The depression of 1946

[swansont]

I've copied the relevant parts of this over from the "A new Pledge" thread

 

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In 1946 Republicans took charge of Congress, with good intend and successfully avoided a predicted return to the "Great Depression" predicted by "Keynesian Economist" advocates (sound familiar)

 

That's not quite true. AFAICT, the prediction of a return of the great depression was contingent on doing nothing to safeguard the economy, and that didn't happen. In 1944 congress passed the GI Bill, and many of the soldiers went back to school rather than look for work. It also paid an unemployment benefit for up to a year, and the loan guarantees helped stimulate construction.

 

 

If the wartime government stimulus had ended the Great Depression, its winding down would certainly lead to its return. At least that was the consensus of almost every economic forecaster, government and private. In August 1945, the Office of War Mobilization and Reconversion forecast that 8 million would be unemployed by the spring of 1946, which would have amounted to a 12 percent unemployment rate. In September 1945, Business Week predicted unemployment would peak at 9 million, or around 14 percent. And these were the optimistic predictions. Leo Cherne of the Research Institute of America and Boris Shishkin, an economist for the American Federation of Labor, forecast 19 and 20 million unemployed respectively — rates that would have been in excess of 35 percent!

 

What happened? Labor markets adjusted quickly and efficiently once they were finally unfettered — neither the Hoover nor the Roosevelt administration gave labor markets a chance to adjust to economic shocks during the 1930s when dramatic labor market interventions (e.g., the National Industrial Recovery Act, the National Labor Relations Act, the Fair Labor Standards Act, among others) were pursued. Most economists today acknowledge that these interventionist polices extended the length and depth of the Great Depression. After the Second World War, unemployment rates, artificially low because of wartime conscription, rose a bit, but remained under 4.5 percent in the first three postwar years — below the long-run average rate of unemployment during the 20th century. Some workers voluntarily withdrew from the labor force, choosing to go to school or return to prewar duties as housewives.

 

But, more importantly to the purpose here, many who lost government-supported jobs in the military or in munitions plants found employment as civilian industries expanded production — in fact civilian employment grew, on net, by over 4 million between 1945 and 1947 when so many pundits were predicting economic Armageddon.

 

Household consumption, business investment, and net exports all boomed as government spending receded. The postwar era provides a classic illustration of how government spending "crowds out" private sector spending and how the economy can thrive when the government's shadow is dramatically reduced.[/Quote]

 

http://www.cato.org/pubs/policy_report/v32n3/cp32n3-1.html

 

swansont; I wish you had waited a few post to take this thread off topic, but nearing the end of the War most all economist, especially the Keynesian advocates (had dominated the 30's and early 40's) felt massive stimulation was in order and those that felt otherwise got elected into the 1946 Congress. While the 1944 GI Bill did allow 7-8 million GI's (think there were 50+ M eligible) to attend College (1945-1956), it would be my opinion it was the return of the private sector into the economy, along with the needs that brought about demise for Keynesian Economics Theory at least until 2008. The point attempted in post #2, this thread was that Congress virtually had nothing it could do with a Democratic Executive, was labeled "The do nothing Congress" and lost in 1948, possibly permitting Truman his victory. In 2012 IMO the very same thing could happen again, but as the 'Do nothing House". They did not win back the Senate (2010) as was in 1948.

 

 

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I did a little checking on this, and the Cato institute is spinning the truth a bit.

 

Real GDP contracted by almost 11% from 1945 to 1946, and contracted further still in 1947 (and there was high inflation)

http://www.bea.gov/national/index.htm#gdp

http://www.usinflationcalculator.com/inflation/historical-inflation-rates/

http://en.wikipedia.org/wiki/File:GDP_growth_1923-2009.jpg

 

So was there a depression? Using the standard definition of a GDP decline greater than 10%, you bet there was. Was it as bad as the Great Depression? No.

 

Unemployment. It depends on what you mean by this. In the recent economy, great hay is made of the different numbers; many reporters like saying how the "real" unemployment rate is something north of 15% when you take into account people who stopped/aren't looking for work for a variety of reasons (and people who work part-time but want to work full-time , the U6 number from BLS)

 

What was the employment picture in 1946? From this pdf, we see that from June '45 to June '46 the drop in federal employment was ~10 million jobs, while the private sector added about 2.7 million jobs. So more than 7 million people were not working who were working the year before. Why was unemployment so low, given those numbers? For the same reason that the pundits are complaining about today's numbers — it's not counting about 5.5 million people who weren't looking for work. The average workweek from before the end of the war also dropped by about 10% in 1946. So while more people worked, people were working fewer hours on average.

 

The flaw in the predictions was the people who stopped looking for work — e.g. Rosie leaving her riveting job and servicemen using the GI bill to go to school (BTW, it's 16 million eligible from WWII, not 50). But predictions of 7-8 million not working were spot-on. They just get twisted by using a convenient statistic for one argument, and not using it when it's inconvenient.