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What is gnp deflator

what is gnp deflator


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ABSTRACT. Relying on standard measures of macroeconomic performance, historians and economists believe that “war prosperity” prevailed in the United States during World War II. This belief is ill-founded, because it does not recognize that the United States had a command economy during the war. From 1942 to 1946 some macroeconomic performance measures are statistically inaccurate; others are conceptually inappropriate. A better grounded interpretation is that during the war the economy was a huge arsenal in which the well-being of consumers deteriorated. After the war genuine prosperity returned for the first time since 1929.

“War prosperity is like the prosperity that an earthquake or a plague brings.”

Ludwig von Mises 1

For nearly half a century historians and economists, almost without exception, have misinterpreted the performance of the U.S. economy in the 1940s. The reigning view has two aspects: one pertaining to the conceptualization and measurement of the economy’s performance; the other pertaining to the explanation of that performance in macroeconomic theory. The two are encapsulated in the title of a chapter in a leading textbook: “War Prosperity: The Keynesian Message Illustrated.” 2

I shall challenge the consensus view. The accepted profile of the economy’s performance during the 1940s—peak prosperity from 1943 to 1945, followed by much worse performance from 1946 to 1949—is indefensible as a description of economic well-being. Further, the most widely accepted explanation of the events of the war years cannot withstand critical scrutiny. The prevailing misinterpretations of economic performance during the 1940s have arisen because historians and economists have failed to appreciate that the wartime economy, a command economy, cannot be readily compared with either the prewar or the postwar economy.

The Consensus

According to the orthodox account, the war got the economy out of the Depression. Evidence for the claim usually includes the great decline in the standard measure of the unemployment rate, the large increase in the standard measure of real GNP, and the slight increase in the standard measure of real personal consumption. The entire episode of apparent business-cycle expansion during the war years is understood by most writers as an obvious validation of the simple Keynesian model: enormous government spending, with huge budget deficits, spurred the military economy and produced multiplier effects on the civilian economy, the upshot being increased employment, real output, and consumption and decreased unemployment. Some analysts, recognizing the rapid increase of the money stock during the war, have blended Keynesian and monetarist explanations, treating them as complements. This consensus account, occasionally with minor qualifications or caveats, appears in the works of historians, economists, and other writers. 3

Employment and Unemployment

The standard measure of the unemployment rate (persons officially unemployed as a percent of civilian labor force) fell

between 1940 and 1944 from 14.6 percent to 1.2 percent. 4 Michael Darby’s measure, which does not count those in “emergency government employment” as unemployed, fell from 9.5 percent to 1.2 percent. 5 Either measure signals a virtual disappearance of unemployment during the war, but in the circumstances neither measure means what it is commonly taken to mean.

The buildup of the armed forces to more than 12 million persons by 1945 made an enormous decline of the unemployment rate inevitable. But the welfare significance of the decline is hardly the usual one. Of the 16 million persons who served in the armed forces at some time during the war, 10 million were conscripted, and many of those who volunteered did so only to avoid the draft and the consequent likelihood of assignment to the infantry. 6 The civilian labor force between 1940 and 1945 ranged from 54 to 56 million. 7 Therefore, the 12 million serving in the armed forces during the last year of the war, most of them under duress, constituted about 18 percent of the total (civilian plus military) labor force, itself much enlarged during the war.

What actually happened is no mystery. In 1940, before the military mobilization, the unemployment rate (Darby concept) was 9.5 percent. During the war the government pulled the equivalent of 22 percent of the prewar labor force into the armed forces. Voilà, the unemployment rate dropped to a very low level. No one needs a macroeconomic model to understand this event. Given the facts of the draft, no plausible view of the economy is incompatible with the observed decline of the unemployment rate. Whether the government ran deficits or not, whether the money stock increased or not, massive military conscription was sure to decrease dramatically the rate of unemployment. 8

Between 1940 and 1944 unemployment fell by either 7.45 million (official measure) or by 4.62 million (Darby measure), while the armed forces increased by 10.87 million. Even if one views eliminating civilian unemployment as tantamount to producing prosperity, one must recognize that placing either 146 or 235 persons (depending on the unemployment concept used) in the armed forces to gain a reduction of 100 persons in civilian unemployment was a grotesque way to achieve prosperity, even if a job were a job.

But military “jobs” differed categorically. Often they entailed substantial risks of death, dismemberment, and other physical and psychological injuries. Military service yielded little pay under harsh conditions and, like it or not, lasted for the duration of the war. Sustained involvement in combat drove many men insane. 9 Physical casualties included 405,399 dead and 670,846 wounded. 10 To treat military jobs as commensurable with civilian jobs, as economists do in computing the tradeoffs between them, betrays a monumental obtuseness to their realities.


(as percent of total [civilian plus military] labor force)

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