economic consequences of war

8/3/2019 Economic Consequences of War

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ECONOMICCONSEQUENCES o

WARon the U.S. ECONOMY

An oeie o the macoeconomic eects o oenment spendin

on a and the milita since Wold Wa II. It speciicall examines

ie peiods: Wold Wa II, the Koean Wa, the Vietnam Wa, and the

Iaq/Ahanistan Was, summaizin the eect o inancin the as

on consuption, inestment, taxes, oenment deicits and inlation.


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HE INSIUE FORECONOMICS & PEACE

/ QUANIFYING PEACE AND IS BENEFIS

Te Institute o Economics and Peace (IEP) is an independent, non-partisan, non-poteseach oganization dedicated to shiin the olds ocus to peace as a positie, achieable,and tanible measue o human ell-bein and poess.

IEP achiees its oals b deelopin ne conceptual rameoks to dene peaceulness;poidin metics o measuement; uncoein the elationship beteen peace, businessand pospeit, and b pomotin a bette undestandin o the cultural, economic andpolitical actos that die peaceulness.

IEP has oces in Sdne, Ne Yok, and Washington, D.C. It oks ith a ide rane opartnes intenationall and collaborates ith inteoenmental oganizations on measuin

and communicatin the economic alue o peace.

Fo moe inomation please isit .economicsandpeace.o


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CONENS

Executie Summary 4

Intoduction 6

Wold Wa II and the Geat Depession 7

Koean Wa 10

Vietnam Wa 12

Cold Wa 14

Iraq and Ahanistan Was 15

Financin the Was 17

Conclusion 18

Biblioraph 19


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EXECUIVE SUMMARY

One o the enduin belies o moden times is that a and its associated military spendin has ceatedpositie economic outcomes o the U.S. econom. Tis has been supported b ecent public opinionpollin in the U.S. hich shos a sinicant numbe o people beliee that a and military spendin hasimpoed the econom. 1 Tis contrasts ith the idespead public acknoledement and undestandino the human cost o a.

Te aim o this pape is to hihliht the aious macoeconomic eects o oenment policies and spendinon the U.S. econom oe the last seent eas duin majo peiods o conict. It specicall examinese distinct peiods: Wold Wa II, the Koean Wa, the Vietnam Wa, the Cold Wa, and the Iraq and theAhanistan Was. Te pape does not debate the moral, political, o philosophical justications o theseconicts, but simpl hihlihts some o the ke macoeconomic ramications o the U.S.s policies duinthe eleant conict peiods.

o analze the eects o these conict peiods on the U.S. econom, chanes in a numbe o macoeconomicindicatos hae been analzed both duin and ae each conict peiod. Te indicatos analzed ee:

GDP

Public debt and levels of taxation

Consumption as a percent of GDP

Investment as a percent of GDP

Ination

Aveage stock market valuations

Income distribution

Heihtened military spendin duin conict does ceate emploment, additional economic actiit andcontibutes to the deelopment o ne technoloies hich can then lte thouh into othe industies.Tese ae some o the oen discussed positie benets o heihtened oenment spendin on militaryoutlas. Hoee, it can be aued that porams specicall taeted at acceleratin R&D o ceatin

emploment ould potentiall hae the same eect but at a loe cost.

One o the most commonl cited benets o the econom is hihe GDP oth. Tis has occuedthouhout all o the conict peiods, othe than in the Ahanistan and Iraq a peiod. Anothe benetcommonl mentioned is that WWII established the appopiate conditions o utue oth and endedthe eat depession. Tis as associated ith a shap decline in income inequalit. Te tend in declinininequalit started ith the onset o WWII and lasted thouh to the end o the Cold Wa hen it oseagain.2 It can be aued that the leelin o income inequalit ceated the ideal conditions to build thelae consume oiented econom that the U.S. is toda.

Tee does not appea to be a diect elationship beteen aerae stock maket aluations duin theseconict peiods. Duin WWII stock makets did initiall all but ecoeed beoe its end, duin theKoean Wa thee ee no majo coections hile duin the Vietnam Wa and aerwads stock makets

emained at om the end o 1964 until 1982.

1. Pio to the 2003 inasion o Iraq, a CBS/Ne Yok imes surve ound that 23% o people elt the a ould impoe the

econom esus 41% ho didnt and 31% ho said it ould make no dieence. A moe ecent CNN poll in 2008 ound that

hile the majoit o people (71%) thouht the spendin in Iraq had hurt the econom, oe a quarte o espondents (28%)

still thouht it didnt hae an impact on Ameicas economic position.

2. In 1941, 1% o the U.S. population contolled 15% o the ealth, this dopped dramaticall so that b 1945 the top 1%contolled 11% o the ealth. Tee as then a decline thouh till 1973 hen the top 1% contolled 8%. B 2005 the ue

had isen to oe 17%.

