Is war good for the economy?
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Published: Thu, 04 May 2017
This is a question that has long been debated by economic, political, and historical analysts. It has divided these researchers into two groups, a group of analysts mostly American such as David Broder and Hugh Rockoff who believe that war leads to an increase in GDP and productivity and a decrease in unemployment, thus wars are good for the economy and ultimately lead to economic growth, and the other group of analysts like Linda Bilmes and Joseph Stiglitz who believe that peace is economically better than war and that people studying economics of war should take into account the concept of opportunity cost of wars and how many wars had devastating effects on the economy . Each of the two groups have concrete references, and use historical evidence, facts, ideas, and statistics to and show how GDP,inflation, unemployment, and the allocation of resources are effected by wars in order to prove how economies are better off with or without war.
There are analysts who believe that war is good for an economy and that sometimes an economy will not be able to overcome a depression or a big recession without engaging in a foreign war. They use history to prove that countries with economic prosperity are in fact countries that have fought in the biggest wars. Not only that, but they believe that the seeds of prosperity and growth were planted during times of war. These analysts are supporters of the Keynesian argument of war, a policy which explains how governments sometimes dedicate a large portion of their spending to military spending for the aim of economic growth. They show the economic effects of such a policy on different aspects of the economy such as the effect on demand, where the direct government spending induces spending by consumers by a multiplier effect, thus promoting industry. Another effect the supporters of Keynes use for war is the effect on the supply side, where the military spending during war on research and development leads to a big increase in productivity by achieving more advanced infrastructure and technology.
The American economy during WWII is the example that these economists use, to show the positive impacts of the engagement of the US in the war, on its economy facing a depression. “Military spending can also sometimes boost the civilian economy; the massive spending on WWII finally brought the Great Depression to an end” (“Understanding American Government” by Susan Welch). To add, spending on the war opened the way for the federal government to control the economy by controlling spending and consumption. Technological and scientific innovations which were the main reason of the success of allies in the war, rapidly increased during the war. In WWII, a nationwide complex of laboratories and plants to manufacture atomic fuel and to fabricate atomic weapons was built and was called Manhattan Project which by that time “had become a colossal economic endeavor, costing approximately $2 billion and employing more than 100,000” (Christopher J. Tassava in “The American Economy during World War II”), and Aerospace was the single largest sector of the war economy, costing $45 billion, employing a staggering two million workers, and most importantly, producing over 125,000 aircraft. And this continued to develop even after the war ended, to include fields other than weaponry and military hardware.
When a government decides to go into war, it has to equip its soldiers with various kinds of weapons, bombs and equipment.Other workers are also hired to cover job openings in private sectors when soldiers and all their staff are sent overseas. In WWII federal spending increased from 9.47billion $ (9.34% of GDP) of which 17.5% were military spending in 1941 to 72.11billion $ (41.56% of GDP) of which 89.5% were military spending in 1945. The US GNP grew from $88.6 billion in 1939 – to $135 billion in 1944 of which 40% were war-related. Furthermore,there was expansion in employment which paralleled the expansion in the industry, where unemployment hit a bottom record of 1.2% in 1944(close to full employment) from a 14.6% in 1940; Personal Income for almost all Americans increased, reaching in some states a growth of 42% (Washington), 45 %( Oregon) (1940-1948). This means larger effective production which means larger amounts of products leading to a higher GDP.
To finish this case, the industry expansion during the war and its everlasting effects, led the US to be an economy larger and richer than any other, an economy able to face harsh situations and still stay on the top.
Another example is 9/11, in which the World Trade Center was attacked. After the attacks, people were pessimistic and predicting one of the worst economic recessions ever. Economically, what happened after the attacks is that the government was spending in different areas which gave a push to the economy. Before any military action was taken, the Federal Reserve took several actions it wouldn’t take under normal circumstances. So fearing a possible economic meltdown, the Fed freed up currency and extended billions of dollars in credit and loans to businesses, thus increasing liquidity to very high levels, and the Congress have given authorization to the use of 40b$ as a relief program, and all that after just a few days of the attacks. The Fed lowered the interest rate to 1%, which was considered a boom to the markets, since foreign money was flowing to these markets in search of attractive assets and diverted away from US Treasury bills and bonds which were generating very low yield. Although nobody would suspect optimism following such an incident, it turned out to be the first defeat against a growing recession in the 21st century, as Bush the US president described it.
