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

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

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.


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