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Unnamed comments on Open Thread, May 19 - 25, 2014 - Less Wrong Discussion
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This just struck me: people always credit WWII as being the thing that got the US out of the great depression. We've all seen the graph (like the one at the top of this paper) where standard of living drops precipitously during the great depression then more than recovers during WWII.
How in the world did that work? Why is it that suddenly pouring huge resources out of the country into a massive utility-sink that didn't exist until the start of the war rapidly brought up the standard of living? This makes no sense to me.
The only plausible explanation I can think up is that they somehow borrowed from the future using the necessities of war as justification. I feel like that would involve a dip in the growth rate after WWII - and there is one, but it just dips back down to the trend-line not below like I would expect if they genuinely borrowed enough from the future to offset such a large downturn as the great depression. The only other thing seems to be externalities.
However this goes, this seems to be a huge argument in favor of big-government spending (if we get this much utility from the government building things that literally explode themselves without providing non-military utility, then in a time of peace, we should be able to get even more by having the government build things like high-tech infrastructure, places of beauty, peaceful scientific research, large-scale engineering projects, etc.). So should we be spending 20-40% of our GDP on peace-time government mega-projects? It's either that or this piece of common knowledge is wrong (and we all know how reliable common knowledge is!).
Or I'm wrong, of course. So what is it?
(Bonus question: why didn't WWI see a similar boost in living standards?)
One simple model which seems to fit the "WWII ending the depression" piece of data (and which might have some overlap with the truth) is that it's relatively difficult to put idle resources into use, and significantly easier to repurpose resources that have been in use for other uses.
During the depression, a bunch of people were unemployed, factories were not running, storefronts were empty, etc. According to this model, under those economic conditions there were significant barriers to taking those idle resources and putting them to productive use.
Then WWII came and forced the country to mobilize and put those resources to use (even if that use was just to make stuff which would be shipped off to Europe and the Pacific to be destroyed). Once the war was over, those resources which had been devoted to war could be repurposed (with relatively little friction) to uses with a much more positive effect on people's standard of living. So things became good according to meaningful metrics like living standards, not merely according to metrics like unemployment rate or total output which ignore the fact that building a tank to send to war isn't valuable in the same way as building a car for local consumers.
The glaring open question here is why there might be this asymmetry between putting idle resources to use and repurposing in-use resources. Which is closely related to the question of why recessions/depressions exist at all (as more than momentary blips): once a recession hits and bunch of people become unemployed (and other resources go idle), why doesn't the market immediately jump in to snap up those idle resources? This article gets into some of the attempts to answer those questions.
(Bonus answer: World War One did not happen during a depression, so mobilizing for war mostly involved repurposing resources which had served other uses in peacetime rather than bringing idle resources into use.)
I like that this explanation gives a good reason for why this kind of spending could only work to fix a depression or similar situation versus always inflating standards of living. Thanks.