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Tuesday, December 4, 2012

How World War Two Helped the Economy

There's a fairly common belief out there that World War II ended the great depression. Suddenly millions of men had jobs as soldiers and millions of men and women on the home front had jobs building war materials. What this line of thinking has a harder time with is why the economy didn't crash again when "the boys came home" and there was no longer a need for millions of soldiers and the bombs, airplanes, tanks and rifles they had used. There was a brief and sharp downturn in the GDP in 1945 as the war (and war spending) ended, but unemployment never really went up much (it peaked at 5%) and the economy quickly took off. Why?

One explanation points out that the US was the only major developed nation which hadn't been bombed to pieces during the war, and thus as the intact victor it was in an excellent position to become an export powerhouse. That seems like it definitely was a factor.

Another factor which may have contributed is one which Arnold Kling alludes to here:
After the second World War, the U.S. economy easily created new patterns of specialization and trade. I think that one reason is that the war increased mobility, as soldiers met others from different parts of the country. Instead of remaining in their communities of birth, men moved in order to take advantage of new opportunities.
It strikes me that the effect would go beyond shaking people up geographically. The war provided a distinct break in many people's lives, during which many went places and did things that they never would have otherwise. With the war over, there was a clear sense of starting over. It seems like this would have made both workers and employers more open to trying new things. Soldiers coming back from the war and workers who had been employed in war industries new that they needed to look for jobs wholly different than they had had during the war, and as such there was really no reason they needed to look for jobs the same as they'd had (or been looking for) before the war started. Employers knew that after four years during which everyone had been focused on the war, they were going to have to hire and train workers who might not have directly relevant experience.

In an economic sense, the war may have served in some ways as a giant "reset", clearing away structures, expectations, and "stickiness" in a host of ways which allowed things to head off in new directions.

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