The Washington Post recently reported on the logistic and technological failings of the United Network for Organ Sharing (UNOS), the private non-profit agency with a government-enforced monopoly on the United States’ system of procuring organ donations and matching donated organs to the over 100,000 people waiting for them. A report from the White House US Digital Service found that UNOS has been ineffective, lacks transparency, and relies on outdated software, with frequent system failures and cybersecurity concerns. While UNOS has resisted efforts to modernize and reform, these problems have necessitated billions of dollars every year for continuing medical treatments like dialysis and meant that the organ donation system has failed to prevent the deaths of thousands who could have been saved by getting a donated organ.

UNOS, and the entire organ donation system, is sorely in need of reform, but the ultimate issue with US organ donation is that there is a supply shortage caused by laws banning compensation for donors. The Summer 2022 issue of Regulation features ideas on how to overhaul the system from some of the experts involved in efforts to change US organ donation policy.

Most of the current problems stem from the National Organ Transplant Act (NOTA) of 1984, which established the system of monopoly contractors to supply donated organs (organ procurement organizations (OPOs)) overseen by an organ procurement and transplantation network (OPTN). UNOS has been the OPTN since a contract was finalized in 1986.

At the same time, the NOTA banned the purchase of organs, making it a federal crime for “any person to knowingly acquire, receive, or otherwise transfer any human organ for valuable consideration for use in human transplantation if the transfer affects interstate commerce.” The justification for this ban was to prevent the exploitation of the poor by wealthy patients in need of organ transplants, but its effect has been to severely curtail the availability of donated organs.

The easiest way to address the shortage would be to provide some type of incentive for organ donors. As Van Doren has discussed previously, many people have animosity towards the sale of human organs. But if it is not immoral to do something for free, then it is not immoral to do it for money: “Adding money to a transaction never turns an otherwise moral exchange into an immoral one.”

The potential benefits of paying donors softens people’s animosity towards the idea, as long as the system is designed to limit the possibility of exploitation. Mario Macis, a Johns Hopkins University economist, describes his research on public attitudes towards compensation for kidney donation. In a survey of more than 2,500 people, Macis and his colleagues found that attitudes toward paying kidney donors depend both on ethical considerations and the potential for reducing the United States’ kidney shortage. Macis explains:

These results suggest that a majority of Americans would support compensating organ donors if the system were governed by a public agency ensuring transparency and fairness. The system with the highest support was one with non‐​cash compensation (such as contributions to a retirement account) provided by a public agency. Support for such a system ranged from 64% to 77%, depending on its hypothesized effect on lives saved.

Along these lines, Josh Morrison and Sammy Beyda of the advocacy group Waitlist Zero suggest emulating Israel’s donor support system. Israel provides living organ donors with temporary benefits such as an exemption from the national health insurance tax, reimbursement for health, life, and disability insurance expenses, paid time off from work, therapy, a recuperative vacation, and reimbursement for travel expenses. Since implementation in 2008, living donation rates in Israel have quadrupled. Morrison and Beyda estimate that a similar program in the United States with a similar increase in donations would save about 18,000 lives and billions of dollars per year.

Sally Satel and Alan D. Viard of the American Enterprise Institute propose more direct compensation through a $50,000 tax credit for living donors and a $5,000 tax credit for deceased donors. The physical and emotional health of prospective donors would be carefully screened, and there would be a six-month waiting period to deter people from donating organs impulsively or under duress. Satel and Viard note that opponents might view such compensation as “commodifying the body,” but argue that this concern is misplaced:

Recipients would not be allowed to buy organs; instead, donors would receive compensation from the government for contributing to the public good. When a transplant is performed, the surgeons and hospitals are paid, as are the agencies that obtain and transport the organs in the case of cadaveric organs. Currently, the only entity in the entire process that does not receive any compensation for its contribution is the donor, who bears a modicum of risk and myriad costs as well.

Even with some form of compensation for donors, as long as there is not a pure free market for organ donation, the system the government relies on for matching donated organs to potential recipients requires reform. Abe Sutton, former White House domestic policy advisor, proposes several reforms to the system of OPOs and OPTN to improve their performance. Most notably, Sutton argues that organ procurement policy has prioritized the incumbency and monopoly of the current system participants at the expense of patients. The system should be opened up to competition through standard government contracting procedures. Furthermore, Sutton proposes reforming governance of the OPTN, separating the policy-making and technological functions of the OPTN, opening the technology component to all bidders to better identify the best vendors, and making de-identified OPTN data publicly available to increase the transparency of the system.

The Post’s report on the current issues with UNOS, and its refusal to be transparent and to modernize, highlight the need for the reforms Sutton suggests. Even with a more effective procurement and matching system, however, the fundamental problem of the supply shortage would remain. The most direct way to address this shortage would be incentivizing donors, who currently endure the risks and costs of organ donation without any financial compensation.

The Inflation Reduction Act being considered by Congress would vastly expand the Internal Revenue Service. The IRS currently has 82,000 employees, and the legislation would boost the number by roughly 87,000, according to a related Treasury estimate (Table 3).

Of the $80 billion increased IRS funding in the Act, $46 billion would go to enforcement. That expansion promises to damage small- and medium-sized businesses and undermine civil liberties. Politicians complain about tax cheats, but noncompliance is low in the United States compared to other countries.

All those new IRS employees would undermine GDP rather than producing it. But that would be only part of the waste. Another cost would be the increased time and energy needed by taxpayers, lawyers, and accountants to defend against a more aggressive IRS.

The Inflation Reduction Act adds or expands a slew of special-interest tax breaks and creates a parallel corporate tax structure based on financial statement income. Those misguided changes would also increase tax compliance costs on the private sector.

The Office of Management and Budget estimates that individuals and businesses currently spend 6.5 billion hours a year on federal tax paperwork, which is equivalent to 3.6 million people working full-time on this unproductive activity. That “Tax Army” is two and half times larger than our uniformed military of 1.4 million service members, as shown in the chart.

The Inflation Reduction Act will prompt an expansion in the private-sector Tax Army. If the Tax Army expands even 10 percent, that would be 140,000 more Americans consumed in unproductive paperwork, tax planning, and IRS defense activities.

Congress has created a tax code at war with growth and efficiency. The government needs to collect adequate revenue, but we could reduce the compliance burden by 90 percent if we replaced the income tax with a consumption-based flat tax. We could demobilize most of the Tax Army and put people back to work adding to the nation’s economy.

The immigration system of the United States is more restrictive than most other developed countries. As my colleague David Bier has shown, the foreign-born U.S. share of the population is the 35^th highest out of 47 countries, including illegal immigrants. The United States has a foreign-born share of the population between Spain and Estonia. Using just the legal immigrant share of the population, the United States would have the 40^th highest share that is foreign-born, between Denmark and France.

A big difference in immigration between the United States and Europe is that illegal immigrants are about 3.1 percent of the U.S. population. In Europe, by contrast, less than 1 percent of the population are illegal immigrants. However, Europe and the United States have a similar share of the foreign-born population who are illegal immigrants at slightly over 20 percent, if one only examines non-EU and non-EFTA immigrants in Europe. Immigration is a major political issue in Europe, but the illegality of immigrants is less salient because there are many fewer illegal immigrants. In the United States, policy and political disagreements over immigration are linked with the large illegal immigrant population, illegality, and the chaos from large black markets.

Most illegal immigrants who have arrived in the recent years prior to President Biden entering office likely entered lawfully and overstayed their visas. A large number also entered unlawfully and that share has likely risen since Title 42 was enacted in March 2020, which created perverse incentives to enter unlawfully. Illegal entries are the main source of chaos and the perceptions of chaos along the U.S.-Mexico border. After all, President Trump frequently employed the slogan “build the wall” in reaction to the chaos along the border – he didn’t use the slogan “reduce legal immigration.” President Trump had little success in reducing the number of illegal immigrants in the United States and cutting the number of unlawful border crossers, but he did reduce legal immigration. Still, the border chaos was the political motivation for his elevation of the immigration issue.

I’ve long written about how perceptions of chaos along the border and the lack of government control over immigration reduce political support for legal immigration. It’s natural for many people to see the chaos of millions of apprehensions of illegal immigrants along the border and to thus support more border enforcement, higher walls, and hiring more Border Patrol agents in response. We’ve pointed out that more legal immigration, even temporary guest worker visas, reduces illegal immigration by creating a legal alternative that drives some would-be illegal border crossers into the visa system. Unfortunately, the legal visa rules remain complex and the regulatory barriers are frequently worse.

Support for liberalized legal immigration reduces when there is a perception of chaos caused by illegal immigration. This creates a policy Catch-22 for American supporters of liberalized immigration. Chaos and illegal immigration are caused by government restrictions on legal immigration, but it is extraordinarily difficult for policymakers to support liberalization in the face of so much immigration-related chaos. Thus, U.S. immigration restrictions produce chaos and the liberalizations required to reduce that chaos are politically difficult or impossible so long as the chaos remains.

