How much did World War II boost post-war growth?

by on January 7, 2016 at 2:15 am in Data Source, Economics, History | Permalink

Petros Milionis and Tamas Vonyo have a new paper on this question (click through to the first pdf here), the effect was a major and long-lasting one, here is part of the abstract:

…this reconstruction process was an important driver of growth during the post-war decades, not only in Europe but globally, and its impact on growth rates lasted until the mid 1970s. Moreover, a counterfactual analysis suggests that in the absence of the reconstruction effect global growth rates from 1950 to 1975 would have been on average 40% lower and only slightly higher than those observed during the years from 1975 to 2000.

Here is Alex’s MRU video on the Solow growth model, part two here.

1 Aidan January 7, 2016 at 3:24 am

Massive government investment programmes could hugely increase growth during the post-war era, but can’t today because…

2 Gpower January 7, 2016 at 4:04 am

Have you tried clicking on the link that says “Solow model”?

3 tjamesjones January 7, 2016 at 4:31 am

entitlements aren’t investment.

4 Moreno Klaus January 7, 2016 at 6:26 am

…the total public and private debt is almost 300% (!!!!!!!!!!) of the world GDP?

5 Joël January 7, 2016 at 9:42 am

But the total **net** public and private debt is about 0% (!!!!!!!!!!) of the world GDP.

6 Doug January 7, 2016 at 12:05 pm

Distress costs are the primary reason Modigliani-Miller doesn’t hold in practice.

7 The Arthurian January 7, 2016 at 6:31 am

Massive government investment programmes could hugely increase growth during the post-war era, but can’t today because private sector debt is a massive cost burden. How massive? Based on economic performance, private sector debt was already interfering with growth before 1974. If private debt levels (relative to public debt) was as low today as in the 1950s we would see huge increases in GDP today.

Along with those huge increases in GPD, however, we would see huge increases in private sector debt. Debt would outgrow GDP until debt-related costs again began to hinder growth…

8 Thin-Skinned Masta-Beta January 7, 2016 at 7:05 pm

“…private sector debt is a massive cost burden…”

If this is true how do we reconcile it with the savings glut and historically low interest rates to borrow and invest?

From my view we are out of ideas and have lost the stomach to tear old things down and build new ones.
The crust of established economic interests fight to protect their comfortable positions that guarantee their business model or livelihood.

With everything in rubble and ashes there were hardly any existing economic interests to hold up progress. Rebuilding was an easily recognized investment opportunity.

In our peaceful society governed by the rule of law, creative destruction is usually impeded.

Bombs clear the way for the phoenix to build great new things tangibly out of bricks or out of social fabric in new institutions.

9 Derek January 7, 2016 at 6:56 am

Because somebody runs on a campaign of turning it off and wins. See Bush vs. Obama.

10 Anon. January 7, 2016 at 7:37 am

Because the low hanging fruit of infrastructure has already been done.

11 Gochujang January 7, 2016 at 9:16 am

That is tied to a one-shot view of technology. As if electricity gets invented, built out. Done. Now suddenly all that hard work was “low hanging” and cannot happen again.

A technological civilization should never run out of infrastructure.

Now we happen to be building a lot of wireless infrastructure now, with private debt.

12 E. H. January 7, 2016 at 2:55 pm

Anon hits the jackpot.

13 marris January 7, 2016 at 8:15 am

Because we’re starting from a point where we haven’t destroyed most of the developed world’s infrastructure. And because we’re no longer the sole provider of large capital equipment. But if we did dig a big hole, then presumably we *could* have rapid growth while we try to climb out of it.

14 Harun January 7, 2016 at 11:13 am

Like China, who can plug in already developed technologies with a vast need for more power plants, roads, bridges, trains, airports, phone networks etc. in 1980’s until now.

15 jorgensen January 7, 2016 at 12:43 pm

Right. Picking 1950 as the starting point skews the result.

For comparison they could start at December 1913 and see what would have happened with even modest growth and no World Wars from then forward.

