Friday, June 22, 2018

After the War

This is a response to Ben Hoffman's fascinating analysis of the economic and social consequences of wartime mobilization, available at


The Problem with Demobilization

Ben, thanks for another useful and original essay! I accept your claims that (1a) collecting taxes for self-defense can put farmers who aren't used to doing much trading in the position of being forced to take on private debt simply to meet their civic obligations, and that (1b) a benevolent government might need to borrow money for a war of self-defense above and beyond what it can collect by taxing farmers, creating public debts, and that (1c) the government's attempts to pay back these public debts after winning the war by taxing more than it spends can cause compound harm that is worse than the sum of its parts by deflating the value of the labor that farmers might otherwise have used to service and repay their private debts, causing the farmers to go bankrupt in ways that are difficult for the farmers to predict or avoid or cope with.

I likewise accept your claims that (2a) prolonged or intense war can leave villages 'hollowed out' or otherwise less comfortable or sustainable places to live, and that (2b) forcibly resettling ex-villagers back in their old villages, even when done with careful planning, has repeatedly led to horrific casualties and suffering.

I further accept your (implicit?) claim that (3) trying to cope with the above problems by using fiat currency to artificially stimulate urban employment saps our ability to find joy and inner peace by training us to interpret all of our experiences as either service to an outside authority (which is compulsory, and therefore unpleasant) or luxury consumption (which is shallow, and therefore unsatisfying). At least, I'm assuming that's the chain of causality you're trying to draw between World War 2 and your co-worker not realizing that she could put her kitchen knife away if that would make her happier.

Coping with the Collapse of Wartime Demand

So, what would be a better solution to post-war demobilization? For starters, I think it's necessary to acknowledge that there's a very real loss associated with the sudden collapse of wartime demand. On the one hand, people *must* make investments in wartime production because otherwise the nation will not be able to increase its production sharply enough, and the nation will lose the war as a result. See, e.g., Nazi Germany, which coddled its home front until 1943 and was therefore unable to match the Soviet Union's more ruthless production of tanks and planes. On the other hand, the social utility of wartime production very sharply decreases the day after your enemies surrender, and you can't accurately predict or control the timing of your enemies surrender. That means *someone* will be a big loser when the carousel comes to an abrupt stop. If you build a tank factory in 1941, you're a genius. If you build a tank factory in 1942, you're a genius. If you build a tank factory in 1943, you're a genius. If you build a tank factory in 1944, you break even, and if you build a tank factory in 1945, you lose your shirt. The problem is that ex ante you have no idea how long the war will last. *Someone* will lose their shirt by patriotically opening a tank factory (or moving to a factory city to work at the tank factory, or moving to a factory city to open a cafeteria to sell dinner to laborers at the tank factory). This loss is real, and the loss is not preventable by any means short of achieving permanent world peace.

By printing money until urban employment stabilizes at wartime levels, you are essentially hiding and denying and postponing this loss, but the loss cannot be avoided forever. Artificially stimulating employment leads to artificial employment, which erodes virtue and causes long-term deadweight losses. If you train people to buy a superficially 'new' but functionally identical model Ford every three years as a way of keeping Detroit's factories open even after the US Army stops buying tanks, then you're throwing enormous amounts of industrial wealth away just to create the illusion of prosperity.

What you *can* do safely is print just enough money to cancel out post-war deflation. Suppose the optimal level of peacetime government infrastructure investment in new bridges, hospitals, dams, etc. (optimal in the sense that the investment will yield the highest rate of annual GDP growth) is $800 billion per year, and the optimal level of debt service (optimal in the sense of keeping your interest rate low without forcing you to delay consumption for too long) is $200 billion per year. Assume the government is going to adopt these optimal spending levels, and is just trying to figure out how it should pay for them. So, consider three choices:

  1. If you stay on the gold standard and set taxes at $1 trillion per year, you trigger a deflationary spiral and indebted farmers go bankrupt. That's bad.

