My first post of this year: on Paul Samuelson and the post 1945 boom.
Paul Samuelson comes in for a lot of criticism about his allegedly failed predictions concerning America’s economy after WWII. I see there is further Samuelson bashing going on at the moment from the usual suspects. The following comments are based on an earlier post.
The relevant article by Samuelson that is normally cited by his Austrian and libertarian critics is this:
Samuelson, Paul A. 1943. “Full Employment after the War,” in Seymour E. Harris (ed.), Postwar Economic Problems, McGraw-Hill, New York and London. 27–53.It is perfectly clear that the critics have never really bothered to read what Samuelson said in the chapter in question. If they did, they would see that Samuelson was basically right in his assertions.
The point I have made before too is that Samuelson (1943: 37) was also clear that there were fellow economists who were optimistic about a post war boom, on the basis of “private demand alone,” and he listed three types of such economists. The second group of these “optimists” appear to have been some of his fellow Keynesians:
“[sc. the “optimists” argue that if] ... we add to this the forced saving plans which the future will certainly bring, as well as postwar tax refunds to corporations, it will be seen that the real backlog of deferred demand as a result of wartime depletion of capital will be accompanied by the financial means to make it effective.” (Samuelson 1943: 46).That optimism about the post-war economy was shared by John Maynard Keynes:
“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.” (Colander and Landreth 1996: 202).But here is the crucial paragraph from Samuelson that must be read properly to understand his predictions:
“When this war comes to an end, more than one out of every two workers will depend directly or indirectly upon military orders. We shall have some 10 million service men to throw on the labor market. We shall have to face a difficult reconversion period during which current goods cannot be produced and layoffs may be great. Nor will the technical necessity for reconversion necessarily generate much investment outlay in the critical period under discussion whatever its later potentialities. The final conclusion to be drawn from our experience at the end of the last war is inescapable – were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties – then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced. This does not deny that there may be a boom after the war. In this the experts may still be correct. For the release of controls upon demand coupled with plentiful amounts of monetary demand might well give rise to price increase, inventory buying, feverish speculation and all the superficial earmarks of a boom. But it would be the antithesis of a prosperity period, constituting instead a nightmarish combination of the worst features of inflation and deflation. Nor, having spent itself, could it be expected to evolve into healthier channels. Instead, the final outcome would undoubtedly be a cumulative hyperdeflation from which, at best, we should lose a decade of progress and which, at worst, our democracy would not survive.Now note very carefully Samuelson’s explicit comment: “Of course, this is not intended as a picture of what will in fact happen.”
Of course, this is not intended as a picture of what will in fact happen. For there is every reason to believe that we shall not be lulled into a feeling of false security by the last war’s experience or by the half-truth that the end of the war will witness a boom. No doubt, we shall retain direct controls for a period after the conflict ends. We shall taper off war production gradually. We shall undertake income maintenance in the form of dismissal pay for soldiers, unemployment compensation, direct and work relief expenditure. It is probable, although less certain, that, in addition, the Federal government will initiate employment maintenance measures such as large scale public works, etc. But even these will not be adequate to maintain full employment or any approach to it.” (Samuelson 1943: 51).
Samuelson’s prediction of the “greatest period of unemployment and industrial dislocation which any economy has ever faced” was dependent on certain assumptions as follows:
(1) the war ending suddenly within 6 months after 1943;Now Samuelson was wrong in that he underestimated the scale and vigour of private sector investment and consumption spending after 1945. He was of course wrong in thinking that the post-1945 boom might be a hollow boom of mere inflation, inventory buying, and speculation to be followed by a hyperdeflation. Yet these remarks have to read in context and with the observations in the rest of the chapter (see below).
(2) very rapid termination of war effort and production;
(3) rapid demobilization and liquidation of price controls, and a sudden shift from astronomical deficits to the large deficits of the thirties, and
(4) absence of any “income maintenance in the form of dismissal pay for soldiers, unemployment compensation, direct and work relief expenditure.”
Samuelson was right on a number of other points. For example, the US did not suddenly dismantle price controls as soon as the war ended: it was not until 1946 that Truman lifted many of these controls.
Samuelson was right that dismissed soldiers would receive “unemployment compensation” and other support: for the Servicemen’s Readjustment Act (or G.I. Bill of Rights, July 1944) gave extensive unemployment benefits to demobilised soldiers. The act also gave soldiers four free years of college education, which must be counted as a significant measure that prevented unemployment from rising as well, since many returned servicemen took college degrees and did not seek work.
The US government still had massive budgets in 1946 and 1947: it did not suddenly reduce the amount of government spending to, say, less than 10% of GDP, where it had been in 1934–1935 and certainly historically pre-1914.
Samuelson was therefore correct in saying such measures would in practice avert the “greatest period of unemployment and industrial dislocation which any economy has ever faced.”
Samuelson was also well aware that pent up demand (or what he called “deferred demand”) would be a source of post-WWII growth (Samuelson 1943: 52), but argued that this would fade out after 18 months to 2 years. He must be judged essentially right on this point too, for the US slipped into recession by November 1948, as the post-war boom faded.
Above all, the point that emerges from all this is that a number of other Keynesian economists did not share some of Samuelson’s more pessimistic views (and he cited their opinions as those of his second group of “optimists”).
Keynes certainly did not, nor did the Keynesian Richard M. Bissell (who is cited in Samuelson 1943: 53, n. 1, as holding an opposing view on the strength of “future private demand” post-1945).
Colander, D. C. and H. Landreth (eds). 1996. The Coming of Keynesianism to America: Conversations with the Founders of Keynesian Economics, E. Elgar, Cheltenham.
Samuelson, Paul A. 1943. “Full Employment after the War,” in Seymour E. Harris (ed.), Postwar Economic Problems, McGraw-Hill, New York and London. 27–53.