“I don’t know what private aggregate demand means, or the phrase “pent-up” demand. The usual way that Keynesians explain the post-war expansion despite the huge cut in government spending is to say, well of course the economy boomed, there was a lot of pent-up demand. What does that mean? There is always pent-up demand in the sense there is a stuff I wish I could have but can’t. But the standard story is that people couldn’t buy washing machines or cars during the war–they were rationed or simply unavailable or unaffordable. So when the war ended, and rationing and price controls ended, people were eager to buy these things. But the reason these consumer goods were rationed or unavailable is because all the steel went into the tanks and planes during the war. So when the war ended, there was steel available to the private sector. That’s why cutting government activity can stimulate the private sector.”To which the response should be: and how is this inconsistent with Keynesian economics?
Russ Roberts, “Keynes vs. Reality-2,” July 14, 2011
Americans had accumulated vast savings during the war: some $100 billion by 1944 including $43 billion in savings and money.
But American consumers could not spend the money on consumption during the war, owing to shortages, rationing and the fall in production of consumer goods. Unless you seriously believe that the desire to consume — to satisfy your subjective utility preferences by buying commodities — does not rise with income, then the meaning of “pent up” should be obvious: it means the desire to purchase consumer goods but being unable to buy them, even though you have the money.
When the war ended and the wartime command economy was dismantled, resources were freed up for reconversion to a peacetime consumer economy, and there was a totally atypical downturn in 1945 were GDP fell by 12.5% between February and October:
“The decline in government spending at the end of World War II led to an enormous drop in gross domestic product making this technically a recession. This was the result of demobilization and the shift from a wartime to peacetime economy. The post-war years were unusual in a number of ways (unemployment was never high) and this era may be considered a ‘sui generis end-of-the-war recession’.”Samuelson feared that there might be a return to long-term depression after this conversion: he was wrong. There was the massive surge in consumption after 1945 using accumulated savings, and income rose even more after the 1945 tax cut of $6 billion, passed in November. The post-war growth to 1948 was an entirely predictable development consistent with Keynesian economics.
In 1943 — the same year Samuelson got it wrong — Keynes was giving a lecture at the Federal Reserve and was asked by Abba Lerner about the possible economic problems of the post-war period. Keynes’s reply is significant:
“Keynes harshly rejected the risk of post-war stagnation, holding that because of Social security there would be a large reduction in private saving and so that would be no problem.”In other words, Americans now had the security of welfare programs that allowed them to free up more of their income in spending.
D. C. Colander and H. Landreth (eds), The Coming of Keynesianism to America, E. Elgar, Cheltenham. 1996. p. 202.
What kind of analysis of the post-war boom ignores what Keynes — the founder of Keynesian economics — thought about this question? Samuelson was simply wrong; Keynes was right.
Another problem for Austrians is this: there was a very sharp rise in government spending from 1948 to a 1953? Why?
The second post-WWII recession extended from November 1948 to October 1949. Truman’s budget surplus of 4.6% of GDP in fiscal year 1948 fell to 0.2% in fiscal year 1949, as spending went from $29.8 billion in 1948 to $38.8 billion in 1949, as automatic stabilizers kicked in. In fiscal year 1950 (July 1, 1949 to June 30 1950), the budget went into an actual deficit of 1.1% of GDP. Moreover, Congress had pushed through a tax cut in 1948, which boosted private spending in 1949. What we have here is classic Keynesian countercyclical fiscal policy.
Some of the increases from 1950–1953 were, of course, related to the Korean war, but also to new social, welfare and military programs enacted under Truman. Government spending in both absolute terms and as a percentage of GDP surged from 1948 to 1953, fell slightly from 1953–1954 as the Korean war ended, but remained between about 25% and 30% of GDP throughout the classic era of Keynesian economics (1945–1973), as can be seen here: