The World War II Canard



Tags: percent, inflation, spending, america, economic, krugman, according, different, nations, infrastructure

Since February 2009, and the passage of the second stimulus of the Great Recession, progressives have defended high government spending as necessary to economic recovery and derided opposition as being unwise, ill-informed or outright dishonest. One particularly popular defense of this spending, which was utilized last month by New York Times columnist Paul Krugman, is America’s having weathered similar debt-to-GDP ratios after World War II. According to Krugman, Americans should not worry about the size of the debt because we’ve recovered once before from high levels of debt and we can do it again. Unfortunately for the Debt-Paying Generation—young people who will bear the consequences of the debt—this is unlikely to happen. Here are three reasons why 1945 is different from 2012:

First, we didn’t have a growing entitlements crisis in 1945. As aptly pointed out here, federal spending as a percent of Gross Domestic Product (GDP) dropped significantly after World War II, as did the level of debt as a percent of GDP. Looking forward 40 years, on our current path, we will have very opposite numbers as debt and spending continue to rise precipitously. Back in 1945, for example, Social Security was paid for by 42 times as many workers as retirees who utilized it. Today? That ratio is about 2.9 to 1, and getting worse. Meanwhile Medicare, which did not exist in 1945, is expected to grow from 3.6% of GDP to 5.5% of GDP between 2011 and 2035.

Second, the economic state of nations such as Germany, Britain, France, Japan, China and others are very different today than they were 66 years ago. After World War II, these nations had little infrastructure or economy left. Additionally, many of their young people had died in the war. Meanwhile, America was left with infrastructure, a stable monetary system, a first-class educational system and an economy that exported to the vast majority of the nations of the world. Unfortunately, America no longer has those advantages. In fact, we are in the middle of the pack educationally, according to a December 2010 Program for International Student Assessment report, and our infrastructure is aging rapidly while our imports increase and our exports decrease.

Third, part of the reason America’s debt-to-GDP ratio dropped from a 100 percent ratio in 1945 to under 27 percent in 1976 is due to inflation, AKA theft of dollars from citizens via devaluation of the dollar. According to Reinhart and Rogoff in This Time is Different, "Governments can also default on domestic public debt through high and unanticipated inflation, as the United States and many European countries famously did in the 1970s." Additionally, "Needless to say, unexpected increases in inflation are the de facto equivalent of outright default, for inflation allows all debtors (including the government) to repay their debts in currency that has much less purchasing power than it did when the loans were made." Are Krugman and those like him really suggesting that we massively increase inflation, which would cause major suffering among the so-called “99 Percent” they claim to support?

This is not to say the Debt-Paying Generation should necessarily look to Republicans to stave off the coming fiscal disaster. Even the allegedly aggressive Paul Ryan budget plan wouldn’t balance until well past 2030. The solution is to go past party politics and look at the facts showing a growing level of debt that could leave young Americans in severe straits for their entire working lives. That is the challenge for progressives and conservatives to address, and distractions from the Krugmanites only slow down the process of finding ways to meet that challenge. 

The writer is the pseudonym of a congressional staffer who has contributed to a number of publications with ideas regarding public policy. His work reflects his own views and not necessarily those of his employer. Contact: Anthony Randazzo, director of economic research, at anthony.randazzo@reason.org

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