Does Government Intervention Retard or Foster Economic Growth?: The Case of Postwar Prosperity

The period beginning shortly after World War II’s end in 1945 through 1973 is generally regarded as the apex of American prosperity. This is the impression given by the classical data, in particular the economic-growth time series of the Bureau of Economic Analysis, Gross Domestic Product. From the trough in GDP in 1947 through the peak of 1973, economic growth per annum was 4.03 percent per year. This rate exceeded all subsequent trough-to-peak periods of at least ten years in length. The closest is 1982–2000, whose per annum growth rate was 3.73 percent. The trough of 1982 was, however, in real-economy terms, considerably lower than that of 1947. In 1982, the ex-government economy had shrunken by 6.3 percent over the previous three years; in 1947, the real economy had expanded by 39 percent over the previous two years. Thus the base of private economic activity was comparatively higher in 1947 than in 1982, even as the aggregate growth rate over the two multidecade periods that ensued was greater in the former case. In the contemporary era, 1947–73 was clearly the dominant run of GDP growth.¹

Further canonical data establish the incomparable nature of the economic performance of the postwar era. Median family income increased in inflation-adjusted terms by 104 percent from 1947 to 1973, easily setting a standard. The only other notable run in the statistic was when it grew by 25 percent from 1983 to 1999. The national unemployment rate averaged slightly under 5 percent from the beginning of that measurement in 1948 through 1973, while inflation over that quarter century was often near or less than 2 percent per year, currently the Federal Reserve’s benchmark of price stability. Jason Furman, President Barack Obama’s chair of the Council of Economic Advisers, reflected a common view in the fall of 2013, when he spoke repeatedly in prepared remarks of “that golden age from 1948 to 1973.”²

Yet the GDP time series also reveals segmentation in the 1945–73 period. Growth was strong, then moderate if not slow, then strong, then moderate. In the first subperiod, from the trough of 1947 through the peak of 1953, GDP averaged a 5.3 percent increase per year. Over the eight years of the Dwight D. Eisenhower presidency, 1953–60 inclusive, growth was less than half as much, 2.5 percent per annum. From 1961 to 1969, growth was double that of the previous subperiod, at 5 percent per annum. It gave way to a 3.6 percent rate to the 1973 peak. (The segmentation is slightly milder over the first two sub-periods concerning ex-government growth, which was 3.6 percent per annum from 1947 to 1953 and 2.5 percent from 1953 to 1961. From 1961 to 1973, the public and private sectors followed a similar growth path.)

As for the frequency of recessions, from 1949 to 1960, four occurred, with average amount of time spent in recession, from the 1948 peak to the 1961 trough, 27 percent. Over the 106–month span of February 1961 to December 1969, no recessions occurred, the longest such period up to that time in the record keeping of the National Bureau of Economic Research. As for the severity of the 1950s-era recessions, that of 1957–58 contained the worst two-quarterly drop in GDP in the entire time series, inclusive of the latter-day Great Recession. GDP fell at an annual rate of 7 percent over the half-year beginning in October 1957, edging out the 6.8 percent annual-rate fall in the half-year beginning in October 2008. Furthermore, the growth of the 1961–69 subperiod was consistently high. From the last three quarters of 1961 (the exit of the trough of the 1960–61 recession) through first quarter of 1969, per annum growth was below 4.4 percent in one year, 1967. That year’s growth of 2.7 percent was above the average growth of the Eisenhower years.³

“Postwar prosperity” (a term probably...