A Tried and Tested Model to Follow for Rebuilding Our Economy

Written on:December 14, 2012
 
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On the surface the “fiscal cliff” debate is all about the federal deficit. But the reality behind the talk is the weakness of the economy. In its current state it can neither generate anything approaching full employment, nor provide the tax revenue needed to support the basic functions of government.

In fact the size of the national debt is not the issue. In the five years from 1940 to 1945 the U.S government drove the debt from 50% to 120% of Gross Domestic Product, with outstanding results: victory in history’s greatest war; GDP doubled in five years; modernization of the American economy, with major progress in science, technology and management; and initiating a fifty-year peacetime boom, the benefits of which are only now beginning to fade.

This achievement has often been attributed to patriotic fervor born out of the attack on Pearl Harbor. In reality the industrial “home front” effort was initiated in May 1940, a full eighteen months before the attack. At the time a large number of voters and politicians were opposed to any war effort, and President Roosevelt needed all his abilities to push the massive build-up through – in an election year no less.

Politically, technically and management-wise, the WWII industrial effort was both challenging and complex. But its essence was simple:

The government borrowed huge sums from the population via war bonds. Part of the proceeds was used to pay, feed and equip the 12-million strong armed forces. The rest went into armament contracts to private industry, covering all incurred cost – wages, equipment, new facilities – plus reasonable profit. Due to circumstance and limited spending opportunities most of the wages were saved, pushing consumption into the future while freeing more funds for bond purchases.

This closed borrowing-spending-saving cycle became a “virtuous spiral” feeding the industrial boom and pulling every available person into the work force – including millions of women never before employed. War production took on such momentum that already in 1944 planning began for re-conversion to civilian activity.

The end of hostilities could have caused a deep recession, but due to accumulated savings and pent-up demand the downturn was short and shallow. War bond redemption provided a steady stream of additional cash and the GI Bill helped by delaying the re-entry of soldiers into the labor force.

By 1950 the national debt was at 75% of GDP, and in 1960 down to the 50% pre-war level. The civilian boom erased the war debt just as the war build-up ended the Depression. The combination was the most successful “pull up by the bootstraps” operation in history.

As we are today bogged down in economic weakness the question is: Can it be done again?

The answer is yes – providing we understand what made the model so successful:

First, it was entirely self-contained: American money was spent to pay U.S. citizens and American corporations with plants within our borders. Wages and profits were deposited in domestic banks. The little money that left the country served to buy materials truly unavailable here, such as natural rubber.

Second, money spent was either saved, or invested – in research and technology development, new infrastructure and modern production facilities – later converted to civilian use.

Third, the labor force was not just used to produce tanks, ships and bombs. Its needs were understood and addressed: whole cities were built from scratch around the great West Coast shipyards; women were trained and earned good wages; medical care was provided; and the G.I. Bill rewarded military sacrifice. Despite all the mistakes, faults and blemishes of the war effort, the U.S. took care of its own.

Fourth, while there were lively and even hostile debates about budgets, appointments, policies and priorities, the nation as a whole recognized there was one goal – victory. The bitterness of Depression politics was not forgotten, but submerged in the national effort, and we learned again what it meant to be one nation.

That is the model. If we understand why and how it worked, we can do it again – in peacetime or war.


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