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Monday, November 8, 2010

Private Real GDP Growth Before and After WW II

Eyeballing values off of a graph is never easy, but I made an attempt here, to prove a point.

In a Working Paper that can be downloaded here as a PDF, David Henderson makes rather a big deal about an alleged post WW II economic miracle - all because government spending was greatly reduced, as a result of the war ending.

Henderson's big fundamental flaw is the kind of misrepresentation of Keynesianism that is all-pervasive, and generally not challenged.   Keynes only proposed government spending as an economic solution under certain circumstances:  aggregate demand shortfall, zero interest bound, monetary policy not working (kind of like now.)  To the pain caucus, all govt spending is Keynesian.  That's what Ron Paul said about the preceding decade

Henderson includes this graph as Fig 2, and says this about it.

The massive increase in private investment was one of the major factors in the postwar boom, because the boom in private investment led to a boom in private output. Figure 2 shows the growth rate in real private gross domestic product in 1987 dollars. In 1946, private gross domestic product (GDP) rose by a stunning 29.5 percent, an all-time record  for the U.S. economy.

It is indeed stunning.  But to talk about it as he does - basically context free - is cherry picking.  Lets look at all of the post war data on the graph, and compare it to the New Deal.   Here is how I have estimated the percentage change numbers from the graph for the relevant years.  New Deal numbers are in blue, Post WW II numbers in red.

Prvt GDP

An average of the post WW years from 1946 through 1950 is 8.2%.  The average of the New Deal Years from 1934 through 1941 is 6.4%.  A difference, to be sure, but not enough to call one a miracle, while suggesting that the other was a flop.   In fact, without the bad year of 1938, which occurred because FDR made the mistake of prematurely abandoning New Deal policies, and attempting to balance the budget, the rest of those years average to 8.4%.  If we include 1945 in the post WW II set, it increases that average to 8.5%

On average, there is not enough difference here to even mention, let alone hang any economic theories on.

Bad cherry picking leads to bad conclusions.  One is tempted to suspect that the rather odd quantity of the growth rate of real private GDP (which I have never heard of before) was chosen, because no other data set would support his case.  As it turns out, this one doesn't either.  Oh, well . . .

For a lot more on Henderson's ass-hattery, see here and here.


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