In the 1950s, harsh immigration enforcement combined with liberalized temporary guest worker visas reduced the number of illegal immigrants by 90 percent and the number of border crossers by 97 percent in just a few years. Then-director of the Immigration and Naturalization Service Joseph Swing described the Eisenhower Administration’s efforts as an exchange of illegal immigrants for legal migrants. He said, “If there is any employer who cannot get legal labor all he has to do is let either the Department of Labor or Immigration know and we will see that he gets it.” A Border Patrol official warned that if the guest worker visa program was ever “repealed or a restriction placed on the number of braceros [guest workers] allowed to enter the United States, we can look forward to a large increase in the number of illegal alien entrants into the United States.” That is exactly what happened when that guest worker visa was repealed and immigration chaos at the southern border has been a feature since the mid-1960s.

A recent excellent paper by Dallas Card, Leah Boustan, and others shows that “crime” and “legality” are the most salient rhetorical frames used by policy makers when debating immigration today. “Crime” includes violent and property crimes, terrorism, and smuggling, but also violations of immigration law. Policymakers are very concerned about illegal immigration and that dominates the debate over immigration, as is shown by the recent talk of an “illegal immigrant invasion.”

A straw poll of conservatives at CPAC shows this clearly. The pollsters, knowing their audience’s concerns, lumped the border wall and immigration question together into one (6:07:49). Immigration scholars may object that border security and legal immigration are different, and they’re correct, but they are connected in people’s minds so we can’t separate those issues and convince people to support expanded legal immigration. The Catch-22 of immigration reform is that it is politically extremely difficult to liberalize immigration in the face of so much border chaos and it is extremely difficult or impossible to radically reduce the border chaos without immigration liberalization.

Boosting immigration enforcement without increasing legal immigration may decrease the number of border crossers, but the chaos would be more salient with additional photos, videos, apprehensions, and stories about the chaos. Imagine apprehensions falling by 90 percent but there being more photos of every apprehension, for instance. Furthermore, boosting enforcement is substantially more expensive than increasing the number of visas. In the year 2018, we estimate that additional Border Patrol agents would have resulted in a taxpayer cost of $4,353 per extra apprehension from just the extra government salaries paid and not including the other costs of detaining or removing the illegal immigrant. But a 1 percent increase in additional H‑2 temporary worker visas for Mexicans decreases their number of apprehensions by slightly more than 1 percent at a taxpayers cost of zero.

A concerted immigration enforcement effort combined with a vast liberalization of temporary guest worker visas would dramatically and permanently reduce the border chaos, even to the point where the government could reduce enforcement. More enforcement isn’t necessary from a practical policy perspective, but it may be from a political perspective. At least, a big show of enforcement would be necessary. This is the assumption baked into every immigration enforcement reform effort over the last 20 years. It’s one of the possible ways to resolve the Catch-22 of immigration reform.

America’s war on opioid prescribing continues unabated, predicated on the false assumption that opioid prescribing over the years caused a surge in addiction rates which in turn fueled a rise in the non-medical use of opioids and an increase overdose deaths. A new study reported on August 4 in Frontiers in Pain Research used linear regression models to compare overdose deaths and prescription volume from 1999–2019 and found:

The analyses revealed that the direct correlations (i.e., significant, positive slopes) reported by the CDC based on data from 1999 to 2010 no longer exist. Based on data from 2010 to 2019, the relationships either have reversed (i.e., significant, negative slopes) or are non-existent (i.e., no significant model).

The authors concluded:

The guideline, guideline update, CDC’s public, medical profession, and intergovernmental communications should be corrected/​updated to state no direct correlation has existed between POS [prescription opioid sales] to OTA [opioid treatment admissions], POD [prescription opioid deaths], AOD [any opioid deaths], and TOD [total overdose deaths] since 2010. Individualized patient care and public health policy should be amended accordingly.

Josh Bloom, Director of Chemical and Pharmaceutical Science at the American Council on Science and Health gives a good summary of the study here. This new study adds another metric—overdose deaths—to metrics about which I wrote with co-authors in the Journal of Pain Research, and Jeffrey Miron and colleagues wrote about in a Cato Policy Analysis: there is no correlation between prescription rates and non-medical use or addiction to opioids. On June 7, 2022 I argued this and other points at a Soho Forum debate in New York City. I pointed to data from the National Survey on Drug Use and Health showing the addiction rate among persons aged 18 and above has been essentially unchanged while prescription rates were first surging to record highs and then, after 2012, dropped 60 percent.

