The Devil is in the Deflator.

At Econospeak Barkley Rosser brings up WWII:

This curiously relates to a matter that has been much argued about previously on various blogs, namely the nature of the short and sharp post-WW-I recession of 1919-20. Some have argued that this shows how wrong Keynes was, because laissez-faire was followed, including letting prices (and some wages) fall sharply in 1921, with the economy bouncing back very nicely, after having the unemployment rate soar from 5% in 1920 to 9% in 1921. Most economic historians have attributed this recession to "postwar adjustment problems."

OTOH, some of those making a big fuss about that recession somehow fail to notice that in fact there was a post-WW-II recession, if also very brief, if sharp. It occurred in 1945 with the sharpest decline in wartime spending, although not much remembered. However, the official stats have US declining in GDP by a whopping -12.7% in that year, although that number must be taken with some grains of salt due to all kinds of measurement issues and restructurings. Some say this exaggerates things as the unemployment rate only went from 1.5% to about 3.6%, a rise, but not all that much to get worked up about.

Two points. The first is that this latter event does not account for the massive decline in female labor force participation that occurred in 1945, from about 38% to about 30%. We all know (or should) that those withdrawing from the labor force do not count in the unemployment rate. That not very large increase in the UR does not disprove that there was a sharp (if short) decline in GDP.  The second point I'm not going to deal with, it is about the Federal Reserve and interest rates after the war. The point above though I'm more than happy to write about. While I do believe Prof. Rosser is mistaken, those that are challenging him in his comments section are right for the wrong reason.

Robert Higgs was mentioned about a dozen times as providing the basis for the idea that there was no post war recession. However, that claim is somewhat dubious. Higgs starts from the presumption that all government spending is useless and wasteful and with that eliminates the decline in government spending from consideration when he declares that there was no post war recession. Essentially Higgs' argument revolves around assuming that "legitimate" or "welfare enhancing" GDP = C + I + NX. What Higgs focuses on is the extraordinary jump in investment in 1946 (the end of war spending shows up in BEA data mostly in 1946, not 1945) which is actually quite remarkable and which Higgs attributes to the "pro-businesst" policies of the new Truman Administration and the general go-gettingness of the supply side.

The conclusion you reach about the depth of the recession when using NIPA data--as Higgs does--depends very heavily on which deflator you choose to use. A cottage industry has sprung up around producing WWII deflators:

Table 1 shows real GDP and real GDP growth given a bunch of different deflators:

Table 2 shows real "private" GDP and real private gdp growth

Starting from the "Hayekian" assumption that there was no business cycle downturn after the war does not disprove that there was no Keynesian effect at work. One of Prof. Higgs' most important insights is that savings was not "spent down" after the war as the traditional Keyensian story tells and that is much of his basis for declaring a supply side explanation to the post war boom . However, the demand side story holds up if one thinks of that pool of savings as the basis for the financing that allowed a returning G.I. an his new bride Rosie the Riveter to fill up there new house with the durable goods that the war spending had crowded out. Much more importantly, that pool of savings provided those new families with the financing to buy the house they bought and needed to fill with modern conveniences.

Another way of putting this that is more in line with the point Rosser is making is that Keynesian theory does not dictated an endless stream of government spending to prop up the economy. One can think of the post-war boom as a delayed multiplier effect. War production crowded out the production of durable goods (most importantly housing and cars) but increased incomes (though, yes, nominal disposable incomes did "stagnate" from 1942-1945 after a 30% increase between 1939 and 1942). These increased incomes became savings without the normal platter of goods available. That savings became goods after the war when the swelled balance sheets of financial institutions looked for new assets to replace wartime assets.

In fact, WWII as a "Keynesian Event" is unique in how dramatically it parses out the effect of government spending increases and then the secondary multiplier effect that provides the autonomous engine of growth that Keynes clearly saw as being at the heart of the capitalist system, the debate over the preface to German edition of _The General Theory_ aside.