A Defense-Adjusted National Accounting of the US Economy and its Implications, 1791-2023

Vincent Geloso, Chandler S. Reilly (2025). Review of Austrian Economics

Journal (DOI) · Markdown

Abstract

This paper revisits the assessment of living standards in the United States from its founding to the present, challenging the conventional portrayal of economic well-being during wartime periods. Reflecting multiple criticisms made of the quality of national accounts which include defense spending during times of both peace and war, we employ the methodological framework established by Higgs, R. (*The Journal of Economic History 52*(1), 41–60 1992) and extended by Geloso, V. and Pender, C. (*Social Science Quarterly 104*(4), 377–394 2023) to correct national accounts by subtracting military expenditures from GDP and GNP data. This rectifies the overstatement of living standards attributed to defense spending. Our analysis uses comprehensive data from the *Historical Statistics of the United States* and the Measuring Worth database, adjusting for price controls during World Wars I and II, the Korean War, and the Vietnam War using a corrected price deflator based on a regression model of economic indicators. The study finds that traditional measures significantly overstate living standards during the Civil War, World War I, and World War II. Post-World War II analysis reveals a persistent overestimation of living standards, particularly pronounced during the Vietnam War years. More importantly, our results provide nuanced insights into certain stylized facts of trends in American improvements of living standards (notably inequality and the Great Depression).

1 Introduction

Macroeconomic aggregates can reveal considerable information. They can also conceal more than reveal. The process of aggregation (i.e., the assumptions used) determines whether there is more revealing than concealing at play (Hayek 1931, p. 277). When more concealment occurs, incomplete or false conclusions are reached. Nowhere is this more applicable than with respect to national accounts. When Gross Domestic Product (GDP) is estimated, it is done by assuming that prices observed are a reliable indicator of the value of goods exchanged such that the obtained number by summing the value of all goods and services exchanged becomes a reliable indicator of economic value created by exchange. This assumption is especially relevant when valuing government services for which no market exists, when prices observed under coercion (such as a situation where an individual is forced to sell a good below its market value) or when price controls are in place. These factors diminish the usefulness of GDP as a measure for assessing well-being in such contexts. Consequently, this can lead to an overestimation of the government’s role in driving economic growth. If these issues are large enough, they can conceal different trends and changes in living standards that GDP should capture. These points have been frequently emphasized, but not exclusively, by scholars inside the Austrian school of economics (Kuznets, 1945; Forte and Buchanan, 1961; Nordhaus and Tobin, 1972; Spindler, 1982; Batemarco, 1987; Boulding, 1993; Rothbard, 2004).

In this paper, we provide three partial corrections of GDP measures from 1791 to 2023 for the issues raised above: price deflators being affected under price controls during wartime; the role of military expenditures in assessing living standards and the role of depreciation of the capital stock in wartime. We call our measure “Defense-Adjusted GDP” since the adjustments are largely related to the role of defense spending during times of peace and war. More importantly, we argue that these corrections are those that are least controversial since there is a wide degree of agreement regarding their relevance.¹ We are simply the first to compile all of these elements into a single article spanning more than two centuries of economic data. Yet, as we demonstrate, our corrections yield meaningfully different interpretations of the evolution of living standards in America since 1790. The most significant differences arise from the adjustment to remove military spending. While this adjustment has little impact from 1790 to 1914 – given the relatively small size of government and the military, except during the Civil War and its immediate aftermath — it fundamentally alters the portrayal of much of the 20th century. As a result, the era from 1865 to 1910 emerges as one of the fastest periods of growth relative to 1900 to 1945. In fact, after applying the corrections, the period from 1910 to 1945 shows no net growth at all. Additionally, the postwar period from 1945 to 1975 is modestly revised downward, such that it no longer stands as the fastest growth episode in American history. Instead, it is rivaled – and possibly even surpassed – by the 1867 to 1907 period.

These adjustments also significantly alter other key aspects of the narrative surrounding American economic growth. Most notably, the revised timing can be connected to broader debates, such as the evolution of income inequality in America. As we discuss at length in the conclusion, the period between the 1940s and 1970s commonly referred to as the “great leveling” marks the arrival to a low plateau in U.S. inequality (Lindert and Williamson, 2017). When inequality is calculated using the uncorrected measure of GDP, especially in the 1940s, there are rising living standards and falling inequality suggesting that the poor were becoming richer. However, once our corrections to living standards are made, we observe falling living standards and falling inequality. The switch is important because it suggests that everyone became poorer during this period. Although inequality was improving, it was only possible through falling living standards. This rejoins a rising literature that contests key aspects of the “great leveling” (Geloso et al., 2022; Fitzsimmons et al., 2025; Geloso and Toda, 2024). It underscores how distortions in national accounts caused by war can cascade into other critical discussions, disrupting interpretations of pivotal economic and social trends.

Our article is divided as follows. Section 2 reviews the discussion on the quality of national accounts in war and when military expenditures are included more generally. Section 3 explains the modification we did to create the War-Adjusted series. Section 4 presents and discusses our results. Section 5 discusses and concludes.

2 National Accounts Quality and Military Expenditures

The primary goal of creating national accounts is to measure and track a country’s economic activity. The changes in economic activity are meant to be synonymous with changes in well-being. As such, indicators such as GDP serve as key indicators of living standards. There is a litany of criticisms raised at national accounts that are frequently discussed (e.g., valuation of non-market output – see Wagman and Folbre (1996)) and debated (e.g., how great is the synonymity between living standards and measures of economic growth obtained from GDP – see, Pritchett (2022)). However, less frequently discussed today are the issues of the valuation of government services, the effect of price controls, and depreciation in wartime. All of these, we argue, lead us to overestimate the contribution of government to long-run economic growth.

2.1 Valuation of Government Services

The issue of why war-related government expenses negatively impacts the quality of national accounts is part of the broader question of how to value government services. This question has been extensively, but not exclusively, examined by scholars within the Austrian economic tradition when they debated how to value government services. Rothbard (2004) – a prominent figure in the Austrian school of economics – offered multiple criticisms against national accounts, many of which are beyond the scope of this paper.² However, one relevant criticism pertains to the treatment of government expenditures. Rothbard questioned how such expenditures contribute to the “product of society” (Rothbard 2004, p. 1292).³ Normally, the assumption is that the cost of the services bought by government is the contribution to the national product. This is what drew Rothbard’s ire – he pointed out that “governmental services are not tested on the free market,” which meant there was “no possible way to measure government’s alleged ’productive contribution’” (Rothbard 2004, p. 1293). He claimed that “monopolized and inefficiently supplied” services are worth less than their cost (Rothbard 2004, p. 1293). Including government expenditures in the national product, Rothbard argues, overstates its true value. This led him to develop the concept of “net private product” (NPP), which excluded income derived from government enterprises and the salaries of government officials. From this, he calculated the “private product remaining” (PPR), which further deducted what he referred to as the other “government depredations.”

Such corrections have the potential to alter key facts about the evolution of living standards in America. For example, (Rothbard 1972, pp. 224, 297-304) attempted to calculate his alternative estimator in his work on the Great Depression and found that there was a steeper contraction during the Depression with PPR than GNP.⁴ Batemarco (1987) attempted to compute the real PPR for the period from 1947 to 1983 and found that it had increased by a factor of 2.38 as opposed to 3.26 for real GNP. On a per capita basis, this means that GNP increased by 2.05% per year over the period compared to 1.19% for PPR. Higgs (2013) made a similar attempt for the period from 2000 to 2012 and found that there was virtually no growth over the period compared with some growth with more conventional figures. Such a wholesale rejection of government contributions is likely too extreme for most economists.⁵ Even if one accepts that some government services, whether public or private goods, are intermediate goods (e.g., lighthouses, roads, or weather information services),⁶ it is difficult to argue that government provides no value through the production of certain final goods and services (e.g., postal services, alcohol retail stores). Rothbard’s approach is therefore often criticized as discarding too much.⁷

While Rothbard’s NPP and PPR frameworks provide a provocative critique of traditional national accounting, they remain outside the mainstream due to their exclusion of all government output, regardless of its potential value to society.

There is, however, broad agreement that certain government services are not properly priced.⁸ This issue is particularly relevant in the case of military expenditures during wartime, where proper valuation is even more challenging. In peacetime, production may be more directly linked to consumer welfare; however, when the products being made are bullets intended for enemy soldiers, the connection to domestic welfare becomes less clear. This is why many prominent economists outside of the Austrian school of economics argue in favor of, at least, deducting military outlays from national accounts to obtain a measure of living standards. For example, Kenneth Boulding⁹ created a net civilian product (NCP) which was equal to GNP minus capital depreciation and government expenditures on defense. This, he stated, provided “at least a rough measure of the ability of the average person to have a real income in terms of civilian goods” (Boulding 1993, p. 27). Boulding further believed that the “product of the war industry is equal to its cost” was a “dubious assumption” (Boulding 1993, p. 27). Four Nobel laureates argued similarly. James Buchanan, alongside Francesco Forte, argued that it is better “to exclude all valuation of government produce that is not directly priced” (Forte and Buchanan 1961, p. 116) – by which they meant that they could not observe market prices. This proposition applies easily to defense spending. James Tobin and William Nordhaus (Nordhaus and Tobin, 1972) went further and claimed “defense expenditures have no direct value in household consumption” as “no reasonable nation purchases because its services are desired per se” (p. 28).¹⁰ Last but certainly not least, Simon Kuznets dedicated an entire volume in 1945 to addressing the problems of wartime national accounting, advocating for the removal of at least some components related to national defense (Kuznets, 1945).¹¹

However, even this modest correction to deduct military outlays, which is more widely accepted (though not frequently applied),¹² still yields important differences in terms of the evolution of living standards. The best example of this application is provided by Higgs (1992), who deducted wartime spending from national accounts and found that there was essentially no growth in America between 1941 and 1945.¹³

A similar finding is noted in the estimates of Boulding (1993). From 1929 to 1960, the trend growth rate is 2.7% per annum. With his alternative NCP, he found 2.3% per annum.¹⁴ Using Canadian data, Geloso and Pender (2023) replicated the approach of Higgs (1992) for the period from 1867 to 1949, adjusting wartime price deflators to account for the effects of price controls. They found that both World Wars were associated with stagnating or declining living standards, in contrast to the rising trends observed in the unadjusted series. The subtraction of defense spending appears to directionally satisfy both the more radical position of treating government spending as funding solely intermediary goods (or as overvalued final ones) and the more moderate position that defense spending poorly reflects people’s living standards. Therefore, this subtraction would be broadly acceptable, and any further adjustments would only strengthen our findings. We argue that there is importance to this first issue in that a positive trend in the level of military spending relative to the economy will generate the impression of rising living standards even though the true increases are more modest. As a result, such a trend would lead us to overestimate the contribution of government to economic growth.

