Table 1
This table illustrates something important about the war, while it absorbed a significant amount of the countries resources, the impact of the war on the domestic economy was mitigated, relatively speaking. Furthermore, the US was really the only economy that had on net experienced growth during the war:
Figure 1
Finally, here is an excellent illustration of how the US came out of the war essentially unscathed. The euphemisms of economists aside, it also makes it clear how much it sucked to be a Russian during the war.
Table 2
Now National Income and Product Accounting (NIPA, or GDP) during the war is going to be heavily distorted by price controls during the war. GDP/conumsption deflators are a whole other issue that i do not want to get involved in now (see here) so the numbers I'm going to use need to be taken with a grain of salt since they are in nominal dollars using official price levels. Also a refresher of GDp accounting may be useful.
Purchases of newly produced final goods and services can be decomposed as such
Output (Y) = Consumption (C) + Investment Spending (I) + Government Spending (G) + Exports - Imports (EX-IM)
(1)Y = C + G + I + (EX -IM)
This accounting identity then divides up production between the different sectors of the economy. From the table above, its clear that G (in the form of military spending) is crowding out other activity. This manifest itself in two related ways. Inflation and shortages. Inflation I will deal will separately but shortages caused by the war primairly manifest themselves in durable goods (C), in particular housing in wartime boom towns and in cars and car parts (rubber). Also, meat becomes hard to find. Investment (I) on "nonwar" production also gets crowded out.
While these inconveniences were real in the US there is the other side of the NIPA coin. Identity 1 measures the sales of final goods and services. Naturally, if something is produced and sold that is income for the seller. The sellers here are the owners of the "factors of production" that went into producing the good (Land, Labor, Capital and "Management"). So we can write another identity based on what income can be used for:
Y = Consumption (C) + Savings (S) + Taxes (T)
(2) Y= C + S + T
I would hazard that identity 2 is ultimately how most people "experience" GDP. The following two charts show the change in personal income during the war:N
Figure 2
Figure 3
Converting nominal product/income to real variables is a messy business for this war period and I will not dwell on it. However, I have included a couple of constructed deflators to give you more of a sense of what disposable income growth looked like. Disposable income, of course, is simply income minus taxes and so it gives one a good idea of what peoples after-tax paychecks looked like and what they "spent it on" in a very general sense.
One obvious thing that stands out from looking at the two graphs is that the war put a big wedge between disposable income and consumption. That, of course, is savings. There was an "excess" of savings created by the war above and beyond normal rates of savings. During the depression saving was low because income was low very roughly speaking savings rates were around 2%. After the war household savings were around 7% or so. Household savings rates during the war were around 21% (Edelstien p164).
The other thing that is striking from figure 2 is that there was a wedge driven between personal income and disposable income. This, of course, is the increase in taxes paid by households during the war. That increased tax burden comes fromt wo places. First, the marginal tax rate on lowest income bracket was 4% in 1940 on incomes of $0 to $4000. It increased to 10% in 1941, and then 19% in 1942 on incomes of $0 to $2000. It increase slightly to 23% in 1944.[1] However, more important to tax collection was the fact that in 1943 the federal government instituted its system of pre-withholding taxes directly out of paychecks. This, naturally, amounted to much better enforcement of the tax code and greater tax collection. While the increase in taxes were driven by a need to finance the war, there was a secondary goal: reducing inflation. The result of increasing taxes would have been what you would expect, less disposable income means less money to spend on goods and services. It's not obvious, however, that the decrease in disposable income would have come out of consumption and not savings. However, an increase in taxes would have meant less reliance on inflationary methods of financing the war.
Financing the war.
This brings us to the next thing I want to highlight: how the war was financed. According to Micheal Edelstein 42.5% of the war was financed by taxation. Only a a third (33.7%) was financed through borrowing from the "nonbank public". The balance (23.8%) was financed though money creation. The war was financed so heavily by money creation because of the Federal Reserves policy of keeping rates on treasury bonds very low. The Fed targeted the yield curve from 3/8th of a percent for short term to 2.5% for long term bonds. This of course meant that the Fed had to be prepared to buy any excess debt above what the market would purchase at that level. Compounding, demand for shorter term bills by banks declined becuase a stable interest rate also meant stable bond prices essentially making longer term bonds better than cash since they paid a (small) riskless return.
Below is a table from Edelstein that shows the increase in debt by who held it. It also shows a more than doubling of the money supply through the course of the war.
[1] http://www.taxfoundation.org/publications/show/151.html
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