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Tuesday, May 03, 2011

"Those Pesky Postwar Recessions"

Barkley Rosser has a follow-up to his post on Keynes:

Those Pesky Postwar Recessions, by Barkley Rosser: Well, the debate over my post on Keynes on central planning has gone viral... I ... want to comment further on a point raised ... by one of the makers of the video in question, John Papola. This has to do with ... the point being made in the video that unlike what lots of Keynesians supposedly said (Samuelson being provided in the debates as an example in 1943, although not Keynes himself), we did not go into a deep depression after WW II, even though there was ... a sharp drop in government spending...
OTOH, some of those making a big fuss about that recession somehow fail to notice that in fact there was a post-WW-II recession... It occurred in 1945 with the sharpest decline in wartime spending, although not much remembered. However, the official stats have US declining in GDP by a whopping -12.7% in that year, although that number must be taken with some grains of salt due to all kinds of measurement issues and restructurings. Some say this exaggerates things as the unemployment rate only went from 1.5% to about 3.6%, a rise, but not all that much to get worked up about.
Two points. The first is that this latter event does not account for the massive decline in female labor force participation that occurred in 1945, from about 38% to about 30%. We all know (or should) that those withdrawing from the labor force do not count in the unemployment rate. That not very large increase in the UR does not disprove that there was a sharp (if short) decline in GDP. (Rosie the Riveter went home to boom out those babies, and to buy houses to be built, given that basically none had been for about 15 years in the US).
The other point, which is perhaps more cogent for the debates here, involves monetary policy. ...[T]he very loose monetary policy of WW II basically continued during the immediate postwar years, only finally ended with the Fed-Treasury Accord of 1951 in the face of rising inflation tied to the Korean War. So, it may well have been that the Fed was listening to Samuelson and was slow to tighten monetary policy, thereby helping to ease that postwar transition...

    Posted by on Tuesday, May 3, 2011 at 12:33 AM in Economics, History of Thought | Permalink  Comments (13)


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