The other effect that the Second World War had was a period of high forced saving in the United States. The government imposed rationing which reduced the standard of living. The massive surplus then went partially into technological development and paying industry to retool. The war ended but the technologies and factories remained.

16 ladderff January 7, 2016 at 8:25 am


17 ZZZ January 7, 2016 at 9:22 am

…because it’s easy to get huge percentage increases when you start with GDP near zero, today not so much.

18 TallDave January 8, 2016 at 11:38 am

They can, if you don’t mind killing ~250M people and destroying a significant percentage of the industrialized world first.

19 Phil Hayward January 8, 2016 at 9:04 pm

Back then, government investment in highways actually flattened urban “land rent” and enabled far more of the available liquidity to be applied to actual construction and consumption of housing and other produced items.

Under conditions of rationed supply of urban land (due to absence of automobility, deliberate central planning of urban “growth”, or explicit corruption between rentier land-owners and government), government “stimulus spending” ultimately is funneled into the capture of increased “economic rent” by the property and finance sectors. The post-WW2 era was exceptional in terms of the flattening of urban land rent enabled by automobility with government co-operation rather than obstruction.

Some types of advocate call this a “subsidy” that brought about an “evil” – automobile “dependence”; but in fact the benefits and positive externalities far outweighed the negatives. The problem is we came to take the positives for granted, without understanding that if we one day decided to prohibit competitive automobile based development, we were going to lose those positives. Such as the democratization of ownership of decent homes.

The housing options available to the lowest income earners in the UK, versus those in the typical affordable US city, should be regarded as one of the moral issues of our era, especially as by copying UK urban planning, we will import the same injustices.

20 GiveMeMoreOfThatWar January 7, 2016 at 6:35 am

I’ve got it! Let’s start world war three to boost the economy!

And, btw, to the spammer: pasta raises your insulin and IGF-1 levels, whole wheat or not.

21 rayward January 7, 2016 at 7:00 am

Of course, inequality was very low during the period too, low in Europe because of the physical destruction of assets during the war and low in the U.S. because of the destruction in value of assets in the depression. As inequality began to rise (in the 1980s and beyond), however, growth has receded, in Europe, in the U.S., and now in places like China. Likewise, as inequality began to rise, investment in productive capital and (public) infrastructure began to recede, dragging down future growth, although China has committed to large scale investment in infrastructure. The correlation between rising inequality and receding investment in productive capital and infrastructure is the most concerning, because of the adverse effect on productivity, wages, and growth. The irony is that there’s a savings glut, but the owners of it show little interest in investing it in productive capital and even less in public infrastructure, perhaps confirming the adage that wealth and intelligence are inversely related.

22 Thiago Ribeiro January 7, 2016 at 8:06 am

But the growth started to falter in the early 70’s.

23 rayward January 7, 2016 at 8:20 am

Correct, and inequality began to rise in the 1970s, but took off in the 1980s. I’m not attempting to identify the turning point (for both growth and inequality).

24 chuck martel January 7, 2016 at 8:29 am

If the wealthy Scrooge McDuck drops a cigar butt in his money silo and incinerates his stock of Benjamins, then what happens? Is there more equality? Is the country poorer? If a tornado comes by and spreads his dough over the landscape will there be more productive investment made by those that pick up the greenbacks?

25 The Original D January 7, 2016 at 2:26 pm

If he wants to buy a penthouse in New York he probably won’t bid it up so high.

26 Gochujang January 7, 2016 at 10:16 am

I had forgotten that Tyler had written on the global perspective in 2014.

Income Inequality Is Not Rising Globally. It’s Falling.

I think I understood it then, but I didn’t accept it yet as unstoppable.

See also why Republican candidates talk about manufacturing jobs they know aren’t coming back.

27 rayward January 7, 2016 at 10:45 am

Inequality across countries is falling, but inequality within countries, including less developed countries, is rising. So when Cowen et al. state that global inequality is falling, it is highly misleading (though accurate). Indeed, income inequality within China is higher than in the U.S.

