More On The Destruction Leads To Growth Theory

A reader has sent in the following comment and question on my post about the effects of the earthquake/tsunami on the Japanese economy:

Regarding the strange view that Keynesian have on war/disaster/destruction induced booms, I think there are a lot of people that really thinks that there is apiece of truth in this (especially in Sweden (social democrats).

Perhaps that is to some extent due to the fact that e.g. the U.S. only finally came out or their depression in ~1929-1939 when they startedrearmament for World war II. So, how should this actually be understood? Was the positive effect on the U.S

First of all, it should be noted that the situation in Japan is not really comparable to America during World War II as no American cities or power plants were damaged during the war. So even if we accept for the sake of the argument that the war ended the depression, it would not validate the view that destruction of cities are good for the economy.

The comparison one could make is with Japan as well as Germany in 1945, as most of their cities were destroyed to varying extent by American-allied bombings. And while Japan and Germany (especially the Western part) did recover, there is no reason to believe that the bombings had speeded up the recovery. Indeed, the recovery had likely come sooner if the Japanese and Germans had their productive capacity intact.

As for the belief that the war was good for the American economy, I again recommend Robert Higgs' writings on the subject.

In short, Higgs points out that the disappearance of unemployment was fake:

Ten million drafted, and others signed up because they didn't want to get drafted into the infantry; so buildup hinged on coercion of workers. What if today we arrested that many people and put them into prison? We'd have to build the prisons and feed them; the jailed people could work. Gets rid of unemployment, but it's fake.

Higgs also points out that it is very difficult to really estimate the value of military production because the "prices" used were more or less arbitrary estimates. The price controls used likely also meant the private sector production that remained saw deteriorating quality not captured by price indexes as one way to respond to price controls is to cut costs in ways that often reduce quality since it is only the price and not the quality that is controlled.

Moreover,  civilian GDP ( GDP minus military spending) fell sharply even accepting the official price indexes

What World War II really showed was then that the government can initiate a massive military build up at the expense of real prosperity. That doesn't imply that spending binges from the government in general helps the economy, especially not if it is associated with the destruction of productive capacity.