Paul Krugman poses a very good question. He points to:
…the role of WWII in cleaning up private-sector balance sheets.
During the war years there was very little private borrowing, thanks at
least in part to wartime restrictions; meanwhile there was both strong
economic growth and a lot of inflation. The result by the war’s end was
a very low private debt level relative to GDP.How big a role did these improved balance sheets play in the fact that the postwar economy didn’t fall back into depression?
The economic history of these years, in my view, still remains to be written.
Wow! So the Fed, by depreciating the currency, destroys the real debt owed to private individuals and we’re supposed to rejoice in the possibility of this recurring again in the not-so-distant future? No wonder credit is seemingly difficult to come by. Krugman has the most corrupt sense of morality imaginable.
The whole post-WW2 era until the late 70′s was dominated by (and a triumph for) Keynesian economics, right?
Consider the stimulus act, and the debate regarding the size of multipliers for spending versus tax cuts etc, and that some economists regard the multiplier to be 1 or less, in general. Also consider that the post-WW2 era had decent savings rates – lots of precautionary saving, owing to cultural habits and values, these being amplified by the mindset induced by the Great Depression. Consider Krugman’s important point, and finally, that monetary policy was out of fashion in that era. Now let’s get an overview of the post-WW2 “golden age” of economic growth and stability;
* Investment multiplier <= 1.0
* Low private debt to GDP ratio
* Relatively high savings rate
* Minimal active monetary policy
Lets rewrite economic history and call this era the Golden Age of Classical economics.
One point about the debt as % of GDP graph that Krugman fails to make, is that the private debt ratio is already pretty low by Pearl Harbor – less than 100% it looks like, and falls to a little above 60% by the end of the war. So its not all down to the war – we have to consider the benefits of liquidation during the depression too.
It seems the government is already restricting private borrowing by crowding out private lending. Transition to high inflation will help with that; lenders will be setting interest rates with the effect of restricting borrowing (to the degree they will still be free to set their rates).
Except for the part of destroying the rest of the civilized world in order to create a strong export market for our goods, it looks like policy is going Krugman’s way.
I think I remember him arguing vehemently (PK vehement) about this with George Will a couple of months ago on some TV show. Was he making this same argument? I don’t think so. I don’t watch TV so I don’t remember the show, aacch, can’t search now…some Hardball-like thing linked around the blogosphere.
So now we have, thanks to the spending bill, very high public debt levels compared to GDP. So in two-three years, when the ARM on the future starts to reset at higher rates, and the huge public debt level needs to be serviced, where will people get affordable funds to expand the economy?
In a year Krugman will be writing about how he did not support this stimulus bill, that he had a different vision that the political idiots ignored, because of those darn Republicans, and if they had only done what he said, everything would have been OK.
So Mr Krugman, if after WW II people had large debts, paid by either taxes or out of income, we might have had a second depression?
‘During the war years there was very little private borrowing, thanks at least in part to wartime restrictions; meanwhile there was both strong economic growth and a lot of inflation.’
Let’s see – no new cars, no new tires, low meat meals, minimum home fuels, about 2 sets of clothes per year, 35 mile per hour speed limit, 2880 miles per year mileage, 3 gallons of gasoline per week (an ‘A’ sticker,IIRC,building material and appliance shortages, poor selection in stores. Couple that with overtime war work and inflation hidden by wage, price, and rent controls, I suspect most civilian employees did come out with improved balance sheets. What were you going to spend it on?
My dad tells the story of having 2 flat tires in one mile on the 1928 Dodge my grandfather used on auto service calls. The old tubes had been patched repeatedly until you had patches on patches. The ration board finally allowed him to buy 2 new tires.
Aren’t we all missing the important thing, which is that you can simply look at Krugman’s chart and see that what he says is not true? Eyeballing it, private debt levels as a % of GDP fell very consistently from 1931 through 1945. The war years were not significantly different from the Depression and New Deal years in this respect.
So, if my house is paid for, should I take out a mortgage now? I just want to do my part for the macroeconomy
Axel L. made that point in the post Tyler linked to the other day: WWII cleaned up private balance sheets.
But if reducing private debt is your goal, there’s an easier way: speed bankruptcy, aka mass debt-to-equity conversions for prima facie insolvent banks and firms. Sheila Bair could create $1 trillion in new equity just by converting the long-term debt of the top 5 biggest TARP recipients.
Check their 10-q statement or the slides from my latest Capitol Hill Campus talk at the Mercatus website for more details.
Glad to see that Krugman emphasizing that recessions are about balance sheets not just income statements. That’s the sophisticated Keynesian view, after all.
I agree with Dr. Krugman’s analysis but not his conclusion. Is he really implying that we undertake a program on the magnitude of WWII? That’s ridiculous. It may hurt quite a lot, but people have to learn to save more and spend less.
Are we still marveling at how quickly banks can go under during a panic? Funny how margin calls on highly leveraged institutions work out.
And, now we have the novel idea that retrenchment and inflation might get people out of debt. Hmmm, I guess sometimes the relatively obvious needs to be stated explicitly.
So, the banks are not folding, but taking losses and are considered “zombies” because they aren’t lending. But, are people really wanting to borrow? It seems like people are now really cutting back. Why not let dying dogs lie until they need to be euthanized?
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