2.2 The Effect of Price Controls on the Reliability of Deflators

Even more widely accepted is the role of price controls during wartime. When price ceilings are established, rationing becomes necessary to manage shortages, leading to costs that are not fully captured in the controlled prices. Alternatively (or even concurrently), higher prices emerge on black markets, which are harder to observe and integrate into “official data.” These distortions compromise the accuracy of price deflators used to convert nominal figures into real ones, affecting economic analysis and policy decisions (Barro, 1978, 1981; Evans, 1982; Rockoff, 2004; Geloso and Pender, 2023). It is difficult to create “actual” price deflators that correct for the issues created by price controls. However, attempts that have been made suggest that it is not a negligible issue. Kuznets (1952) himself proposed alternative wartime price deflators for World War II that showed far more inflation than reported. Vedder and Gallaway (1991) developed an empirical model to predict the GNP price deflator for the period from 1916 to 1941 and then used the evolution of the independent variables to forecast the price deflator from 1942 to 1948.¹⁵ The corrections they made showed that prices increased 46.1% during the war compared to between 13.8% and 29.7% according to official data. Their corrected deflators suggest that GNP was somewhere between 50% and 75% lower than what official figures suggest (Vedder and Gallaway 1991, p. 9).¹⁶

Higgs (1992), in addition to his modifications to remove military outlays, used a price deflator produced by Milton Friedman and Anna Schwartz to correct consumption data and found that there was a decline during the war (-1.7% from 1941 to 1945) (Higgs 1992, p. 52). However, these corrections are generally enacted for a few specific episodes. The problem is that there were price control episodes from 1917 to 1919, 1940 to 1947¹⁷, 1951 to 1953, and 1971 to 1974. Because price controls cause deflators to underestimate inflation, they overestimate real living standards in these key periods. Moreover, because “official” prices catch up once controls are dismantled, periods of improvements can be labeled as periods of deterioration. This means that the price controls might affect the trend of living standards quite significantly. By not making corrections systematically (even if imperfectly) over all periods, we may end up with national account statistics that present biased proxies of living standards and their evolution.

2.3 Wartime Depreciation Rates and Net Civilian Product

The last remaining issue is the role of the depreciation rate assumed on capital. Normally, the depreciation rate assumption does not matter for GDP or GNP since gross fixed capital formation is used to measure investment in capital goods regardless of whether these are for maintenance of the existing stock or additions to the stock. However, for net national product (or net domestic product), the depreciation rate matters since it is deducted from the gross figures. In the process, we obtain a measure of actual production – something that might be more akin to real living standards, which is why some prefer it as a measure of welfare (Boulding, 1993; Brekke, 1994).

Generally, some “aging” function of capital is used and then employed to determine what share of investment has to be deducted as maintenance of existing capital (Giandrea et al., 2022). However, there are some fixed assumptions regarding the intensity of usage of capital. As Higgs (2004) pointed out, stable usage intensity did not occur during World War II. “Standard formulas fail to take into account certain extraordinary conditions during the war” such as the “accelerated depreciation resulting from intensive plant use and scarcity of replacement parts” (Higgs 2004, p. 515). Pointing to longer operation shifts, hours of usage of machinery and the difficulty to replace spare parts¹⁸, Higgs (2004) argues it is clear that there was far more depreciation. The difficulty of finding spare parts was also an issue during World War I (Kester, 1940) suggesting that the issue was present for this period as well.¹⁹ However, we do not have reliable data on the extent of the spare parts problem during World War I that would allow us to arrive at a plausible estimate for adjusted depreciation.

There is a way to empirically document the potential importance of this underestimation for World War II. Higgs (2004) estimated the depreciation allowances on the private capital stock from 1941 to 1945, adjusting these estimates upwards by 10% in 1941 and 20% from 1942 to 1945. This adjustment generated an additional $9.1 billion in depreciation over the course of the war. These adjustments can be integrated with the Net Civilian Product concept developed by Boulding (1993). Since Boulding (1993) used the capital depreciation as is but subtracted national defense, we can arrive at a net product that adjusts for the wartime depreciation and deducts military outlays. This allows us to visualize two of the effects discussed above. When Higgs’s (Higgs, 2004) extra allowances for depreciation are included, Boulding (1993)’s net civilian product drops by 1% to 2% during World War II. The sum of these two corrections placed the net civilian product between 52.1% (in 1944) and 81.4% (in 1941) of the level observed with unadjusted gross national product.

3 Data and Methods

Taken as a whole, the three issues we discussed above do appear to have the strong potential to cause incorrect assessments about the evolution of living standards. They must conceal more than reveal.

To reverse this concealment, we make three modifications to evaluate living standards more robustly since the 1790s. First, we remove government spending on defense for every year in the series. Second, we make corrections for the effects of price controls when they were applied (specific years are detailed below). These first two adjustments allow us to present gross domestic products adjusted for defense spending and wartime policies for 1790 to today. Third, we move from Gross Domestic Product and Gross National Product to two measures Net Civilian Product by subtracting both national defense and the depreciation on capital. In that last step, we can only consider the period after 1929 (for the GDP derived measure) and 1919 (for the GNP derived measure) but we follow the admonition of Higgs (2004) that depreciation rates were underestimated.²⁰

3.1 Removing Government Spending on Defense

Our investigation into the real standards of living in the United States draws upon two principal data sources. The first source is the comprehensive U.S. GDP series from Measuring Worth, spanning from 1791 to 2023. This series combines data constructed by Johnston and Williamson (2025) for the period 1791-1929, with detailed methodology accessible via our references, and extends with data from the U.S. Bureau of Economic Analysis up to 2023. We also use the GDP price deflator from Measuring Worth to deflate GDP. Our secondary metric is the GNP series from the Historical Statistics of the United States (U.S. Census Bureau, 1975), curated by the U.S. Census Bureau, with underlying data sourced from the BEA’s compilations in Kendrick (1961) for the years 1889 to 1928. GNP is extended to the present day using the BEA’s series retrieved from FRED (U.S. Bureau of Economic Analysis, 2024a). There are some discrepancies between the years of overlap in the two GNP series. To address this issue, we splice the two series starting at 1929.²¹ To deflate the nominal GNP series, we create a complete GNP deflator index where 2017 = 100. This index is constructed using the GNP deflator from the Historical Statistics of the United States for the years 1889 to 1928 and splicing it with the GNP deflator from the BEA (U.S. Bureau of Economic Analysis, 2024b) using the same procedure as described for the GNP series.