During the late 1990s and early 2000s, as opioid prescribing increased, prescription pain pills were more easy to divert into the black market for non-medical users. When policymakers decided that opioid prescribing was the cause of the overdose crisis, federal and state policymakers took measures to reduce opioid prescribing. Furthermore, the Drug Enforcement Administration placed quotas on the manufacturing of all types of prescription opioids, ratcheting those quotas downward year after year. By 2019, the reduction in the prescribing rate led the DEA to announce that less than one percent of controlled substances distributed to retail purchasers were getting diverted.

Of course, we all know what happened: non-medical users migrated to more dangerous drugs supplied by the black market—first to heroin, then to heroin and fentanyl, and now roughly 90 percent of opioid-related overdose deaths involve fentanyl. Along with that migration came a surge in overdose deaths—directly resulting from non-medical users switching from pharmaceutical-grade diverted prescription pain pills (of known purity and dosage) to more potent, impure, and deadly opioids made and sold in the black market. Meanwhile, patients whose pain had been well-controlled with long-term opioid therapy were abruptly tapered or cut off from pain meds by doctors afraid they may get a visit from law enforcement or lose their license for “overprescribing” pain meds. Many patients become “pain refugees,” some of whom seek relief in the dangerous black market or sometimes turn to violence or suicide. Similarly, many patients are undertreated for acute pain.

As researchers at the University of Pittsburgh reported in 2018, the overdose rate has been rising exponentially since the late 1970s, with different drugs dominating at different points in time. The Joint Economic Committee of Congress reported that overdose deaths began their rise as far back as 1959.

The overdose crisis was never about doctors prescribing opioids to their patients in pain. It has always been the result of a growing number of non-medical drug users accessing drugs in a black market providing evermore potent and deadly drugs. In short, the overdose crisis is really a prohibition crisis. Alas, lawmakers and policymakers remain in state of denial.

In a sudden move, the U.S. Department of the Treasury declared Tornado Cash as a sanctioned entity on Monday—barring all Americans from using the service.

The move comes on the one-year anniversary of Congress’s assault on cryptocurrency via the Infrastructure Investment and Jobs Act. Across the board, critics expressed frustration at the time over how the cryptocurrency provisions in the law were far too broad—effectively labeling miners, software developers, and the like in the same category as exchange platforms. In doing so, the law set a de facto ban on legal cryptocurrency mining and exposed over 60 million Americans to new felony crimes.

However, with this latest move, it seems that the Treasury is keen on repeating Congress’s mistake with a new sweeping decision that has exposed Americans to another new felony crime. With little to no notice, the Treasury announced that Tornado Cash and a host of cryptocurrency wallet addresses were added to the Office of Foreign Assets Control’s (OFAC’s) list of specially designated nationals (SDN). To interact with the service or the wallets is now in direct violation of U.S. sanctions laws and could lead to upwards of 20 years in prison.

When Nikhilesh De reported the news early on Monday morning, he was correct to note that Tornado Cash has been a tool used by hacking groups. Its core function is to obfuscate the source of funds and is thus attractive for criminals for obvious reasons, but, this feature is not attractive for criminals alone. Financial privacy is something that is valued far beyond any one group. And as De later noted, “What makes the new sanction interesting is that Tornado Cash also has a significant amount of value that flows through it but is not associated with any illicit activities.”

Yet the Treasury’s decision is not overly sweeping solely because of the innocent bystanders that have been affected in its wake. The Treasury also appears to have failed to recognize the nature of a decentralized software protocol, which is an important consideration for regulators and policymakers alike when attempting to regulate cryptocurrency and blockchain projects. The developers of Tornado Cash made the code open source, the service non-custodial, and the governance subject to a decentralized autonomous organization (DAO). So while the Treasury may wish to really target just the bad actors, targeting software is a poor proxy for doing so. Just how poor of a proxy it is was put on display when U.S. Secretary of State Antony Blinken tweeted (and then deleted) the claim that Tornado Cash was a North Korean state-sponsored hacking group.

While someone in the State Department clearly recognized that Blinken’s tweet went too far, the administration appears unwilling to craft cryptocurrency policies that simply go directly after criminals, despite the ability to do so being readily available. For instance, a senior Treasury official said, “We do believe that this action will send a really critical message to the private sector about the risks associated with [services like Tornado Cash].” And it certainly has sent a message: Google, Github, Circle, and likely a host of others have opted to cut ties with Tornado Cash. However, it’s unlikely they did so because of the alleged criminal risks that Treasury had in mind. Rather, it seems they recognized the real risk now is engaging in an activity that the Treasury has suddenly deemed illegal.