28 Gochujang January 7, 2016 at 10:55 am

Is it a higher morality to choose nation as peer group?

Or should we just relax, be happy, as humanity?

Serious question. I think the way we have to process it is to be happy, but also to compete in that marketplace. Capture fair gains, with a global perspective for fairness.

29 rayward January 7, 2016 at 11:07 am

Rising inequality in a stable country like the U.S. doesn’t present much of a social or political risk (right-wing populists notwithstanding), but in less stable countries, it likely will present a significant risk.

30 Brian Donohue January 7, 2016 at 12:37 pm

@rayward, no, it is your perspective that is misleading. We hear a lot about the plight of the median American lo these forty years. Even if I accept the dubious claims of stagnation, we’re talking about someone at the 90th percentile worldwide. Boo hoo.

Growing up, I used to hear the expression “count your blessings” a lot. In edgy modern parlance, I think the term is “check your privilege.”

31 chuck martel January 7, 2016 at 8:22 am

The wealthy must resemble Scrooge McDuck, swimming in their silos full of money, rather than investing that money even in low-interest things like savings bonds.

32 The Original D January 7, 2016 at 2:28 pm

Saving bonds are better than a silo because the government will do absolutely everything possible to protect the wealth of the rich.

33 Gimlet January 7, 2016 at 2:28 pm

It was also low because wages reflected the fact that the global labor force was down millions of men. U.S. wages were also up because the productive capacity of the rest of the world was gutted when those assets were destroyed.

34 Phil Hayward January 8, 2016 at 9:10 pm

The biggest factor in inequality has been pointed out by critics of Piketty, who understand even from Piketty’s own data, that all the inequality has been in the inflation of urban land prices. Returns to PRODUCTIVE capital is NOT implicated. Eg Rognlie; Stiglitz, Wassmer et al.

Inequality was flattened along with urban land rent, by the change post WW2, to automobile based development as the norm for housing growth, which introduced truly abundant supplies of land, and hence competition into “land supply”, for the urban economy. Inequality started to return again as automobile based development started to be proscribed by reactionary regulators who could only see negative externalities and not the positive ones.

35 Jay January 7, 2016 at 7:30 am

Add raw chicken to accelerate the weight loss.

36 chuck martel January 7, 2016 at 7:32 am

“there’s a savings glut, but the owners of it show little interest in investing it in productive capital and even less in public infrastructure, perhaps confirming the adage that wealth and intelligence are inversely related.”

What’s the arithmetic behind that statement? If the owners of savings are reluctant to invest it in productive schemes shouldn’t that DECREASE inequality? In such a situation there would be at least some savers that would detect opportunities and increase productivity to their own benefit. Of course, that could only happen in a free market environment.

37 rayward January 7, 2016 at 8:24 am

Piketty’s focus in his book on capital share misses an important phenomenon: increasing reliance on capital gains (as opposed to return on capital). More recently in his talks Piketty has been making that distinction.

38 chuck martel January 7, 2016 at 8:45 am

Capital gains means that someone has sold capital to a buyer, who evidently expects to increase his economic well-being in the aftermath of that purchase. Public infrastructure consists in large part of transportation facilities, roads and airports, water and sewer systems, and sports arenas. How many more square miles of concrete-covered earth does the country require to carry on its business? How many more pro football teams are needed to fill up television programming?

39 Harun January 7, 2016 at 11:22 am

Especially as populations shrink or move to shrink.

40 Cooper January 7, 2016 at 3:32 pm

And given what we know about mega projects, the ROI on many of these infrastructure investments will be deeply negative.

Chunnel investors have lost around 95% of their investment, for example.

41 Phil Hayward January 8, 2016 at 9:14 pm

It is capital gains in urban land that is the problem.

