The myth of wartime prosperity: Evidence from the Canadian experience

Abstract

This paper investigates therelationship between prosperity and national account data during wartime, focusing on Canada. In particular, we build off of existing literature arguing that military outlays must be excluded for real output measures to reasonably approximate economic prosperity. We analyse all non-war components of Canadian gross national product during both world wars and estimate a novel price deflator for World War II in order to take into account wartime price controls. This allows us to obtain a new estimate of real output in Canada excluding military outlays. We then compare the trends in our new real output series with domestic private investment and stock market trends, all three of which either fell or grew at an anemic pace in Canada during both world wars. Combined, we argue that this provides evidence against the idea of wartime prosperity and more specifically, against the notion of World War II ending the Great Depression in Canada. KEYWORDSCanada, economic growth, great depression, wartime prosperity Despite the apparent horrors and hardships of war, some economists argue that there is a silver lining when a nation enters a war fought on foreign soil. The intuition is that increasing employment, government spending, and ultimately output from mobilization for war can boost aggregate demand and generate "wartime prosperity." 1 This view has led, for example, to claims that the United States entering into World War II ended the Great Depression (de Long and Summers 1988;Rauchway 2015;Vernon 1994).Similar augments have been made for Canada (e.g., Finkel 1993;Haubrich 1990; Horn 1976;Krywulak 2005). In fact, one of the most popular textbooks in Canadian economic history holds this view stating that "…with the war itself [World War II], the greatest economic depression in history was over" (Norrie, 1 Claims of such as this have been made on both empirical and theoretical grounds. For recent works along these lines see Gordon and Krenn (2010) and Eggertsson and Krugman (2012).