Just as it makes no sense to ban air travel to stop criminals from crossing borders, it makes no sense to ban the technology behind Tornado Cash. If Treasury is concerned about criminals, it should go after criminals.

It was supposed to be a debacle.

As the Second World War drew to a close, the nation’s leading economists feared that, once the armed services demobilized, at least 8 million men and women, perhaps many more, would be unemployed. That meant an unemployment rate of 12 percent—almost as high as the rate before Hitler raided the Low Countries, setting off the “wartime boom.” If their forecasts were reliable, they meant that the postwar economy could end up being no closer to recovery than the prewar economy had been.

A Worst-Case Scenario

Of course, such dire predictions weren’t unconditional. Most of those economists had a “worst case” scenario in mind—one in which, in Alvin Hansen’s words (1943, p. 5), the government chose to “just disband the Army, close down the munitions factories, stop building ships, and remove all economic controls,” without compensating for these steps by substantially increasing its spending on public works and other employment-generating programs.

But this “worst case” scenario is just what played out in fact. The government did “just disband the Army”: thanks to Operation Magic Carpet, despite the large number of military personal serving overseas, within ten months after V‑J day more than 8 million of the 12.2 million military personnel on active duty that June had been discharged. By mid 1947, only 1.5 million—a million fewer than the military had planned on—were still enlisted.

And the government did close down munitions factories and other facilities that had been engaged in war production, many of which were established solely for that purpose.[1] Some ended up being demolished; others were deactivated and put on standby for the next war. The rest were cleared of wartime inventory in anticipation of their conversion to civilian uses. The government also stopped building ships: as soon as the war was over, the Navy terminated or canceled most of its ship construction contracts, and most of the shipyards established under the government’s Emergency Shipbuilding Program, including the seven large Kaiser shipyards in Richmond, California, and the Pacific Northwest, shut down.

Finally, the government quickly dispensed with most wartime price controls: those on fuels and processed foods had already been removed before Japan formally surrendered, and by the end of 1945 the Office of Price Administration (OPA) had lifted most others.[2]

As for government spending and deficits, these proved to be especially disappointing. About half of 1945 GDP had been war production, paid for by the government. Between then and 1947, defense-related federal spending fell by more than 75 percent, while (as the blue line in the FRED chart below shows) the share of GDP consisting of current federal expenditures fell by one half, from about 32 percent to about 16 percent. Finally, that year’s wartime deficit of $32 billion, instead of being replaced by a peacetime deficit of at least a third of that amount, as Keynesian economists had recommended, became a peacetime surplus of $2.5 billion (green line, right scale). These cutbacks were considerably larger than pessimistic forecasts allowed for.

The Shoe that Didn’t Drop

Yet, despite all this, there was no mass unemployment. Not according to official statistics, at least. As the next chart shows, far from returning to prewar levels, the unemployment rate never rose above 4.26 percent until 1949, and was generally between 3.5 and 4 percent—numbers comparable to, if not below, those for the Roaring ’20s. The total number of unemployed persons peaked at 2.7 million, not quite half of whom were recently returned veterans, in March 1926, and was generally closer to 2 million. These levels were well within wartime forecasts of postwar “frictional” unemployment, meaning short-term unemployment of workers seeking (and finding) jobs, rather than unemployment resulting from a lack of job openings. As such they were held to be consistent with “full” employment. Hansen, for example, had said in 1943 that, were full employment achieved after the war, between 2 and 3 million persons might still be searching for jobs at any time.

In fact, the unemployed seldom stayed so for long. In particular, the vast majority of veterans who chose to get jobs got them promptly (Modell, 1989, p. 206). That relatively few were on the market at any time during the process of demobilization was all the more remarkable in light of both the huge numbers pouring in and the fact that the 1944 Serviceman’s Readjustment (“G.I.”) Bill lowered the costs of protracted job searches by providing ex-servicemen with 52 weeks of employment compensation at the enhanced rate of $20 per week.

For contemporary testimony regarding the immediate postwar employment story, we can do no better than turn to the document that was among the first substantive fruits of the 1946 Employment Act, namely, the Economic Report of the President, published on January 8, 1947. “During 1946,” the report states,

civilian employment approached 58 million. This was the highest civilian employment this Nation has ever known—10 million more than in 1940 and several million higher than the wartime peak. If we include the military services, total employment exceeded 60 million. Unemployment, on the other hand, remained low throughout the year. At the present time it is estimated at about 2 million actively seeking work. This is probably close to the minimum unavoidable in a free economy of great mobility such as ours.

