Following Up: Captain America and Unemployment

Captain America #603 by Ed Brubaker and Luke Ross, Marvel Comics (2010)

Two weeks ago, we did a post concerning Bad Cap's views on Keynesian economics. Recall that Bad Cap thinks that infrastructure and military spending during World War II helped to bring new industry to America, provide people with jobs, and eventually all but extinguish the unemployment rate in America. Our discussion mostly focused on the inconsistencies between these beliefs and those that Bad Cap now possesses. We detailed a few arguments on whether fiscal policy during World War II actually helped to put an end to the Great Depression, or whether it was really other factors (monetary policy, for instance).

But let's go back to Bad Cap's actual question. He asks himself why the United States' current conflicts abroad seemingly have no effect on unemployment today, whereas World War II helped drastically reduce unemployment in the 1940s.

Well, first of all, the U.S. was already involved in the Iraq War and Afghanistan before the Great Recession actually hit. The 1920s was a relatively quiet decade for America with respect to international conflicts. Remember Harding, Coolidge and Hoover? Isolationist foreign policy? Post-WWI "Return to normalcy?" When World War II hit, America had significantly increased its spending to prepare our troops for war.

Second, there is the issue of the draft. There are certainly debates regarding the extent of the impact of conscription on unemployment, but there was indeed an impact. American citizens went to war who would have otherwise been unemployed. There is no draft today, so this effect is smaller.

Third, today's warfare is less labor intensive and the same level of military activity requires fewer personnel.

To see this, let's look at the spending. Indeed, the second world war was expensive--economist Joseph Stiglitz estimated the cost to be approximately $5 trillion in 2007 dollars (adjusted for inflation). Current military operations are expensive too. As Stiglitz writes:

The cost of direct US military operations - not even including long-term costs such as taking care of wounded veterans - already exceeds the cost of the 12-year war in Vietnam and is more than double the cost of the Korean War.

And, even in the best case scenario, these costs are projected to be almost ten times the cost of the first Gulf War, almost a third more than the cost of the Vietnam War, and twice that of the First World War.

However, as he put it, WWII saw 16.3 million U.S. troops in a campaign for four years. It required the total mobilization and virtually all of the country's resources fully committed to fighting. Total cost of the war was less than $100,000 per troop in 2007 dollars. The Iraq war, according to his estimates in 2008, have cost around $400,00 per troop.

Where is all of this going? Tough to say. In fact, the defense spending budget in recent years has been pretty confusing. In 2008, for instance, President Bush requested from the Department of Defense $481.4 billion for discretionary military spending, which goes to "ensure a high state of military readiness and ground force strength; to enhance the combat capabilities of the United States Armed Forces; to continue the development of capabilities that will maintain traditional U.S. superiority against potential threats; and to continue the Department’s strong support for service members and their families." However, the actual spending for the wars in Iraq and Afghanistan apparently come through "emergency supplemental requests"--the request being about $193 billion in 2008. And there is more. Nuclear weapons research, intelligence gathering, State Department operations in war zones, and allocations towards the "Global War on Terror" technically do not fall in the DoD budget.

And then, of course, there is Stiglitz's famous three trillion dollar total cost estimate. All this is to say that we are spending a considerable amount of money on defense and military of some sort (if you total all the various sources of expenditures), but we are not seeing the same sort of total mobilization we saw in World War II. As mentioned above, much spending today goes towards development of sophisticated technology, nuclear research, etc. These are sorts of things that aren't likely to reduce unemployment in the same way as it may have during a war of full commitment such as World War II.

I'd be interested (as I'm sure Bad Cap would) if anyone could find a more specific breakdown of current military costs.

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Captain America, War, and the Great Depression

Captain America #603 by Ed Brubaker and Luke Ross, Marvel Comics (2010)

It's been a wild ride in the Captain America series. Steve Rogers died via magic bullet, traveled through time, faced off against the Red Skull, then finally came back to life with the help of Bucky. Now that all that's over with, the series take a turn and focuses on more pressing matters.

I refer, of course, to evil super-soldier clones and their political agendas.

In Captain America #603, "Bad Cap," created in the 1950s while the original Cap was in suspended animation, travels by bus from New York to Idaho and ponders the state of the economy along the way. He notices rows of empty houses and long unemployment lines and begins recalling the days of the Great Depression.

