Economic Recovery: Lessons from the Post-World War II Period

September 17, 2012

Americans tend to reflect fondly on the outcomes of World War II and what it meant for the United States. There was a sense of optimism as the economy surged and living standards increased. Opportunities for jobs were plentiful. There is a perception that the postwar economy had a strong government influence, and that was the reason for the prosperity. However, the facts reveal a different picture of the role of government in the nation's postwar success, says Cecil Bohanon, a professor of economics at Ball State University.

  • In 1944, government spending accounted for 55 percent of the gross domestic product (GDP).
  • But by 1947, government spending dropped to just over 16 percent of GDP.
  • Furthermore, federal tax revenues fell by only 11 percent in that time period.
  • Despite the drop in government intervention, consumption rose by 22 percent between 1944 and 1947.
  • Additionally, gross private investment rose by 223 percent.

There was a fear that when the government stopped employing soldiers or buying munitions, there would be economic turmoil for decades to come.  But many of the factories that supplied the government with war-related equipment simply converted their operations to provide goods like toasters.

Politicians often try to liken their proposals to that of post-World War II policies to attract support. For instance, President Obama made references to the GI Bill, which made college affordable for many people in the middle class. However the bill played a minor role in keeping the immediate postwar unemployment rate low, as only about 8 percent of GIs left the workforce for college campuses.

During the war, the nation's economy can be described as a command economy where the government decided how to allocate resources. After the war, when the command economy was dismantled, many economists feared that economic recovery would be sluggish. However, American ingenuity prevailed and ensured that resources were allocated efficiently. A poll found that only 8.5 percent of business executives thought the prospects for their company had worsened in the postwar economy.

Source: Cecil Bohanon, "Economic Recovery: Lessons from the Post-World War II Period," Mercatus Center, September 10, 2012.

 

Browse more articles on Economic Issues