Thus, at the end of 1946, less than a year and a half after VJ-day, more than 10 million demobilized veterans and other millions of wartime workers have found employment in the swiftest and most gigantic change-over that any nation has ever made from war to peace. At its peak during 1946 aggregate employment was substantially in accord with the objectives stated by the Congress in the Employment Act.

That is, the level of employment was in accord with the objectives of that act, even though the act’s original sponsors had been certain it wouldn’t be without large peacetime deficits.

So Many Guns; So Little Butter

But employment is, ultimately, not an end in itself, but a means for procuring life’s necessities, if not its luxuries; and averting depression, as that concept is generally defined, means avoiding not just unemployment but a substantial decline in the real output of goods and services. And herein lies a mystery, for if official postwar employment numbers are ones Truman could flaunt, those for real output, seen in the following chart, tell a very different story: between 1945 and 1946, according to the most recent Commerce Department data, real GDP fell by almost a fifth, implying, in Bob Higg’s (1999, p. 602) words, “by far the largest annual fall ever in U. S. economic history, exceeding even that of the worst year (1932) of the Great Contraction.” The monthly Industrial Production index paints an even starker picture: it was 34 percent lower in February 1946 than it had been a year before—a drop exceeding that of the entire “Great Contraction.”

Such an extreme drop in output hardly seems consistent with an economy at or near “full” employment, even allowing for a postwar decline in working hours, a temporary decline in the size of the labor force, and the “strike wave” of 1945–46. So which numbers are telling the truth? According to Higgs and several other economic historians, it’s the output numbers that bear false witness. And their arguments are compelling.

The many shortcomings of those numbers start with the BEA’s occasional revisions of its real GDP data. Every now and then, Richard Vedder and Lowell Gallaway (1991, pp. 11–12) explain, the Commerce Department’s Bureau of Economic Analysis updates the way it calculates the deflator it uses to convert nominal GNP data into constant-dollar equivalents. Since 1958, when the BEA came up with its first estimates of postwar real GNP, each of these revisions has increased the weight assigned to consumer purchases relative to government purchases in calculating the deflator, with the result that each has made the 1946 downturn look worse than the last.

If, instead of consulting the latest (1990) real GNP numbers, one consults those from 1958, one finds that, instead of losing a fifth of its value between 1945 and 1946, real GNP declines by just 7.8 percent! According to Vedder and Gallaway, and also to Hugh Rockoff (2000, pp. 86–87), the older estimate is probably closer to the truth. It’s also likely to be closer to what Edwin Nourse, Truman’s CEA chair, had in mind when he wrote the 1947 Economic Report.

Several scholars have come up with independent measures of inflation during the 1940s, all of which tend to revise the official wartime figures upward, while revising the postwar ones downward. As Milton Friedman and Anna Schwartz explain (1982, p. 101), the government’s resort to price controls during the war, and its lifting of them afterwards, makes such revisions essential. Such controls, they say,

meant that price increases took indirect and concealed forms not recorded in the indexes. The large rise in price indexes when price control was repealed in 1946 consisted largely of an unveiling of the earlier concealed increases. Hence the recorded price indexes understate the price rise during the war and overstate the price rise after the war. This defect is reflected in the national income estimates in an overestimate of the wartime rise in income in constant prices, and hence an underestimate of the wartime rise in the implicit price index.

While the price indexes Simon Kuznets prepared for the Commerce Department after the war had prices rising by 15.6 percent between 1942 and 1945, and by about 20 percent between 1945 and 1947, Friedman and Schwartz’s revised indexes have prices rising by 27 percent during war, and by just 9 percent afterwards, implying a correspondingly reduced estimate of the depth of the postwar slump. Using somewhat different methods, Vedder and Galloway (1991, p. 10) arrive at an estimate of inflation during the immediate postwar years somewhat below Friedman and Schwartz’s, and conclude, based on it, that real GNP only fell “by a bit over seven percent” between 1945 and 1946.

Yet even such revisions, substantial as they are, fail to address the most serious shortcoming of wartime output measures, namely, their tendency to overstate, and perhaps overstate dramatically, both the nominal value of war material and the extent to which it should be considered part of national output at all. As Higgs reports (1992, pp. 45–7), Kuznets, whose wartime and postwar deflators have been called into question by Friedman and Schwartz and others, had his own grave misgivings about the Commerce Department’s valuation of wartime output. “A major war,” he observed (ibid., p. 45), “magnifies” the usual challenges involved in estimating national income, both because war materiel isn’t sold at anything resembling “market” prices, and because wars blur “the distinction between intermediate and final products.”