To wrap up the above argument, these economists or analysts who believe war is good for the economy, follow Keynes’ argument which makes clear that the extra spending in the whole economy would explain why wars are helpful in breaking depression/recessions. That’s why they discuss that after each major war, for example: WWI, WWII, Korean war(during which the defense spending nearly quadrupled in the last 6 moths of 1950 to reach a peak of 500b$ (current $) which according to Keynes has a multiplied effect of the economy), Vietnam war, 9/11 attacks and similar other attacks, that the countries involved in the conflict face major structural reforms, have periods of better liquidity in their markets, more efficient use of resources, and economic prosperity.
On the other hand, there are analysts, who believe that war is not good for the economy, and that this myth was created to serve the War-Party (which includes politicians and military contractors, mainly industries that benefit from war, especially the ones related to weaponry and ammunition). These analysts criticize Keynes’ argument about the war, and poke holes in his theory in order to show that it doesn’t actually comply with the real world. One central critique they use is The Broken Window Fallacy which explains that if a person throws a rock at a window and breaks it, this act will be beneficial to the whole community surrounding this shop as it would create a new job for the glazier who will in turn buy material from another merchant and so on, thereby creating an economic activity. What economists analyze here is that this deceptive reasoning as many economists argue ignores the principle of opportunity cost thus although this may seem a push to the economy, what really happened is that the shop owner now has less money to spend, as he is forced to spend it to repair his glass. To apply this to war, we can conclude that if there is money being spent on war it is not spent elsewhere, thus Keynes’ arguments for war failed to take into account the concept of opportunity cost, or for example, what would the soldiers have been doing if they were not soldiers or what could have been made by companies instead of war related products.
Another criticism to Keynes is that he didn’t discuss the side effects of the policies the government takes in order to increasing military spending. So they discuss that, government has several ways to finance war, each proving to be harmful to the economy. First way is to increase taxes, which will lead to less consumption thus harming the economy, but since raising taxes is politically unpopular, they decrease spending in other important areas and focus it on military spending. They may also increase the debt- which is done by an increase in taxes in the future, not forgetting the interest that accumulates in this period- leading to a rise in the deficit. This results in inflation, which in turn finances war. So when the government chooses to go to war, there is an expansion in bank credits and inflation, both of which lead to a decline in the value of the dollar, and to financial crisis, thus our savings are severely damaged, and our equity which we depended on to increase and to preserve our financial status, all gets eaten up.
The American war on Iraq proved to be a failure. The total economic cost of the war on Iraq is estimated to be around one trillion $, and “maintaining troops in Iraq through 2015, the true costs may exceed $2 trillion” (Bilmes, Stiglitz 2005). Let’s consider the Macro-economic effects of the War on Iraq, There are at least three major sources of macroeconomic consequences: (a) the increase in the price of oil; (b) the increase in defense expenditures; and (c) the increased insecurity that has followed from the way that the war has been pursued. First concerning security, individuals are risk averse and most important is that increased risk is bad for business; it lowers investment, and over the long run thus has supply side as well as demand side effects. Second the price of oil is significantly higher today than it was before the War in Iraq. The oil price increases generated inflation, and the central banks focusing on inflation, led to higher interest rates, exacerbating the slowdown of the economy. Higher oil prices and higher interest rates to which the oil prices give rise also have effects on asset values(equity market and housing), and on industries that are sensitive to oil prices, like the airline industry, where many firms face the prospect of bankruptcy.
Another example, is the Vietnam War where President Johnson’s decision to finance a major war which was estimated to cost around $167 billion, without increasing taxes, initiated a double-digit inflation and lead to an increase in the federal debt that damaged the American economy and battered living standards from the end of 1960s up to the 1990s.
Finally, these economists realize that war is not good for the economy because when following Keynesian arguments, the defense budget takes a large portion of the government’s budget, so they try to show what is being foregone, when a massive amount of liquidity is available for defense and very little is reserved for the country’s infrastructure and people’s welfare, since money could be spent on social security, education, research and maybe if it was spent on alternative energy they could have been less dependent on oil, thereby more secure. In other words “95% of the country has to sacrifice so that 5% in the Defense Weapon industry can live high on the hog” (Marcus 2010).
To conclude, one cannot hold on to the Keynesian argument which under certain circumstances, proved to be effective 70 years ago and still argue that it can work now. Looking at the big picture nowadays, war is proving to have devastating effects on the economy with benefits only to military contractors. So I think it is more rational to set side with the critics of Military Keynesianism because I see how wars have diverted resources towards itself and slowed our economic progress.
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