Chuck Martel comments about how public infrastructure boosts capital gains, but in fact highways and roads that introduced superabundant supplies of land to the urban economy, actually flattened urban land rent, the very opposite of creation of capital gains.

I recommend Michael A. Goldberg (1970), “Transportation and Urban Land Rents: A Synthesis”.

The importance of this point is inversely correlated with contemporary understanding of it.

42 Rich Berger January 7, 2016 at 7:57 am

I guess they don’t read Bastiat in the universities any more. Alien invasions anyone?

43 Thiago Ribeiro January 7, 2016 at 8:17 am

I had meant to read it, but, after they shut down the Sun, I could not buy enough candles to keep read.

44 Thiago Ribeiro January 7, 2016 at 8:17 am

* keep reading

45 Tim Worstall January 7, 2016 at 8:29 am
46 Amelanchier January 7, 2016 at 9:00 am

Precisely. There’s no inconsistency with Bastiat, for this was reconstruction growth. At the end of it, the world was still worse than we would have been without war and depression.

47 The Anti-Gnostic January 7, 2016 at 10:18 am

The Mother Of All Broken Windows.

48 The Original D January 7, 2016 at 2:32 pm

There are winner and losers in all economic shocks, right? The losers died, but the winners were people who got paid more because of less competition, both from their fellow countrymen and the delay in outsourcing to places like China and Korea. The war prevented trade agreements as well.

49 TallDave January 8, 2016 at 11:43 am

Even in the United States, one of the few place that might have benefited, there was rationing, not to mention conscription, half a million killed, and millions wounded.

50 Gochujang January 7, 2016 at 9:16 am

Apparently if you break really a lot of windows ..

51 josh January 7, 2016 at 10:12 am

“Economic growth” isn’t nearly as meaningful or useful an aggregate as economists think it is.

52 Hazel Meade January 7, 2016 at 10:27 am

How is this not a broken window fallacy?

53 Underemployed Millenial January 7, 2016 at 11:12 am

Sure gave the baby boomers a nice economic wave to ride though!

54 Todd Kreider January 7, 2016 at 10:18 pm

Yeah, but the computer curve is still going strong and a lot of baby boomers are going to prematurely die in their 60s or 70s while you are likely to live well beyond 150. Pencil in your own personal bicentennial.

I think you get the better deal.

55 Adrian Turcu January 7, 2016 at 10:32 am

So maybe if the US and USSR would have gonne at it, nuclear style, we’d all be billionaires by now! All 12 of us, that is.

56 JWatts January 7, 2016 at 2:02 pm

With only 12, you’d all be trillionaires in land value alone. Well, if you could find any buyers, that is.

57 Cooper January 7, 2016 at 3:33 pm

But what is the per acre value of a crater-filled, radioactive wasteland? A couple hundred bottle caps?

58 TallDave January 8, 2016 at 11:41 am

Depends how many settlers are working there, and how naked they are.

59 Yancey Ward January 7, 2016 at 11:04 am

As I have written before- the day when you won’t find anyone brave enough to admit to being an economist is fast approaching.

60 Gochujang January 7, 2016 at 11:14 am

Not fully endorsed, but <a href=""the glass half full view

61 Gochujang January 7, 2016 at 11:19 am

Sorry, link

62 Alex January 7, 2016 at 11:46 am

So I don’t understand whether World War II ultimately lowered growth or increased it.

63 Gimlet January 7, 2016 at 2:32 pm

Worldwide, definitely lowered the level we would have attained, but increased the rate (starting from a much lower bottom). However, in the U.S. (which didn’t have a lot of assets destroyed or lose nearly as many men) one would probably find it was both higher growth rate and higher level attained.

64 Carter Ferrell January 7, 2016 at 12:01 pm

The abstract really seems to discard Bastiat’s broken windows theory, in my opinion. It just doesn’t pass my smell test, but then I’ve only scanned the longer version. I’ll try to take a look after work, but at least superficially it appears to entirely ignore the destruction of capital wrought in WW2. Rapid post-war growth rates are small comfort by comparison.

