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.


Viewed in this light the American fiscal policy of the war years didn't work either. Indeed I have made this argument before in dozens of blog comments, every time someone trots out the old saw that "WW2 ended the Depression" which is of course nonsense.

Paying people to produce and use the weapons of war does count for something, at least insofar as they are no longer officially unemployed. But it is a waste in both the common and the economic senses of the word, and we must never forget that. Every dollar spent on war is a dollar that could have been spent on useful things.

Rothbard argued that government spending should be subtracted in the calculation of GDP rather than added. I think he went a bit too far, but when it comes to war spending in particular there's a strong case for subtraction.

Why is this a critique of fiscal stimulus rather than a critique of a large military build up? Germany happened to allocate their fiscal stimulus largely towards a military expansion. Doing this allowed them to increase the production of the economy. Because they produced weapons this didn't increase welfare, but by what mechanism would the fiscal stimulus be ineffective had they produced something other than weapons.

It's very encouraging to see that we are still debating the merits of Nazi policies. And some cynics think economists are a bunch of fools.

(BTW I am ripping all of us, not Tyler.)

"The contemporaneous boost in measured gdp was almost completely an illusion in terms of human welfare"

I'm sorry.. since when did economists start caring about human welfare more than GDP? I'll have to remember this next time someone argues that social welfare spending is anti-growth...

Pie Logic:

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.

It occurs to me to suggest, for future reference, that the consistent metaphor would be to refer to the non-military portion of the pie as the 'edible' portion of the pie. The increase in GDP due to (re)militarization would correlate to slices of inedible pie.

Sadly, this will be itemized as my 'Serious Thought for the Day'.

Because military expenditure isn't free market, its hard to say what % of it is "throw away." I don't not believe the entire thing is "throw away."

Interestingly, however, the same arguments for military expenditure being throw away, can be said for many other types of government expenditure being such. I wonder how we could calculate what percent of say, "The national endowment for the arts" or medicare is in effect "throw away."

re "There was militaristic make-work, based on transfers from one group to another, but with few accompanying economic benefits."

Economic beneifts of government consumption, like those of private consumption, are in the eye of the beholder. Germans of the day may have had a different view on the desirability of military expenditure in 30s Germany.

But w.r.t. the same point, US militarism in the post-WWII period--the Cold War arms race ($10tn), Vietnam, Iraq--can be viewed similarly. A yet more egregious make-work program is the inefficiency of the heavily subsidized US health care sector (private commercial insurance gets a 35% Federal/State tax break, e.g.), which costs 4% more of GDP than any other country, income and demographics adjusted, while yielding less in outcomes. Yet Americans believe they have the best health care system. Again the economic benefits are in the eye of the beholder.

Well, the US spending on military from 1939 to 1945 would have seemed similarly bad if the US had lost WWII. If Hitler had been more prudent stopped before triggering responses from Stalin and the US. If a truce had been struck after Germany had gained control of France to Poland, a few years of consolidation and rebuilding and Hitler's spending would have looked as reasonable as FDR's massive redirection of the US economy to supplying Stalin, Churchill, and the US miliary against the Axis powers.

Question. Hitler wanted to go to war in 1942, but was forced to start in 1939. Was that because his fiscal policies had virtually bankrupted Germany & he needed the gold reserves of Czechoslovakia & Poland, & the larger tax revenues that taking over those countries would bring?

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