The Europe-in-Rubble Excuse, by Paul Krugman, in NY Times: Whenever I point out how well America did with strong unions and highly progressive taxation after World War II, I can count on conservatives trying to resolve their cognitive dissonance by saying “but it was easy then — all our competitors were in ruins!” You can see this all over the comments on today’s column.
Sorry, guys, but that’s bad history and very bad economics.
On the history: the great postwar boom wasn’t just a few years after the war; it was a whole generation long, from 1947 to 1973 — well into an era in which Europe had very much recovered. Here’s West German GDP per capita as a share of US GDP per capita:
The Europe-in-ruins era was long over while the US boom was still going strong.
But the bad history is incidental; the really key point is that this is nonsense economics. Yes, our competitors were in ruins for a while; so were our customers (who were more or less the same countries). Basically, we had nobody to trade with. Here’s exports and imports as a percentage of US GDP:
There’s a brief surge in exports in the late 1940s; that’s the Marshall Plan. But through the 50s and 60s America essentially did very little trade, exports or imports. If you think that’s good for the economy, you should be all for extreme protectionism.
Actually, there’s a substantial trade theory literature on the effect of other countries’ growth on our income and purchasing power, which says that it can go either way — more competition, but also bigger markets, with the net effect depending on how it affects our terms of trade, the ratio of export to import prices. There’s a slight presumption of positive effects from foreign growth, which becomes a much stronger presumption if the foreign economies start very small — which is exactly the situation after World War II. So the whole notion that we had it easy because Europe was destroyed is just ignorant.
And anyone who reflexively reaches for the idea that we were actually better off because Europe was in ruins as a way to explain the postwar economy should take a hard look in the mirror. Did you think this through? Or were you just grabbing for something, anything, to explain away a fact that your ideology says can’t have been true?