To refine our measurement of living standards, we align with Higgs (1992) and Geloso and Pender (2023) in subtracting military outlays from both GDP and GNP. We compiled military spending data from 1791 to 2023 from two sources: historical outlays from the Departments of the Army, Navy, Air Force, and Defense, reported in the Historical Statistics of the United States for the years 1791-1970, and subsequent data from the Office of Management and Budget’s historical tables (Office of Management and Budget, 2024). The military spending figures were deflated using the corresponding price index from the GDP and GNP series. The corrective measure involves the straightforward subtraction of these normalized military expenditures from the GDP and GNP to obtain a recalibrated indicator of living standards.

3.2 Correcting Price Deflators During Episodes of Price Controls

Following Vedder and Gallaway (1991) and Geloso and Pender (2023) we make an additional correction to the series to address the issue of unreliable price deflators during times of price controls. Our correction relies on estimating the following linear equation via Ordinary Least Squares:

PriceIndex_t = β₀ + β₁M2_t + β₂IC_t + β₃TM_t + β₄E_t + ∑_i=5ⁿ β_i ∗ Lag_i + ϵ_t (1)

The dependent variable in our model, PriceIndex_t, is the price index in year t where the corresponding GDP or GNP price deflator is used in separate estimations. We estimate a corrected price index using the following indicators: M2_t is the M2 measure of the money supply, IC_t is the 4 to 6 month interest rate on commercial paper, TM_t is ton miles of freight on Class I, II, and III railroads, and E_t is total employment in the U.S., all of which are sourced from the Historical Statistics of the United States and Statistical Abstracts of the United States (U.S. Census Bureau, 1974, 1975, 1977, 1979). These are the same control variables as used by Vedder and Gallaway (1991) and Geloso and Pender (2023). We also include the first lagged values of each of these variables.²² All our indicator variables are transformed using natural logarithms and can only be employed for the period after 1904 (because of data availability).

As mentioned above, our control set is the same used by Vedder and Gallaway (1991) and Geloso and Pender (2023) and is justified for a few straightforward reasons. The four variables include two financial variables related to the price level, M2 and the 4-6 month commercial paper rate, and two proxies for real output in ton-miles of rail freight and employment. The financial variables allow us to capture variation in the money stock that affects inflation and a measure of the opportunity cost of money in the short-run. M2, in this context, is preferred to narrower measures of the money stock such as M1 because it captures time deposits at commercial banks in addition to currency in circulation, demand deposits at commercial banks, and foreign demand balances at Federal Reserve banks (U.S. Census Bureau, 1975). Ton-miles of rail freight are a useful proxy for real output because of the sheer volume of goods transported by rail during the relevant period. Employment provides a straightforward proxy of labor market conditions. Alternative measures such as a stock price index are much more volatile and forward looking, failing to capture fluctuations in real output relevant to predicting the price level absent price controls in a given year.

The purpose of estimating this regression is to correct for distortions during times of government-imposed price controls during World War I, World War II, the Korean War, and the Nixon price control years (overlapping with the last several years of the Vietnam War). By using the predicted values from our model for these specific years, we aim to correct for such distortions and achieve a more accurate depiction of economic conditions. Table 1 shows the estimated coefficients of the model above for the GNP price index and the GDP price index.

Table 1: OLS Estimated Coefficients Used to Correct GNP and GDP Price Indexes

Standard errors in parentheses. ∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01

One concern with the method above is its simplicity, which is constrained by the limitations of the data. More advanced adjustments are not feasible due to these constraints. For instance, one potential adjustment would involve using microdata from different periods, both with and without price controls. The period without price controls could serve as a preference revealer, allowing the inference of “virtual” prices for goods under price controls. This approach was successfully applied by Winkler (2015), who used data from 1927 and 1937 to analyze the price controls imposed by the Nazis. He estimated that the food price index was 10% higher than the one calculated with controlled prices (and this was in peacetime).

While appealing, this strategy cannot be applied to the United States for several reasons. First, many price-controlled goods were not part of typical consumer expenditures (e.g., capital goods or intermediary inputs), complicating their analysis. Second, while the Bureau of Labor Statistics (BLS) conducted consumer expenditure surveys before and during World War II, the necessary microdata are only available for interwar surveys.²³ Additionally, while there is a survey available for World War I (covering 1917–1919), it presents even more frustrating challenges. Cities were surveyed at different times, requiring the assumption that consumers in a city surveyed in 1918 (under price controls) were comparable to those in a city surveyed in 1919 (without price controls), despite the passage of time and changing conditions (Fourie and Norling, 2024). Consequently, replicating this strategy for either World War I or World War II in the United States is not possible. The only other available method we could think of to make sure that our method was not dictating too much of our results was to employ a Vector Autoregression (VAR) approach. We will use it only for World War I and World War II (the two most important episodes) to see how well our initial approach fares.

The VAR approach can be employed for forecasting as it assumes there exists some dynamic relationship between multiple time series variables whereby past values of one variable can explain current values of itself and other variables. A form of long-run equilibrium is assumed that requires no formal assumptions. This can be used to forecast outcomes. As such, we can run a VAR approach on data from 1904 to 1916 and 1919 to 1941 (with their lags) and forecast the missing periods (i.e., World War I and World War II during which price controls were enacted). Optimal lag length tests suggest four lags need to be used. These results are shown in Fig. 1 and compared to results obtained via OLS and the uncorrected price index.²⁴ For our purposes, the two methods of prediction obtain similar results and provide further justification for the OLS approach. They yield similar results for World War II, the Korean War and the Vietnam War (the latter two are not shown for the sake of conciseness). They yield a slightly different result for World War I. However that difference suggests that our OLS approach is being very cautious and that it is possible that there was even slower growth in and around the years of World War I.

