The multiplier in wartime

Robert Barro writes:

What do the data show about multipliers? Because it is not easy to
separate movements in government purchases from overall business
fluctuations, the best evidence comes from large changes in military
purchases that are driven by shifts in war and peace. A particularly
good experiment is the massive expansion of U.S. defense expenditures
during World War II. The usual Keynesian view is that the World War II
fiscal expansion provided the stimulus that finally got us out of the
Great Depression. Thus, I think that most macroeconomists would regard
this case as a fair one for seeing whether a large multiplier ever
exists.

I have estimated that World War II raised U.S. defense expenditures
by $540 billion (1996 dollars) per year at the peak in 1943-44,
amounting to 44% of real GDP. I also estimated that the war raised real
GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8
(430/540). The other way to put this is that the war lowered components
of GDP aside from military purchases. The main declines were in private
investment, nonmilitary parts of government purchases, and net exports
— personal consumer expenditure changed little. Wartime production
siphoned off resources from other economic uses — there was a
dampener, rather than a multiplier.

We can consider similarly three other U.S. wartime experiences —
World War I, the Korean War, and the Vietnam War — although the
magnitudes of the added defense expenditures were much smaller in
comparison to GDP. Combining the evidence with that of World War II
(which gets a lot of the weight because the added government spending
is so large in that case) yields an overall estimate of the multiplier
of 0.8 — the same value as before. (These estimates were published
last year in my book, "Macroeconomics, a Modern Approach.")

There are reasons to believe that the war-based multiplier of 0.8
substantially overstates the multiplier that applies to peacetime
government purchases. For one thing, people would expect the added
wartime outlays to be partly temporary (so that consumer demand would
not fall a lot). Second, the use of the military draft in wartime has a
direct, coercive effect on total employment. Finally, the U.S. economy
was already growing rapidly after 1933 (aside from the 1938 recession),
and it is probably unfair to ascribe all of the rapid GDP growth from
1941 to 1945 to the added military outlays. In any event, when I
attempted to estimate directly the multiplier associated with peacetime
government purchases, I got a number insignificantly different from
zero.

I'm a little confused by his definition of the multiplier (how does it relate to "crowding out"?; what he calls a multiplier of zero I would call a multiplier of one), but I think you get the point.  By the way, I ran across this interesting short paper on fiscal policy and the fetishization of measured gdp, from Japan.

Comments

"... consumer expenditure changed little..."

That is not what people who were alive at the time say. For one example, the consumer expenditure on new cars went from {some value} to zero since they stopped making them.

I went through grade school during World War II. Everything was either rationed or unavailable. One of our cars broke down and couldn't be repaired because the mechanic couldn't get parts, and of course you couldn't buy a new car. If you could, you'd have a lot of trouble buying gas, which was strictly rationed. My father couldn't get new clothes to sell to the customers in his clothing store. Off-season produce was unavailable, and meat was rationed. So were medical supplies. Any economic study that doesn't take rationing and shortages into account is less than worthless, and I have a sneaking feeling that Barro's falls in this category.

Also, this is strangely worded:

"I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540)."

"and it is probably unfair to ascribe all of the rapid GDP growth from 1941 to 1945 to the added military outlays."

Did he just look at 1943-1944 or did he look at when military expenditures started to rise in preparation for the war? In 1943, wasn't the unemployment rate already substantially lower? And with women entering the work force at that. The whole idea is that if the U.S. is not producing at its production possibilities frontier, there can be a gov't multiplier, if you go to a point when you are already at PPF, won't there necessarily be a dampening effect, whether you have a classical or keynesian model?

Also, it is sad that economics is seemingly breaking down partisan lines on this issue. Perhaps, we are not so much a science after all.

Charlie

Charlie,

I do feel with you. I was just reading some Hayek and he was complaining that his theory was better than Keynes's on Unemployment, even though the theory could not be proved.

Isn't the criteria for a scientific statement is that it can be disproved?

The fact this is breaking along partisan lines is not good for the profession, not at all. This is basic, basic stuff we are debating, and the fact there is no large scale consensus is more than disheartening, it is scary.

What have economists been doing for the last 100 years, if they cannot:

1. Give warning about huge crisis and recessions
2. Have clear plans about solutions to those problems.

I can't imagine that defense spending has much of a multiplier effect. Since most of the spending is on non-productive resoucres like soldiers and things that are designed to be blown up.

Using WWII as an example is tricky. After the war the economy was much better off than before the war, but how much was that due to the fact that most of the formerly industrialized world had its factories destroyed. The US really had no competition for the goods it produced. Our superiority lasted until the rest of the world got around to replacing their industrial base with the latest technology.

"The severe rationing of WWII is telling you everything you need to know about the true efficacy of spending of WWII." What Yancy Ward said.

See also Krugman's more acerbic take

"I can’t quite imagine the mindset that leads someone to forget all this, and think that you can use World War II to estimate the multiplier that might prevail in an underemployed, rationing-free economy."

Earlier I mentioned what I believe were the Keynesian-style (if not intentioned) effects of Reagan's defense buildup. When he came into office, as I knew *way* too well, unemployment was huge (nearly 20% in my town), interest rates were astronomical (also around 20% for mortgages!), inflation was similarly out of control, and after a decade of all that huge swaths of Americans were demoralized into apathy. Whatever else one could say about Reagan's legacy (I don't have much else good to say about it), massive deficit spending deliberately targeted to create permanent constituencies for military contracting in every congressional district in America at a time of very high unemployment and no rationing had what looked to me to be a very Keynesian-style short-term benefit.

That the stated, long-term intention of Reagan and his pals was the ideological crony capitalism of the 00's (aught naughts?) rather than a Keynesian resuscitation of the economy in the eighties doesn't mean that wasn't the short-term result. It means only that they never intended to stop deficit spending even after the economy's heart started beating on its own.

figleaf

@pinus: Definition of the (Keynesian) multiplier: delta G = delta Y * multiplier. How could the multiplier be 0?

JSK statistically zero isn't zero... but its probably the wrong hypothesis test to be running.

"What have economists been doing for the last 100 years, if they cannot:

1. Give warning about huge crisis and recessions
2. Have clear plans about solutions to those problems."

Policy makers don't like the answers economists have come up with. Policy makers would very much like soothsayers as advisers and they'd very much like to be able to "do something" about the business cycles. Unfortunately, economists have found you can't predict business cycles (any credible, public prediction would change the outcome) and there's little room for fiscal policy in mitigating the cycle.

Chris,

You really need to tell the Keynesians this. Practically everyone I have read use WWII's spending surge as proof that stimulus works. This is one of the reasons that Barro attacked this proposition. He isn't beating on straw.

"This is basic, basic stuff we are debating, and the fact there is no large scale consensus is more than disheartening, it is scary."

No, it's not scary. It's just a reminder that, despite their constant propaganda to the contrary, economics is part of the humanities, not of the sciences. And that's as it should be, since economics is the study of how humans value things, and how they behave (individually and collectively) as a result of how they value things.

The link died. Here is a new one: http://www.iser.osaka-u.ac.jp/library/dp/2009/DP0730.pdf

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