Bill Bonner

The Nobel Prize committee has never withdrawn a prize. It might want to consider it. In Tuesday’s New York Times, prizewinner in economics, Paul Krugman reveals either that he knows nothing about economics…or that there is nothing worth knowing in it. We’re beginning to think it’s the latter.

“From an economic point of view,” he writes, “World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Deficit spending created an economic boom – and the boom laid the foundation for long-run prosperity….”

In the 1938 US elections, voters showed what they thought of the New Deal; Democrats lost 70 seats in the House. Then as now, the public had lost faith in public spending, says Krugman. Nearly two out of three of those polled said they were opposed to stimulus efforts. Roosevelt buckled under the pressure; he drew back from further spending to fight the slump.

Thank God for WWII! No one opposes military spending in time of war. Krugman made his position clear in 2008 in his New York Times blog.

“The fact is that war is, in general, expansionary for the economy, at least in the short run. World War II, remember, ended the Great Depression.”

According to this line of thinking, the best form of stimulus spending is money spent on the military. It creates consumer demand without creating consumer supply. Consumer prices rise; people spend. The slump is soon over.

But if WWII helped the US economy, think what it must have done for Japan; proportionally, its stimulus efforts dwarfed those of the US…and began much earlier. Just this week, Ichiro Ozawa, running for prime minister of Japan, vowed to take “every measure” to lower the yen and promised a stimulus package more than twice as big as the current program. He was just following in the footsteps of Japan’s leaders from the ’30s. It was “economic security” they said they were after. And they thought they could get it by central planning and government spending. Military spending rose from 31% of the budget in the early ’30s to nearly 50% five years later. By the early ’40s it was around 70% and nearly 100% later on. Deficits and debt soared.

Did that create a boom? You bet it did. Japan was the first nation to get out of the global slump. It boomed…and boomed…and ka-boomed. When it came to warships, planes, and soldiers, Japan was soon among the richest nations in the world. Yes, Americans had more electric fans, automobiles, central heating, aspirin, ice cream, and the rest of the paraphernalia of civilized life at the time. In the mid-’30s, the US produced 40 times as many autos per person as did Japan. Even during the Great Depression, the US out-produced Japan by a factor of 7 and its workers earned 10-times as much money.

Economists can’t even measure real prosperity, let alone fiddle it. So they put on the GDP and employment numbers the way a bald man puts on a cheap wig. It makes him look ridiculous and fraudulent, but it’s the best he can do. Unemployment disappears in a war economy. Japan put a million men in uniform. Two million more were part-time reservists. Those who weren’t in the army were put to work building tanks and planes. By 1941, Japan could produce 10,000 planes a year. If you were a swallow you wouldn’t want to build your nest in Japan’s factory chimneys; they belched smoke night and day.

And talk about fiscal stimulus! Krugman would have loved it – stimulus unfettered by real money or even a casual regard for real prosperity. Takahashi Korekiyo was known as the “Japanese Keynes.” Gillian Tett notes in The Financial Times that he was assassinated in 1936 after he came to his senses and tried to bring state finances under control. He was done in by army officers who did not want the stimulus to stop. Not that we’re being judgmental about it. As far as we know, the quality of central banking could probably be improved by an occasional assassination.

Takahashi wasn’t the first. Before him Junnosuke Inoue had held out for the gold standard and balanced budgets. He was out of office by 1931 and out of luck in 1932, when he was murdered. The gold-backed yen was abolished the day he left office. Then, public spending, deficits, central planning, debt, and inflation ran wild. By 1939, the Japanese were spending $5 million a day on their war with China – a huge sum for the Japanese at the time.

Was the economy improved by all this spending? No, it was perverted…hammered into a grotesque imposter – a parody of a real economy. Most of the nation’s resources were put to work building things almost no one wanted. Then, after the attack on Pearl Harbor, the stimulus efforts were redoubled. Rations were reduced further. Working hours were extended. What few consumer items were available were three times as expensive at the end of the war as they had been when it began. Men were conscripted into factories and the army. Women were expected not only to make the tanks, but to join the home-guard and prepare themselves to repulse the American invaders with sharpened bamboo sticks. What a marvelous economy – operating at full capacity and full employment until General MacArthur finally put it out of its misery.

Regards,

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • http://www.rampartsilver.com/ Mexican onza libertad

    Hail Freedonia !

  • Model T

    And Mr. Krugman continues to bash the Reagan deficit defense build-up.

    O, the incongruity.

  • Tom Breen

    Ah…our old friend “The Broken Window” fallacy, only this time in the form of the Blessings of Destruction! Krugman really should read Henry Hazlitt’s book, “Economics in One Lesson.” He might actually learn something about econonomics.

  • Tom Breen

    edit to above, should be “economics” not “econonomics”…bah, darn rented fingers!

  • Boris

    Krugman is the New York Times’ attempt at a comic strip.

  • vdv

    It usually takes a few years for the Nobel prize to take effect, so in a few years Krugman will stop ruining the economy, Gore is almost done increasing global warming. And if Thomas Freidman is given a Nobel prize, then a couple of years from now the world will no longer be flat, it will be round and wholesome again.

  • jmrbayoubobby

    not a single word about the human cost

  • Bloomer

    Krugman didn’t ruin the economy, greedy unfetterd capitalism did.

  • CommonCents

    “The fact is that war is, in general, expansionary for the economy, at least in the short run. World War II, remember, ended the Great Depression.”
    _____________________

    I guess winning the war and being the only industrialized nation left completely standing had nothing to do with it!

    Japan, by surrendering, left most of their capacity intact. And with our help were was back up and running quickly albeit not producing planes and battleships……..wonder how that worked out for them?

  • CommonCents

    I guess winning the war and being the only industrialized nation left completely standing had nothing to do with it!

    Japan, by surrendering, left most of their capacity intact. And with our help were was back up and running quickly albeit not producing planes and battleships……..wonder how that worked out for them?

  • Brandon Adams

    I think it’s obvious that Krugman wasn’t proposing that military spending has intrinsic powers to stimluate the economy. Rather, the necessities of war forced a Keynesian solution to an economic slump.

    It’s just a defense of Keynes that uses one instance of war spending as an example.

  • http://www.facebook.com/ajaragain Jared Hansen

    Congratulations. You’ve demonstrated how unwise it would be for us to pick a fight just to stimulate our economy. Krugman simply used the phenomenon to demonstrate that Keynesian stimulus works – and everyone knows it works. The only remaining question is, did the stimulus invest in anything lasting? If invested in war, only if you win. If invested in public works, it pretty much always lasts. Such intellectual dishonesty dishonors you….

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