The fiscal economics of Nazi Germany, part II

I am a big fan of the columns of David Leonhardt but I do not quite agree with his latest interpretation of fiscal policy in Nazi Germany.  David writes:

More than any other country, Germany – Nazi Germany – then set out
on a serious stimulus program. The government built up the military,
expanded the autobahn, put up stadiums for the 1936 Berlin Olympics and
built monuments to the Nazi Party across Munich and Berlin.

economic benefits of this vast works program never flowed to most
workers, because fascism doesn’t look kindly on collective bargaining.
But Germany did escape the Great Depression
faster than other countries. Corporate profits boomed, and unemployment
sank (and not because of slave labor, which didn’t become widespread
until later). Harold James, an economic historian, says that the young liberal economists studying under John Maynard Keynes in the 1930s began to debate whether Hitler had solved unemployment.

If I am reading this correctly, the implication is that fiscal policy worked but the German economy had a bad and worsening distribution of wealth.  I would sooner say that fiscal policy did not work and the German economy had a bad and worsening distribution of wealth. 

In 1933 military spending was 2 percent of German national income; by 1940 it was 44 percent, with a steady rise along the way.  The contemporaneous boost in measured gdp was almost completely an illusion in terms of human welfare (breaking the Versailles commitments did help Germany) and that includes corporations and their owners.  It is not that labor could not grab its fair share of the pie but rather that fiscal policy did not increase the size of the true (non-militaristic) pie.  If you want to see gnp figures for that period turn to p.25 of this paper by Albrecht Ritschl (and the discussions starting on p.4 on how to properly measure gnp during this time).  Ritschl offers a pessimistic account of the net contribution of fiscal policy and the abstract of his related paper sums it up well:

paper examines the effects of deficits spending and work-creation on
the Nazi recovery. Although deficits were substantial and full
employment was reached within four years, archival data on public
deficits suggest that their fiscal impulse was too small to account for
the speed of recovery. VAR forecasts of output using fiscal and
monetary policy instruments also suggest only a minor role for active
policy during the recovery. Nazi policies deliberately crowded out
private demand to ensure high rates of rearmament. Military spending
dominated civilian work-creation already in 1934. Investment in
autobahn construction was minimal during the recovery and gained
momentum only in 1936 when full employment was approaching. Continued
fiscal and monetary expansion after that date may have prevented the
economy from sliding back into recession. We find some effects of the
Four Years Plan of late 1936, which boosted government spending further
and tightened public control over the economy.

McDonough indicates that economic growth in the Nazi 1930s was due primarily to arms spending, or again it was not real economic growth at all.  This piece has much useful detail on private German consumption during the era and again the conclusions are pessimistic.  Of course employment rose dramatically but it does not seem that real (non-militaristic) consumption and output did very well.  There was militaristic make-work, based on transfers from one group to another, but with few accompanying economic benefits.

On the corporate side, there is this:

It is interesting to note that German productivity only grew 1.3% per
year from 1929 to 1938, roughly half the growth rate of Britain in the
same period.

Productivity statistics can mean a number of things but again this does not make the German corporate sector sound totally healthy or sustainable. 

It could be argued that the Nazi policies did not work because they
stifled private consumption and in that regard they were not Keynesian in the modern
sense.  Maybe so, but we're still back at the Nazi policies not having worked.  I don't consider this research, in sum, "knock down" evidence, but still my view of Nazi fiscal policy is more negative than in Leonhardt's.

Here is my previous post on the fiscal economics of Nazi Germany.


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