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pcm 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?)
Part of it is that deflation in the early 1930s meant that workers were overpaid relative to the value of goods they produced (wages being harder to cut than prices). That caused wasteful amounts of unemployment. WWII triggered inflation, and combined with wage controls caused wages to become low relative to goods, shifting the labor supply and demand to the opposite extreme.
The people who were employed pre-war presumably had their standard of living lowered in the war (after having it increased a good deal during the deflation).
I won't try to explain here why deflation and inflation happened when they did, or why wages are hard to cut (look for "sticky wages" for info about the latter).