Figure 1: Evolution of GDP Price Indexes, 1904-1916 (Top-Left Panel). Evolution of GDP Price Indexes, 1919-1940 (Top-Right Panel). Evolution of GDP Price Indexes Indexed to 1917 = 1, 1917-1923 (Bottom-Left Panel). Evolution of Price Indexes Indexed to 1941 = 1, 1941-1949. All Panels Show The Uncorrected GDP Price Index and Predictions Obtained by OLS And VAR as Indicated in Legend. Figure available in the published version.

3.3 Arriving at Net Civilian Product

The construction of our Net Civilian Product series begins with collecting data on net national product and net domestic product. We collected data on net national product (NNP) for years 1919-2023 from the Historical Statistics of the United States and BEA (U.S. Census Bureau, 1975; U.S. Bureau of Economic Analysis, 2024d). Net domestic product (NDP) is collected from the National Income and Product Accounts of the United States, 1929-1994 for years 1929-1946 and the series is completed through 2023 using BEA data accessed from FRED (U.S. Bureau of Economic Analysis, 1998, 2024c). Then, the following procedure is applied to both series to arrive at two measures of Net Civilian Product. The series cannot be reliably extended before 1919.²⁵ First, the difference between GNP (GDP) and NNP (NDP) is taken to impute depreciation in each year. Second, imputed depreciation is increased by 10% in 1941 and by 20% in 1942-1945, following Higgs (1992). Then, the adjusted depreciation values are subtracted from GNP (GDP) to arrive at our wartime depreciation-adjusted NNP (NDP). Finally, military expenditures are subtracted from these adjusted series and deflated using our corrected deflators. We then have a measure of Net Civilian Product derived from GNP and another from GDP.

The purpose of this measure is to have a supplementary series to our “defense-adjusted” series that further accounts for increased depreciation during World War II. However, most of the results discussed below (i.e., for wars other than World War II) will simply be the defense-adjusted measure which only subtracts military expenditures and adjusts the price deflator during specified years.²⁶

4 Results

The analysis in this paper spans over 200 years of data on living standards. We begin by showing the most complete versions of the uncorrected and corrected measures. The top two panels of Fig. 2 plot the natural logarithm of both GNP and GDP (left and right, respectively). The panel showing real GNP per capita in both its uncorrected and corrected form show that for most of the years prior to the 20th century, the two track each other fairly well. The first major divergence occurs in World War II much like Higgs (1992) results. After this point there is a substantial and persistent gap between the official measure of GNP and our corrected measure. A similar relationship is found for the GDP series running from 1791 until 2023. Moving to the bottom-left panel of Fig. 2, we now see the comparison between the uncorrected real GNP series and our measure of real Net Civilian Product arrived at using the GNP numbers from 1919 until 2023. It is here that we can begin to see more clearly just how deep the contraction during World War II was in comparison to the official series. In terms of our more accurate measure of living standards, there is a substantial wartime contraction. However, there is a rapid recovery once the war ends. The bottom-right panel of Fig. 2, finally, compares the corrected real GNP series and real Net Civilian Product (both of which are indexed to 1919 before taking the natural logarithm). We present this comparison to show the two corrections produce similar movements in living standards from 1919 to the present day, though it does appear that Net Civilian Product exhibits proportionally higher growth, albeit only slightly so.

Figure 2: Real GNP Per Capita (Uncorrected Vs. Corrected) in Constant 2017 Dollars, 1889-2023 (Top-Left Panel). Real GDP Per Capita (Uncorrected Vs. Corrected) in Constant 2017 Dollars, 1791-2023 (Top-Right Panel). Real GNP (Uncorrected) And Real Net Civilian Product In Constant 2017 Dollars, 1919-2023 (Bottom-Left Panel). Real GNP Per Capita (Corrected) And Real Net Civilian Product, Both Indexed To 1919 = 100, 1919-2023 (Bottom-Right Panel). All Values Are Presented In Log-Scale. Adjusted Deflator Used In Corrected Series for Years 1916-1919, 1940-1947, 1951-1954, and 1971-1975. Net Civilian Product as Shown in The Bottom Two Panels Uses Depreciation Increased By 10% In 1941 and By 20% From 1942-1945. Figure available in the published version.

Examining these trends over such long periods, however, can obscure some important differences revealed by our corrections to the measurement of living standards. This is partly because the changes have minimal effects during the period from 1791 to 1914, with the brief exception of the Civil War.²⁷ This is unsurprising, as the largest differences between the series stem from the removal of military expenditures, which were generally small relative to the overall economy (with the state itself being minimal in size). It is only after 1914, as the state begins to grow (Higgs, 1987) as a share of the economy–and with it, military spending–that the adjustments start to produce noticeable differences.

We can isolate specific periods of U.S. economic history to highlight these differences. To avoid drowning the reader in dozens of figures, we focus on several major wars throughout U.S. history that also have significance for economic history. We start with the Civil War and then “zoom-in” on World War I, World War II, the Korean War, and the Vietnam War.

Figure 3 plots the uncorrected real GDP per capita series against its correction from 1855 to 1870, capturing the Civil War and surrounding years. For these particular years, we are only subtracting military expenditures as we have no evidence of widespread price controls during the war necessitating correction of the deflator (nor would we have the necessary data to do the corrections) (Rockoff, 2004). There is a slight deviation between the corrected GDP and uncorrected GDP throughout the entire period shown here, however, the most striking divergence occurs during the war years. According to the official measure of GDP, cumulative growth between 1861 and 1865 is over 18 percent. The rate of growth suggested by official GDP numbers tracks the narrative of the economic effects of the war given by early accounts such as Beard and Beard (1927) and Hacker (1940). But accumulated growth according to our adjusted measure is around 5 percent. This lower rate of growth follows more closely to arguments posed by researchers such as Goldin and Lewis (1975) and Ransom (1989). Clearly, the academic debate has long moved on from assuming the supposed economic growth during the Civil War is genuine and yet the official GDP numbers continue to tell the misleading story.²⁸

Figure 3: Real GDP Per Capita (Uncorrected VS. Corrected) in Constant 2017 Dollars, 1855-1870. Shading Indicates Civil War Years. Figure available in the published version.