In short, this paper seems very dangerous. There is a section of the paper covering anticipated counter-factual growth rates, but that methodology is entirely invalid if indeed as it appears the paper blithely ignores the capital destruction of WW2, and the simple fact that the counterfactual scenario of Europe without WW2 is starting miles ahead of the historical example, with half of the continent destroyed beyond recognition and half an entire generation lost in warfare, for the second time in less than a lifetime.

Is a nominal 1.4% higher post-war growth rate worth all of that? Because the true counterfactual is not a post-war Europe without investment, it’s of a Europe in which war never occurred. The authors appear to disingenuously ignore this fact; that the post-war economic recovery is called a “recovery” for a reason, because a tremendous amount of that rapid growth rate was simply trying to catch up to where Europe was before the war.

There are few things that I find more disturbing than the casual knowledge that “war is good for the economy.”

65 Doug January 7, 2016 at 12:07 pm

Sure, but how much higher would 1945-1970 global growth had been if Roosevelt and his cronies didn’t hand over half of Eurasia to the Soviets.

66 JonFraz January 7, 2016 at 12:39 pm

Um, no one “handed over” anything. The Soviet Army marched westward while pushing back the Nazis and occupied most of the countries. Were we supposed to go to war in 1945 ti drive them out?

67 Eric Rasmusen January 7, 2016 at 12:34 pm

It’s easy to have high growth if you wreck the entire economy except for not killing too many millions of workers. I would expect Japan had a 100% growth rate, at least, from 1945 to 1946. The interesting question is whether the economy is better off or worse off in 1980 because of World War II.

68 E.H. January 7, 2016 at 3:38 pm

Better, obviously. Americans turned Japan into a liberal democracy. Currently, it’s helping it turn into a more illiberal democracy.

69 E. H. January 7, 2016 at 2:54 pm

Guys, does anyone else here notice this post is clearly nonsense? Were Mexico, Finland, Sweden, Australia, Canada, Denmark, Brazil, Portugal, and South Africa, all of which grew faster than the U.S. after WWII in GDP/worker, forced to do any post-war reconstruction?

70 Phil Hayward January 8, 2016 at 9:18 pm

Excellent point – see my other comments. Any country that had plenty of automobile-based suburban development (a new phenomenon based on a new technology achieving mass-market penetration) got the economic boost.

The UK is the counter-example because in 1947 they effectively banned the kind of development that was the norm in all other “first world” economies. Today, they have built literally millions less new homes, comparatively, and will have foregone the multiplier effects from that lost construction. In fact Stewart (2002) estimates that the rate of replacement of housing in Britain is so low that houses need to last 1000 years – contrast this with Japan’s 37-year housing turnover and the USA’s 65-year turnover.

71 Alan January 7, 2016 at 6:59 pm

Looks like the next boom will start about from about 2030.

72 ACC January 8, 2016 at 12:48 am

But how much did it boost post-war wealth?

73 Phil Hayward January 8, 2016 at 8:55 pm

What everyone is missing about the post-WW2 era, is that for the first time, automobile based development brought sufficient “new supplies of land” into the urban economy, that the old “land rent” paradigm was destroyed and there was a massive increase in ownership of newly-built homes on decent sized lots that cost a newly-low amount per square foot.

The vast majority of people who had been renters in high-density accommodation (or destined to be that if they moved from rural to urban living) suddenly became customers to a new “building sector”, and the ongoing cost of servicing a mortgage was competitive to the previous norm of paying rent, even though the space consumed and the quality of the home was much greater.

There are counter-examples, such as the UK which prohibited the sort of sprawl that became normal even in Europe, let alone North America and Australasia. Far LESS actual construction of houses occurred in the UK, hence far less multiplier effects in the economy. Far more of the available liquidity in the absence of competitive automobile based suburban development, is swallowed up in zero-sum wealth transfers in increased urban “land rent” (in the economic rent sense).

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