaceted, and that some of the programs were much better at stimulating economic activity than others. For example, spending on public works stimulated economic activity in the communities in which it was spend as well as in surrounding communities. By contrast, work relief programs stimulated the counties that received the relief at the expense of neighbor counties.

So, government spending can be effective fiscal stimulus, if done right.

apostate December 17, 2008 at 6:10 pm

I think some of you may missed my point (or I wrote it poorly).

This makes sense, because military spending is like Keynes’s famous example of digging a giant hole — there is no continued benefit once the hole’s built. A shiny new bridge, sewer, power line, or subway, by contrast, can spur business by removing bottlenecks or improving the quality of a needed good.

Sorry to use you as an example Tom, but those shiny new things you mentioned only have value to those who use them. Those that don’t or who would prefer an alternative means are in fact being robbed of value. To build the shiny new projects resources are taken from them that would normally be allocated to things they find valuable. Even worse for them, if they wish to use an alternative they will be forced to pay more, if available at all, than they would had the government project not crowded out their alternative that they value. I know a number of people who would gladly bike to work. However, it is currently impractical in most places because the infrastructure is built only for cars. Who’s to say more people wouldn’t bike more if the government had not setup the infrastructure to favor cars?

I imagine most people talk about using government funds for infrastructure because most people make use of it. So it’s easy to get behind. Like it is a foundation for other things to be built on. But we really have no choice in that do we? People don’t build homes or business by roads because that’s the only way to do things. They do it because otherwise they would have to not only pay the cost of building their own alternative infrastructure, they would be forced to compete with government infrastructure that they were also paying for even though they are not even using it. In that case the only sensible thing to do is going along with crowd and making the best value you can with a system less suited to your individual needs.

Take a more specific example, the smart grid concept. It sounds like a good idea, but is it necessary? Perhaps more localized power would be a better fit for certain parts of the country. Maybe personnel solar panels, or some other technology, would have had the funds to develop into something practical had there been a real demand for them. But when government steps in and builds a system that gives everybody power no matter where they are, no matter how inefficient, then why bother?

The fact that government infrastructure attains any value is usually by happenstance and entirely dependent on individuals ability to make the most use out of it given the circumstances, or some cases simply work around it. So the idea that it stimulates anything is incorrect. Whatever value it creates does not make up for the potential value it destroys.

The New York City Math Teacher December 18, 2008 at 12:31 am

The air tastes of wingnut.

I love how most of the posters on this thread write showing they have read neither Tooze nor Goetz-Aly (the author of Hitler’s Beneficiaries) nor Avraham Barkai (author of Nazi Economics), nor anybody else who might have written something halfway coherent on the Nazi ‘economic miracle’.

Tooze’s thesis is very interesting, because it ties together many of the threads of earlier economic historiography.

The right-radical government neutered the influence of the capitalist class and large proprietors by being nominally pro-private property and anticommunist. Later, when creative finance had to spin funds out of thin air to sustain the rearmament drive in 35, 36, and 37, the supine owners had no choice but to place their investments at the service of the Nazi state. This paid handsomely for the period 1938-1944, but was catastrophic after.

The destruction of the labor unions and the pursuit of more stringent regulations in the workplace generally reduced wages. This was all well, because the relatively reduced demand was complemented by the shortages that hard currency deficits caused in the atmosphere of the general collapse of international trade. Capital flight and hard currency controls dating to the Bruening era locked the capitalists and the workers into the distortionary effects of Nazi fiscal policy.

And the threat and use of force liberated a lot of sleeping capital for investment and work-relief. Read William Sheridan Allen on Nordheim as a nice case study – the machtergreifung broke the ice-dam on lending by banks and spending by municipal authorities. a lot more taxes got paid, maybe because of truncheons? Maybe not.

By the way, I’m not referring to the conquest windfalls that arrived with the war, i’m just talking about the macro effects of the forced-draft remilitarization. And the growth thereby obtained convinced my Opa to stay, expanding his chain of shoe stores, up until he was arrested and interned as a Jewish Elder in Boppard in Nov. 1938.

Michael Carroll December 18, 2008 at 10:08 am

Brian Shelley said,

“Also, the entrepreneur and the hoarder are not likely to be the same person. The hoarder hoards because he is extremely risk averse.”

This exactly the problem with deflation. It turns entreprenuers into hoarders. This is why banks are using the federal money to build up excess reserves instead of lending. This is why profits are not being used to rebuild inventories.

The point of Kensyianism is to launch a war of attrition against hoarded wealth by subjecting it to inflationary pressure. The downsides are 1) that all savings get eroded and not just excess savings and 2) lag effects can catapult the economy into hyperinflation if the excess capacity gets absorbed too quickly. The thing is, when faced with a depression these are risk most policy makers are willing to take.

Think defribulation: crazy at normal times, sane during cardiac arrest.

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