Figure 4 presents comparisons of the uncorrected and corrected series for the years 1870-1913 and then from 1914-1925. The top-left panel compares the uncorrected real GDP per capita series against our corrected real GDP per capita from 1870-1913. Although there are minor differences, the two series have no meaningful gap. This is important because the thrust of our argument is that price controls and heightened military expenditures during war distort traditional measures of national income. During extended periods where no such policies occur, we should then expect that these corrections are less meaningful. Contrast this with the differences between the uncorrected series and corrected series as shown in the bottom two panels of Fig. 4. The bottom-left panel plots the two real GDP per capita series and the bottom-right panel plots the two real GNP per capita series. Unlike the corrected GDP series, the corrected GNP series is below the uncorrected GNP series for every year from 1914-1925. The discrepancy between these two corrections may raise questions about the reliability of our approach. But the two corrections do in fact show similar trends relative to their respective uncorrected series. From 1915 until 1918 there is a substantial increase, followed by a steep decline from 1918 until 1921 (relative to the uncorrected series). In both cases, the story told by the uncorrected series understates gains in living standards leading up to World War I and the post-war contraction. A more detailed discussion of these trends is left for the section that follows.

Figure 4: Real GDP Per Capita (Uncorrected VS. Corrected) in Constant 2017 Dollars, 1870-1913 (Top-Left Panel). Real GDP Per Capita (Uncorrected Vs. Corrected) in Constant 2017 Dollars, 1914-1925 (Bottom-Left Panel). Real GNP Per Capita (Uncorrected Vs. Corrected) in Constant 2017 Dollars, 1914-1925 (Bottom-Right Panel). Shading Indicates Years in Which Adjusted Deflator is Used and World War I Years. Adjusted Deflator Used in Corrected Series for All Years 1916-1919. Figure available in the published version.

The next period we will examine is from 1929 to 1949, covering the Great Depression, World War II, and the immediate post-war years. Figure 5 plots four different comparisons of living standards. The top two panels compare uncorrected GDP and GNP to their respective corrections. The bottom two panels compare uncorrected GDP and GNP to their respective measures of Net Civilian Product. If we first look at the World War II years, all corrections tell a similar story. There was a substantial contraction in living standards during World War II. As a result of price controls, massive increases in military expenditures which shifted much production toward the war effort, and increased rates of depreciation, living standards in the U.S. fell. The years from 1929 to 1939 are less clear. The top two panels appear to indicate that living standards are well measured by the uncorrected series. But Net Civilian Product makes a clearer case that the Great Depression was both deeper and longer than that shown by the uncorrected measures.

Figure 5: Real GDP Per Capita (Uncorrected Vs. Corrected) in Constant 2017 Dollars, 1929-1949 (Top-Left Panel). Real GNP Per Capita (Uncorrected Vs. Corrected) in Constant 2017 Dollars, 1929-1949 (Top-Right Panel). Real GDP Per Capita (Uncorrected) and Real Net Civilian Product (GDP Derived) in Constant 2017 Dollars, 1929-1949 (Bottom-Left Panel). Real GNP Per Capita (Uncorrected) and Real Net Civilian Product (GNP derived) in Constant 2017 Dollars, 1929-1949 (Bottom-Right Panel). Shading Indicates Years in Which Adjusted Deflator is Used and World War II Years. Adjusted Deflator Used in Corrected Series for All Years 1940-1947. Net Civilian Product as Shown in The Bottom Two Panels Uses Depreciation Increased By 10% in 1941 and By 20% From 1942-1945. Figure available in the published version.

The final two major wars and surrounding years we zoom-in on are the Korean War and the Vietnam War. While World War I and World War II can be dubbed “total wars” in the intensity of the military and economic effort that they required, both wars were nevertheless very demanding to the American economy. Moreover, both are well-embedded in the Cold War economy which is marked by a permanent war footing (Higgs, 2006; Duncan and Coyne, 2013). As such, they require separate attention.

Figure 6 presents the corrected and uncorrected GDP and GNP series from 1947 to 1956. For the purposes of these corrections, we used our adjusted price index for the years 1951-1954 to capture the effects of price controls used during the Korean War and surrounding years for any anticipated or lagged effects of the controls. Although the scale of mobilization and reliance on price controls during the Korean War did not reach the same level as World War II (Rockoff, 2004),²⁹ there still appears to be a substantial difference between the official and corrected series. Both the GDP and GNP measure (shown in the left and right panels of Fig. 6, respectively) show nearly the same pattern. Relative to the uncorrected series, our corrections show a contraction in output during the Korean War and a quick recovery after the war bringing output back to pre-war levels. The lack of growth is in contrast to the modest growth we see in the uncorrected series. Furthermore, the decline in both corrected GDP and GNP is due to the correction in the price index to account for the effects of price controls. Inflation was higher during the Korean War than the official price indexes would suggest, contrary to the argument from Rockoff (2004) that the Korean War price controls represent one of the more successful cases in terms of taming inflation.³⁰

Figure 6: Real GDP Per Capita (Uncorrected Vs. Corrected) in Constant 2017 Dollars, 1947-1956 (Left Panel). Real GNP Per Capita (Uncorrected Vs. Corrected) in Constant 2017 Dollars, 1947-1956 (Right Panel). Shading Indicates Years in Which Adjusted Deflator is Used and Korean War Years. Adjusted Deflator Used in Corrected Series for All Years 1951-1954. Figure available in the published version.

