Sunday, December 18, 2011

How The US Government Organized and Funded The War Economy

Its common knowledge that government spending on war related projects provided the boost to aggregate demand that got the US out of the Great Depression. How this was accomplished is not common knowledge. This article provides an overview of how the transformation was managed. Government financed spending accounted for 67% of GDP during the transition to a war based economy. The aerospace industry, for example, would not have existed in its present form without help in creating the industry during WW II. This is a clear example of effective industrial policy, that not only got the US out of the Great Depression, but transformed the US into an industrial power. This produced very large budget deficits and an extremely high debt to GDP ratio. Economic growth following the war enabled the government to dramatically reduce the debt to GDP ratio.

It does not follow from this analysis that war is essential to stimulate a depressed economy. If it were politically possible, the government could fund investments in technologies that will be required in the near future to deal with the depletion of resources and the reduction of greenhouse gases among other things. We could also take the necessary steps to rebuild our great cities and reduce our reliance on automobiles by reshaping public transportation. We are only limited by imagination and the political will to lead.

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