He then wonders why the Depression ended-- as the war brought "a wave of industry to America"--while current conflicts abroad make little to no difference on unemployment.

This is a strange thought. Though he doesn't explicitly state in his internal monologue that World War II caused the end of the Great Depression, he is strongly implying it. In fact, he is implying that the wartime spending and increased factory production helped reduce the unemployment rate domestically. Indeed, unemployment in the U.S. quickly fell below 10% after the war began and eventually all but faded.

This is in line with the major view shared by Keynesian economists and historians alike. That is, that massive military and infrastructure spending during the war increased the labor force, increased production, helped boost aggregate demand, and pulled the economy back from collapse. Paul Krugman referred to the war as a "large public works project." In this sense, many see the war--and fiscal expansion--as having been the primary cause of the end of the Great Depression

Of course, this is a subject of much debate. Many attribute the reduction in unemployment during WWII more to the draft than war spending. There are also arguments citing other factors (aside from fiscal policy) that accelerated GDP growth and economic recovery. These debates about the effects of war spending on the Depression aren't exactly new--and many have been resurfacing given the parallels with the current Great Recession.

For instance, in a piece written for the Wall Street Journal last year, economist Robert Barro argued that the fiscal multiplier during World War II was actually less than we thought. According to him, the multiplier was something closet to 0.8, meaning that gross domestic product (GDP) rose by less than the increase in government expenditures (whereas if the multiplier was a flat 1.0, each unit of government spending would have led to a unit increase in GDP):

The other way to put this is that the war lowered components of GDP aside from military purchases. The main declines were in private investment, nonmilitary parts of government purchases, and net exports -- personal consumer expenditure changed little. Wartime production siphoned off resources from other economic uses -- there was a dampener, rather than a multiplier.

A notable paper written in 1992 by economic historian, Christina Romer, entitled "What Ended the Great Depression?" argued that fiscal stimulus played a relatively minor role and that recovery mainly stemmed from monetary expansion--that is, gold inflows into the United States during the 1930s led to lower interest rates, which encouraged more investment and eventually increased aggregate demand.

Regarding World War II's effect on the economy, Romer wrote:

That monetary developments were very important, whereas fiscal policy was of little consequence even as late as 1942, suggests an interesting twist on the usual view that World War II caused, or at least accelerated, the recovery from the Great Depression. Since the economy was essentially back to its trend level before the fiscal stimulus started in earnest, it would be difficult to argue that the changes in government spending caused by the war were a major factor in the recovery. [...] Thus, World War II may indeed have helped to end the Great Depression in the United States, but its expansionary benefits worked initially through monetary developments rather than through fiscal policy.

Does all this mean proponents of fiscal expansion are wrong today? Well, no. In fact, according to a speech Romer delivered in March 2009, the idea that monetary expansion played such a large role does not necessarily negate fiscal policy as an effective recession-fighting tool:

I wrote a paper in 1992 that said that fiscal policy was not the key engine of recovery in the Depression. From this, some have concluded that I do not believe fiscal policy can work today or could have worked in the 1930s. Nothing could be farther than the truth. My argument paralleled E. Cary Brown’s famous conclusion that in the Great Depression, fiscal policy failed to generate recovery “not because it does not work, but because it was not tried.”

In response to those "small multiplier" arguments, Krugman likes to point out that there was rationing during the war (i.e. governments tried to curb consumer spending to conserve resources).

I won't say where I personally fall in the debate, though I will say that I'm surprised Bad Cap seems to take the Keynesian position so strongly. You might recall that he has recently grown angry with what he views as a significant departure from America's fundamental values. He refers to current politicians and policy-makers as "hippies" and "commies," presumably for pushing legislation predicated on government spending and taxation. The same sort of spending that he seems to think worked before! Well, at least for unemployment. He even joins the radical right-wing militia group, the Watchdogs, in an attempt to "reclaim" America and uphold the values of "real Americans."

Bad Cap repeats the claim that America's integrity has fallen since the time of his childhood, but he doesn't seem to be sure how. Perhaps he is a strong believer in wartime Keynesianism, but is skeptical of spending government money on social welfare. I wonder what he thinks of the 1960s and Medicare. Had America already lost its values by then?

Either way, he's been through a lot, what with the super-soldiering, being an evil clone, and the mental instability thing. Maybe he just, you know, changed his mind?

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