The U.S. Postwar Miracle

By David Henderson of EconLog.

"Co-blogger Scott Sumner posted yesterday some interesting facts and figures about the post World War II economic boom in the United States that came after the U.S. government cut government spending massively.

I wrote a study on this for Mercatus in 2010 and highlighted some of the findings in this post in November 2010.

Two things I want to highlight.

First, as I wrote then, "federal government spending on goods and services fell, in a period of two to three years, by over one third of GDP." That puts in perspective Gary Johnson's proposal to cut government spending by 20 percent. A 20 percent cut in federal government spending, when government spending is about 20 percent of GDP, is a 4-percentage-point cut in government spending as a percent of GDP. In other words, Johnson proposes to cut government spending as a percent of GDP by about one eighth of the percent by which Truman and Congress cut it in 2 to 3 years.
Second, I want to answer the question raised by one of the commenters who said:

Real GDP declined an unprecedented 12.7% from 1944 to 1946. Hardly "fine".

I answered this point at length in my Mercatus study. Here's an excerpt from my answer:

According to official government data, the U.S. economy suffered its worst one-year recession in history in 1946. The official data show a 12-percent decline in real GNP after the war. A 12-percent decline in one year would fit anyone's idea of not just a recession, but an outright depression. So, is the story about a postwar boom pure myth? If you ask most people who were young adults in those years (a steadily diminishing number of people, so talk to them soon) about economic conditions after the war, they will talk about "the postwar boom." They saw it as a time of prosperity.

The same commenter, Ben, wrote:

Sure, unemployment didn't increase substantially at all which was likely due to a high demand for workers as women returned home and left the workforce again.

I answered this in some detail in my Mercatus study also. I called this the "Rosie the Riveter Goes Home" explanation. It turns out that half of the additional women who entered the work force during WWII did not go home.

Here's what I wrote in the study:

"There was no surge in unemployment," goes the first explanation, "because women left the defense plants and went back to being housewives and raising families." This explanation is half true and totally misleading. First, approximately half of the women who entered the labor force in the early 1940s stayed. The number of women in the labor force rose from 14.5 million in 1941 to a peak of 19.4 million in 1944, declining to 16.9 million in 1947. In other words, of the 4.9 million women who entered the labor force between 1941 and 1944, 2.4 million stayed in the labor force. Thus, there was still a need for millions of jobs to open up for newly demobilized male soldiers. The fact that the unemployment rate stayed in the low single digits is an outstanding success story.
Second, what defense plants? Almost all of them shut down or reconverted to peacetime uses after the war. Women who wanted to stay employed had to find other private work. As [Robert] Higgs points out, "[T]he real miracle was to reallocate a third of the total labor force to serving private consumers and investors in just two years.""