Figure 7 shows the uncorrected and corrected GDP and GNP series from 1960 to 1978, capturing the Vietnam War and surrounding years. In this case, we subtract military expenditures and use our predicted price indexes to deflate the series for the years 1971-1976. The price controls used during these years are not directly related to the Vietnam War but do coincide with the later years of the war. For most of the period shown in Fig. 7 there appears to primarily be a level difference between the corrected and uncorrected series. The largest deviations appear in the early 1970s, coinciding with the years following the implementation of the draft lottery when more working age males would be taken out of the private labor force. Additionally, that deviation is the result of higher predicted inflation in our corrected price index.

Figure 7: Real GDP Per Capita (Uncorrected Vs. Corrected) in Constant 2017 Dollars, 1960-1978 (Left Panel). Real GNP Per Capita (Uncorrected Vs. Corrected) in Constant 2017 Dollars, 1960-1978 (Right Panel). Shading Indicates Years in Which Adjusted Deflator is Used and Vietnam War Years. Adjusted Deflator Used in Corrected Series Only for Years 1971-1975. Figure available in the published version.

Across all the major wars examined here we have a similar story. There is, of course, a level effect from the subtraction of military expenditures but price controls also contribute to these shocks which have implications for our understanding of American economic history. We turn now to a more detailed discussion of these implications.

5 Discussion and Conclusion

We believe our results affect discussions regarding the evolution of living standards in three large ways by altering some stylized facts in American economic history that connect to some important discussions. The first of those is that we essentially confirm the point made by Higgs (2006) that the American economy was essentially in a depression until the end of World War II. If we represent adjusted and unadjusted figures as a deviation from trend, we can see in fact that living standards were well below its 1867 to 1913 trend from World War I to the end of World War II. The recession of 1907 knocked them off trend and they did not have the time to recover before World War I further knocked them off. By 1919, living standards were 15.5% below trend. The recession of 1920-21 pushed this to 18.1%. The 1920s did not offer a full recovery: from 1923 to 1929, living standards remained 5.4% to 9.2% below its historic trend (with the corrected figures). The Depression created a large deviation which had nearly closed in full by the time America entered World War II in December 1941. From there, living standards further returned to deviations equal to those at the trough of the Depression (in 1933). It is only the return to peace that marked a full return to the pre-1913 trend.

Such a persistent deviation brings us close to the definition of “great” depressions offered by Kehoe and Prescott (2007). For them, if an economy is “significantly below trend”, it is in a depression. The term “significant” can be applied if three conditions are satisfied. A time period D is a depression between in the closed interval between t₀ and t₁ if there is some t_i in the interval that is 20% below trend. Second, there at least one year t_i within the ten years after t₀ (i.e., t_i < t₀ + 10) that has a deviation of at least 15% from trend. Third, there must be no year t₂ ≥ t₁ + 10 when the economy grew at the trend rate (i.e., there are no point in time in which the decade after witnessed trend growth rate) (Kehoe and Prescott 2007, pp. 10-11). This definition, as Kehoe and Prescott (2007) note, does not require an economy to return to trend. Hysteresis, unemployment scarring, bad institutional responses can prevent a full return to level expected by continued trend. Essentially, the depression ends once the trend growth rate is met again even though there is a persistent level difference. With our adjusted data, the United States is in a “great depression” from 1929 to 1933, 1937 to 1938 and from 1942 to 1945. In contrast, the unadjusted data suggests only a great depression from 1929 to 1933 and one from 1937 to 1938.

Second, it is worth pointing out that our corrections create two new, and interrelated, facts regarding the history of economic growth: a) the recession of 1907 was a far more important turning point that is commonly appreciated; b) the period from the end of the Civil War to 1907 was the fastest one in American economic history. The trend rates from 1867 to 1913 in the adjusted and unadjusted series (for GDP per capita) stand at 1.80% and 1.81%. However, when the years 1867 to 1907 are used only, that trend is between 2.05% and 2.06%. With GNP per capita, the period to 1907 offer rates of 2.44% but of 2.3% if extended to 1913. The panic of 1907 (Horwitz, 1990) bucked the trend and the economy never returned to the pre-1907 path as shown in Fig. 8. The panic knocked the economy to roughly 10% below trend and fell further to 20% below trend until 1922. This means that the economy was never to match its productive capacities of the pre-1907 period and return to trend. In fact, even after the 1920-21 depression, the US economy remains at 80% of what the trend predicted. It fell further during the Great Depression (obviously) and during World War II. From 1907 to 1947, the US economy drifted from the pre-1907 trend line. However, after 1947, it gradually inched up until the 1990s. In 1947, our adjusted series suggest that income were at 75.3% of the level predicted by the pre-1907 trend. That number climbed to 80.1%, 86.0%, 89.5%, and 89.4% in 1957, 1967, 1977, and 1987, respectively. In other words, American never returned to the 1867-1907 growth path.

Figure 8: Real GDP Per Capita (Uncorrected And Corrected, Log-Scale) Against Pre-1907 Trend, 1867-2023. Figure available in the published version.

This leads to a second, closely related point: the period of the thirty glorious years (from the end of World War II to the mid-1970s) is not as exceptional as it is often portrayed. When corrected GNP and GDP estimates are used, the trend growth rates from 1867 to 1907 rival those of 1947 to 1975. As a result, we believe that the three decades following World War II can no longer be considered the fastest growth period in American history.