In light of such considerations, Kuznets came up with several unofficial, alternative measures of wartime and postwar GNP, all of which implied both a less-impressive wartime boom, or none at all, and no postwar slump. In particular, Higgs reports (ibid., p. 46), “whereas the Commerce Department’s latest estimate of real GNP drops precipitously in 1946 and remains at that low level for the rest of the decade,” Kuznets’s revised “wartime” GNP estimate “increases in 1946 by about 8 percent, then rises slightly higher during the next three years.” Another Kuznet estimate—what he called “peacetime” GNP—went still further, by valuing goods produced for military use at their nonmilitary surplus values only. In the table below, reproduced from Higg’s article, Kuznets’s “peacetime” GNP measure, labeled “Variant III,” is compared with various others. According to it, real output rose by almost 18 percent between 1945 and 1947!

More recently, Hugh Rockoff (2020, p. 38) has created a chart comparing real net national product (GNP minus depreciation) estimates by Kuznets, the Commerce Department’s Bureau of Economic Analysis (“NIPA”—for “National Income and Product Accounts”), and others, including Kuznet’s “peacetime” estimates, for both the 1930s and 1940s. The chart shows especially clearly just how unsafe it is to conclude, from the NIPA estimates, that, despite low unemployment, the U.S. economy suffered a severe slump just after World War II.

The Market’s Verdict

While the various measures of wartime and postwar output suggest that there may not have been any substantial postwar contraction, they don’t completely rule out that possibility. There is, fortunately, other evidence one can look at to decide whether the U.S. economy was depressed in 1946 or not; and it all tells the same story, to wit: that if there was a sharp postwar slump, nobody seemed to notice.

Consider the stock market. As a rule, recessions are bad for stock prices, and severe recessions or depressions have always been bad for them. During the 1920–1921, 1929–1933, 1937–1938, and 2007–9 contractions, for example, the S&P common stock index fell by 24, 79, 32, and 40 percent, respectively. Yet during the 1945 contraction it rose 18 percent. Writing in 1983, when he was teaching at Rutgers, former Bureau of Labor Statistics Commissioner Geoffrey Moore (1983, p. 147) observed that, until then, there had been only two occasions since 1873 when a business recession wasn’t associated with any decline in stock prices. One was during the very mild—and all-but-forgotten—recession of 1926–1927, which the bull market completely ignored. The other was in 1945.

Nor have things changed since Moore wrote, as is plain from the next chart (courtesy of Macrotrends), in which the orange line marks the ’45 downturn. For the whole postwar period (as of early August 2022), the average S&P 500 drop during contractions has been about 29 percent, while the median drop has been about 24 percent. In short, if there was a severe downturn during 1945, the stock market’s response to it was sui generis.

Much the same may be said about the bond market’s reaction, allowing, of course, for the fact that recessions tend to raise rather than lower bond prices, while lowering bond yields. Because yields on short-term marketable securities, such as Treasury bills, tend to be most sensitive to changes in overall business conditions, these should be expected to decline most. In fact, Treasury bill yields fell during all save two of the contractions between 1919 and 1970. The exceptions were 1920–1921 and, once again, 1945 (Moore, p. 153, Table 9–4).

A final source of clues concerning the performance of the U.S. economy immediately after the war consists of contemporary magazines and newspapers, which one can search through for references to a major slump. But one will do so in vain, because there aren’t any.

****

To conclude, there was no “Great Depression” of 1945–1946. Instead of being a mere intermission in a two-act Great Depression tragedy, the war left the depression behind, ushering in a period of remarkable prosperity both in the United States and abroad that was to continue, with only relatively minor interruptions, until the 1970s. And it appeared to do so with very little help from the federal government.

The question is, how?