  1. If you set taxes at $600 billion per year and print $400 billion per year in paper money, you get full employment in your cities, but (by definition) if you are funding businesses with paper money just for the sake of creating jobs, then you have severed the link between employment and genuine productivity, so your economy rapidly becomes fake and/or corrupt, and even respectable businessmen in grey flannel suits start shamelessly investing in Coca-Cola and McDonalds and Walmart and Facebook and other things that don't actually make anyone happy.  That's also bad.

  1. If you set taxes at $800 billion per year and print $200 billion per year in paper money. That way the paper money *only* gets used to pay off wartime creditors. There's no need to artificially stimulate whole new industries of bullshit, because by law and custom, the only acceptable government use of paper money is to pay the government's own bills. You still wind up somewhat diluting the value of the currency by printing some paper money...but this primarily harms the people who *have* currency, i.e., the people who can best afford to pay, instead of primarily harming the indebted farmers who are least able to pay. This is tolerable.

If you go with Option (C), it's a little sad that people who have savings lose some of their wealth, but because in the immediate aftermath of a large war we expect that many of the people who have savings were either deliberate war profiteers or simply lucky in that they guessed right about when to invest in a new tank factory, it's not *very* sad. It's also probably the least sad option available: the loss caused by surprise closure of tank factories is real; you can't erase it or entirely prevent it; all you can do is allocate that loss to the people who can best afford to absorb it while minimizing second-order harms like deflation and McDonalds.

Coping with Unemployed Ex-Villagers

This still leaves the problem of what to do with all of the laborers who flocked to cities in order to work in the wartime economy, who now do not have jobs because the war is over, and who do not particularly want to return home to their villages because the wartime economy made their villages a sucky place to live, and/or because exposure to urban living permanently changed their lifestyle preferences and social networks. As Ben ably explains:

  • If you do literally nothing about all the unemployed urban workers, you get riots and mobs and organized crime and maybe your government collapses under the weight of internal dissent. That's bad.

  • If you try to forcibly resettle the unemployed urban workers, they resist you, and you wind up with widespread slaughter of your own civilians. That's bad.

  • If you try to artificially employ the urban workers with make-work jobs, you collapse the character of the national economy just as surely as if you printed too much money. You wind up with McDonalds and Facebook. That's bad.

  • If you just cut all the unemployed urban workers a welfare check, you get feelings of uselessness, opioid addiction, and suicides. That's bad.

It seems like the solution that's missing from Ben's list is offering *voluntary incentives* for workers to return home. This could take the form of a massive "rural renewal" infrastructure program that tries to make villages nicer places to live -- the Rural Electrification Act was a good start, as are modern-day efforts to lay down fiber-optic cables in the countryside. It could take the form of providing additional social services and supports in modest villages -- not necessarily handing out welfare checks, but providing incentives for doctors, therapists, teachers, and other "helping professionals" to live and work in smaller towns, or even simply paying for the construction of the buildings (in small towns) that such professionals would need in order to do their work. It could involve subsidies for upgrading private solar panels, septic tanks, and other amenities that make it easier to live far from the central grid. It could even be something as simple as training: if the new crop of 20 year olds don't know how to farm or fish or enjoy camping because they spent their teens in an overseas war instead of learning the family business from their parents, then hire some camp counselors who do remember the good old days, and teach them to have fun in the village, or hire some expert farmers and teach them to earn a living in the village.

The reason why subsidizing village life ought to work better than subsidizing city life is that the former is sustainable and healthy and based on something real. You can't safely *force* people to move back to their old villages, because mass violence for the sake of social engineering is Very Bad (tm). You can't easily *invest* in cities in a way that makes city life sustainable, because city life is inherently artificial: there's too much service, too much consumption, too many deadly motor roads, too little community, too much transience, too little investment in one's own homestead or neighborhood simply for the joy of seeing it grow and thrive. What you can do is invest in villages in a way that makes people want to return to those villages even without being ordered there at the point of a gun. Once people choose to return to the villages, they can resume the kind of life they had before the war -- with perhaps a bit more sophistication, a bit more infrastructure, and perhaps even a sense of gratitude for having survived and endured the upheavals of their time.

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