January 23, 2009 - By New
York Times Writer Paul Krugman
One of the small compensating benefits of the economic crisis
is that people have suddenly realized that economic history
is relevant. Unfortunately, some of the attempts to use that
history are spectacularly off-base — such as the attempts
by conservative economists to use experience during World
War II to argue that the multiplier on government spending
is low. I’ve written about this here and here. But
I thought a bit more data might be instructive.
You see, Robert Barro made much of the fact that private spending
actually went down during World War II — which he took
as evidence of “crowding out”. But what types of
private spending fell, and why?
Well, the chart below, drawn from Millennial Historical Statistics,
shows spending on new homes and cars before, during, and after
the war years. Both basically collapsed. Why?
The answer is that (1) There were draconian building restrictions
in effect — in fact, the end of those restrictions helped
set off the postwar housing boom, and (2) new cars weren’t
being produced, because the factories were making tanks instead
(and if you did manage to acquire a car somehow, gasoline was
rationed).
Why anyone thinks that private spending during those years
is a model for what will happen as a result of fiscal stimulus
now is beyond me.
Read more of Paul
Krugman's Articles
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