Continue Reading The New Deal and Recovery:

• Intro
• Part 1: The Record
• Part 2: Inventing the New Deal
• Part 3: The Fiscal Stimulus Myth
• Part 4: FDR’s Fed
• Part 5: The Banking Crises
• Part 6: The National Banking Holiday
• Part 7: FDR and Gold
• Part 8: The NRA
• Part 8 (Supplement): The Brookings Report
• Part 9: The AAA
• Part 10: The Roosevelt Recession
• Part 11: The Roosevelt Recession, Continued
• Part 12: Fear Itself
• Part 13: Fear Itself, Continued
• Part 14: Fear Itself, Concluded
• Part 15: The Keynesian Myth
• Part 16: The Keynesian Myth, Continued
• Part 17: The Keynesian Myth, Concluded
• Part 18: The Recovery, So Far
• Part 19: War, and Peace
• Part 20: The Phantom Depression

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[1] According to Jack Stokes Ballard (1983, p. 124), aircraft, munitions, and shipbuilding firms alone employed 5.6 million workers in mid-1945, compared to just 700,000 in 1939. After the war, production in each of these industries shrank to levels that weren’t substantially higher than those before the war.

[2] After 1945 the story gets more complicated. The OPA was scheduled to shut down at the end of June, 1946. President Truman vetoed a bill that would have kept a much-weakened version of it going for another year, but only because he hoped for one that wouldn’t weaken it as much. Instead, the OPA was briefly allowed to expire, with the result that prices that had still been controlled, including those on meat, shot up rapidly. In July, another “weak” OPA bill secured Truman’s signature, allowing controls on meat prices to be reinstated. But those led to such severe shortages and consumer backlash that Truman had them lifted in October—which was not quickly enough to keep their consequences from costing the Democrats dearly in the midterms. Finally, on November 9th, 1946, Truman shut down the OPA for good, claiming that continued controls “would do the nation’s economy more harm than good.”

So much for the strictly American part of the story. Alas, what happened in the U.S. was a comedy compared to concurrent happenings in Europe and elsewhere, where the war and its aftermath led to far more severe food shortages, and U.S. authorities’ mishandling of price controls, among other blunders, impaired their capacity to stave off famine. Concerning this see Barton Bernstein (1964).

[Cross-posted from Alt‑M.org]

For decades, Congress has done little more than complicate the tax code which, to this day, punishes success in a variety of ways. During this time, many politicians have consistently demagogued corporations, treating them as little more than a new source of tax revenue.

The Inflation Reduction Act of 2022 continues this trend and ignores the fact that corporations are nothing more than legal associations that represent human beings, all of whom potentially represent employees, consumers, and shareholders. Raise taxes on “corporations” and people will pay–or pay for–higher taxes.

A sensible framework would acknowledge this fact and only collect taxes from individuals (once) when they earn or consume income. But Congress refuses to implement that sort of system.

Based on the Inflation Reduction Act, Americans will soon have to deal with an even more complex tax code, one that institutes a corporate minimum tax tied to financial statement income. This provision may seem obscure, but as it currently stands, financial statement income and taxable income are very different. So different, in fact, that progressives have long used financial statement figures to wrongly assert that corporations pay very low tax rates.

The Inflation Reduction Act also institutes a brand-new tax on stock buybacks (see section 10201), one of the latest progressive pet peeves. During the last few years, members of Congress have criticized stock repurchases as devices for manipulating stock prices and for unfairly rewarding executives and large shareholders. The Securities and Exchange Commission has even proposed new disclosure requirements for buybacks, ostensibly to “modernize and improve disclosure about repurchases of an issuer’s equity securities.”

One problem with this new tax, though it appears relatively small, is that it adds a layer of taxation even though stock buybacks already trigger capital gains taxes, as they should under the current tax code. Beyond this criticism, the whole idea fundamentally ignores that there is no evidence of these buybacks being used to illegally manipulate prices. It also ignores that “the value of buybacks relative to market capitalization has remained relatively constant over the past decade.”

The truth is stock repurchases represent management’s decision to purchase the company’s own shares in lieu of paying dividends or investing cash in something else.

This decision is often driven by (among other reasons) a lack of profitable investment opportunities for the firm, the desire to alter the firm’s capital structure, or even the choice to implement new tax strategies (thanks partly to an overly complex tax code). Evidence also suggests that some managers use buybacks to signal their views on whether the company’s stock price is too low relative to what they believe the firm is worth.

Adding this new tax is not going to hurt “big corporations” because those are just legal names. It will, however, hurt customers, employers, and investors. Managers will distribute less cash to private investors, and innovation will suffer as members of Congress substitute their political judgement for private individuals’ investment decisions.

It is good that the tax is relatively small, but that fact is hardly comforting given the history of the income tax in the United States. It’s also unclear exactly how much this “small” tax might end up distorting corporate managers’ decisions in conjunction with the new corporate minimum tax and the countless other “small” provisions in tax code.

What is clear, though, is that members of Congress should not be in the business of punishing people when they make voluntary financial decisions that members emotionally don’t like.