Public Spending as an Engine of Growth and Equality: Lessons from World War II

September 23, 2020

As climate disasters multiply and exacerbate the recession brought on by the COVID-19 pandemic, it becomes even more imperative that we map a path toward a green economy that restores full employment and closes the widening output gap we now face. The major public investment and reorganization of production that this entails mirrors that of the economic mobilization undertaken during World War II. It is useful to draw lessons from past efforts as we contemplate similar levels of investment today.

In “Public Spending as an Engine of Growth and Equality: Lessons from World War II,” authors J.W. Mason and Andrew Bossie draw two main macroeconomic lessons from the World War II experience. First, economic growth may respond more to demand than previous thinking suggests. Typical discussions of economic policy, and critics of a major public investment in line with a Green New Deal, often assume that the economy operates close to full potential and thus any major expansion in public spending must crowd out private spending in similar measures and reduce living standards in the short run. Experience from World War II suggests the contrary, that the boost in demand from a massive public investment like the Green New Deal will raise consumption and living standards for all Americans.

Second, the extremely tight labor market and near-full employment that are characteristic of the World War II period served as an extremely powerful force for economic equality. The “high-pressure” economy of the war collapsed income inequality more dramatically than any other time in history: The share of income going to the top 1 percent and top 10 percent fell by about a third, and those at the lower end of the income distribution benefitted the most. These findings suggest that there is no conflict between ambitious public spending programs and the goal of broader economic equality. In fact, central ambitions of a Green New Deal, like economic and racial justice, will be positively served by a major expansion in public investment.