This conclusion is complemented and reinforced from the well-known issue of shifts in non-market production that entered or left the market. Wagman and Folbre (1996) observed that from 1870 to 1890, the percentage of housewives among all women workers declined, leading to a relative expansion of the non-market sector. When they adjusted GNP estimates to include non-market production, they found significantly faster growth rates. Instead of the conventional 1.70% annual growth rate, their adjustments yielded a rate of 2.0% per year – a 17.6% increase (a ratio of 1.176) of the trend rate. However, since Wagman and Folbre (1996) relied on older GNP estimates, applying their corrections to updated data suggests a trend growth rate of 2.5% per year pre-1907. This stands in contrast to the post-war growth period, often referred to as the “thirty glorious years.”

From the 1910s to the 1940s, married women gradually entered the workforce. This means that the growth in that period is overstated, further accentuating our claim of a long deviation from trend after 1907 and lasting until the late 1940s. Then, in the 1950s and 1960s, there was a dramatic surge in the labor force participation of married women. While GDP statistics captured the increased market output, they overlooked the lost household production. When women shifted to market work, their contributions were seen as a net gain in GDP, but the actual improvement in well-being was the additional market output minus the lost household production. This omission likely overstates post-war growth. Using corrections based on BEA satellite accounts, we estimate post-war trend growth (1947–1975) below 2.3% per year, instead of the widely reported 2.5%. This would make the period from 1867 to 1907 the one with the fastest economic growth in American history. The differences in these two episodes should invite further research with respect to the causes of growth.

Third, our findings contribute to ongoing discussions regarding income inequality before 1960. This is because the national accounts of the United States serve as the denominator for calculating total income in all estimates of top income shares. The numerator, on the other hand, is derived from tax data that is independent from national accounts. If the denominator is incorrect, this leads to inaccuracies in the estimated top income shares, as the ratio between the numerator and denominator no longer accurately reflects the distribution of income. It also foils our comprehension of living standards at the bottom of the ladder.

One set of studies suggests that inequality rose during the 1920s, stabilized at a high plateau during the 1930s (without fully reverting to the 1920s levels), and then sharply declined during the 1940s (Piketty and Saez, 2003). Another set proposes a more modest increase in the 1920s, followed by a sustained decline from 1929 onwards, with a minor acceleration in the 1940s (Geloso and Magness, 2020; Geloso et al., 2022). Both sets agree that from the 1940s to the 1970s, inequality remained at a low plateau, completing what Lindert and Williamson (2017) describe as the “great leveling.”

Our results are significant because they suggest that living standards leveled while falling for everyone, regardless of which set of inequality estimates one accepts. Indeed, income estimates during wartime are plagued with issues related to military outlays and price deflators, which created the appearance of significant increases in living standards during the 1940s. Falling inequality coupled with rising living standards would imply that the poor were becoming richer quite rapidly. However, when these wartime issues are accounted for, living standards decline, meaning that unless inequality fell significantly faster, the poor must have suffered as well. In other words, the leveling might have largely occurred while everyone was growing poorer.

To see this whether this is the case, we can use the income shares estimated by both sets of studies and produce the income per person in the bottom 99% of the income distribution. As can be seen from Fig. 9 below, uncorrected living standards suggest that inequality fell from 1929 to 1935 as living standards also fell. They also show that inequality fell during the 1940s as living standards improved. This is true regardless of the set of inequality estimates used. However, once the corrected series are used, all of the leveling achieved during the 1940s takes place while living standards below the 99th percentile are falling. In other words, everyone was getting worse off but the richer did so faster.

Figure 9: Real GDP Per Capita (Right Axis) for The Bottom 99% and Top 1% Income Share (Left Axis) According to The Inequality Estimates of Piketty and Saez (2003) (Left Panel) and Geloso et al. (2022) (Right Panel). Figure available in the published version.

This is a particularly important finding. Contemporary debates regarding inequality include numerous conversations regarding policy responses. Many perceive the levelling of the 1940s as being the result of tax policy (i.e., tax increases, reductions in the personal exemption, tax withholding). However, others have tended to emphasize that policy had more modest effects. They tend to emphasize the role of large external crises (e.g., depressions and wars) as levellers (Geloso et al., 2022). For example, Walter Scheidel (2017) argues that significant reductions in inequality historically occur primarily through large-scale disruptions (wars, depressions, state failures, disease outbreaks) that also reduce living standards for everyone. These crises do not necessarily redistribute wealth as much as they destroy productive capacities unevenly in ways that disfavor the more fortunate. The more equal distribution does not reflect something desirable per se since people are generally worst off. Here, we believe that the pattern of below trend evolution of living standards provides support to this view of what causes leveling. At the very least, our modifications here should invite efforts to revise inequality estimates for the war-induced distortions.

These are the first three significant implications of our findings. Others may identify additional implications, but we believe the three points we have mentioned are sufficiently important to merit attention and further investigation. Our justifications warrant extending corrections to the valuation of government services beyond the usual methods. It is worth noting that the points we have raised would likely become even more pronounced if we make further, non-conceptually controversial (but methodologically challenging) modifications to national accounts. Future research that builds on the forgotten efforts of earlier pioneers in national accounting and those of Spindler (1982), aiming to better incorporate the true valuation of government services, would only emphasize the results we present here. This would confirm that some aggregates indeed conceal more than they reveal. We believe we have made a compelling case that wars and price controls have significantly obscured the true evolution of American living standards.

Appendix A: VAR Results

Table 2: Vector Autoregressions (4 Lags), 1901-1950. Table 2 is available in the published version.

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BibTeX

@article{geloso2025defense,
  author = {Vincent Geloso and Chandler S. Reilly},
  title = {A Defense-Adjusted National Accounting of the US Economy and its Implications, 1791-2023},
  journal = {Review of Austrian Economics},
  year = {2025},
  doi = {10.1007/s11138-025-00678-2},
}