Four myths about how World War II (and Keynes) saved the U.S. economy

By James Pethokoukis

In blogger and economist David Henderson’s fascinating review of A Great Leap Forward: 1930s Depression and U.S. Economic Growth by Alexander J. Field, he highlights some interesting findings by the author about the impact of World War II on the U.S economy, particularly as it relates to innovation and productivity. Oh, and whether the orgy of government deficit spending ended the Great Depression:

1. Improvements during World War II cannot explain the tremendous increase in productivity from 1929 to 1941 (Growth in the productivity of labor and capital averaging 2.3 to 2.8 percent annually over those twelve years.) Recall that the United States didn’t enter World War II until the last month of 1941. Combined Army and Navy spending in 1940 and 1941 was only 3.2 percent of cumulative Army/Navy spending from 1940 to 1946. It’s true that the United States had moved into war production before entering the war because Franklin Roosevelt was itching to help out his ally, Great Britain, and did so with Lend-Lease. … But Field points out that even with a broader measure of spending that includes Lend-Lease and the government’s Defense Plan Corporation, a subsidiary of the Reconstruction Finance Corporation, spending in 1940 and 1941 was only five percent of the cumulative defense spending that occurred between 1940 and 1945.
 2. Productivity growth slowed during the war. Field estimates it at 1.29 percent per year from 1941 to 1948. (His explanation for why he goes three years beyond the war is persuasive but complicated.) This was down from the earlier low-end estimate of 2.3 percent from 1929 to 1941. The huge increases in output were due to more people being employed, not to large increases in productivity.
 3. The war effort diverted attention from innovation for the private market into innovation in producing the instruments of war. This was costly in two ways. First, much of the innovation was irrelevant to peacetime. Second, producers had to learn the arcane rules of dealing with the federal government. Field writes: “When scientists and engineers devoted their time to producing atom bombs, when businessmen were preoccupied with learning new administrative rules, and when success was measured by one’s ability to produce large quantities of ordnance quickly in an environment of cost-plus contracts, it is scarcely surprising that the overall rate of commercially relevant innovative activity slowed down.”
Field points out that there were few technological improvements during World War II that made the postwar peacetime economy more productive. It’s almost the reverse. It was the tremendous increase in underlying productivity of the U.S. economy before the war that allowed the U.S. economy to be so productive during the war.
4. World War II ended the Great Depression. Field notes that unemployment was falling rapidly in 1941 and that the unemployment rate for the last quarter of 1941 (the government did not collect monthly data back then) was down to 6.3 percent.