ECONOMIC CONSEQUENCES OF WAR / INSIUE FOR ECONOMICS & PEACE

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Goenment policies associated ith undin these conicts esulted in the olloin economic indicatosexpeiencin negatie eects eithe duin o ae the conicts:

Public debt and levels of taxation increased during most conicts;

Consumption as a percent of GDP decreased during most conicts; Investment as a percent of GDP decreased during most conicts;

Ination increased during or as a direct consequence of these conicts.

Te hihe leels o oenment spendin associated ith a tends to enerate some positie economicbenets in the short-tem, specicall thouh inceases in economic oth occuin duin conictspendin booms. Hoee, negatie unintended consequences occu eithe concuentl ith the a odeelop as esidual eects aerwads theeb hamin the econom oe the lone tem.

Dieent appoaches to nancin the additional oenment expenditue and associated chanes to themaket econom meant that the macoeconomic eects aied o each peiod. In eery peiod hoee,oss inestment eithe declined o e at a ery slo rate, and in all but one case, duin the Iraq andAhanistan as, consumption also stalled. Each peiod can be summaized in the olloin a:

Wold Wa II as nanced thouh debt and hihe taxes, b the end o the a, U.S. oss debtas oe 120% o GDP and tax eenue inceased moe than thee times to oe 20% o GDP. AlthouhGDP oth skocketed to oe 17% in 1942, both consumption and inestment expeienced a substantialcontraction. One o the ke causes as oenment contol o ra esouces and mateials. end linestaken om beoe the a and datin om 1933 onads cleal indicate that o inestment, consumption,and GDP oth thee as no incease in the tend lines ae the a had nished. While unemplomentas irtuall eliminated, ecoery as ell underwa pio to the a, and the ke counteractual is hethesimila spendin on public oks ould hae enerated een moe oth. Te stock maket initialldopped and once ictory as oeseeable then ose to be hihe than at the start o the a.

Te Koean Waas lael nanced b hihe tax rates ith GDP aerain 5.8% beteen 1950 and1953 ith GDP oth peakin at 11.4% in 1951. Duin this peiod hoee, inestment and consumptionstalled. Te oenment needed to implement pice and ae contols in esponse to ination hich

had inceased due to the additional stimulus that as ceated b oenment spendin. Notabl, bothconsumption and inestment esumed oin ae the a; hoee the oth as belo the tendrate pio to the a. Te stock maket ose duin the a.

Te Vietnam Waas unlike Wold Wa II and the Koean Wa, as it ramped up slol ith Ameicantoop deploments startin in 1965. Tis a as lael unded b inceases in tax rates, but also ithan expansie monetary polic hich then subsequentl led to ination. Inceases in non-military outlasalso had a ole to pla. Unlike pio as, consumption emained unalteed due to expansionary monetarypolic althouh inestment ell duin the a. Again, as ith the to pio as, GDP oth inceasedand peaked at 7.3% o GDP in 1966. At the beinnin o 1965, the Do Jones index as at 900 and it asnttill ae Octobe 1982 that it stabilized aboe the 900 mak.

Te Cold Wapeiod can be cateoized as unnin om the late 1970s thouh to 1989. Tis peiodsa sustained inceases in military spendin alonside tax cuts hich then esulted in a bloout in thebudet decit. Althouh thee as a boom in consumption it as uelled b a combination o inceased

decit spendin and hihe oenment debt hich in tun also caused inteest rates to incease. Tis asalso accompanied b a substantial trade decit as ell as a bull un ith the Do Jones index inceasinom 1,121 in Febuary 2003 to 2,810 in January 1990.

Te Afghanistan and Iraq Was ee accompanied b eak economic conditions iht om theibeinnin and coesponded ith the bustin o the hih tech asset bubble hich led to the 2001-2002ecession. Tis as also the st time in U.S. history hee taxes ee cut duin a a hich then esultedin both as completel nanced b decit spendin. A loose monetary polic as also implemented hileinteest rates ee kept lo and bankin eulations ee elaxed to stimulate the econom. All o theseactos hae contibuted to the U.S. hain seee unsustainable stuctural imbalances in its oenmentnances.

Tis analsis does not seek to place alue judments on the eectieness o justication o an particulaconict but onl to hihliht the macoeconomic eects o a spendin. It seems eident om this stud

o U.S. macoeconomic history oe the past seent eas, that thee ae a numbe o negatie economiceects om conductin these as.

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INRODUCION

Tis pape assesses the macoeconomic impact o e a peiods on the U.S. econom spannin the lastseent eas. Seen macoeconomic indicatos hae been assessed to detemine ho the hae chanedduin the conict peiods:

GDP Public debt and levels of taxation Consumption as a percent of GDP Ination Aveage stock market valuations Income distribution

Inceased military spendin can enerate some positie economic benets thouh the ceation oemploment and additional economic oth as ell as contibutin to technoloical deelopments. Tiscan poide a multiplie eect hich then os on to othe industies. Tese ae some o the acknolededpositie benets o inceased oenment spendin on military outlas. Hoee, in acknoledin thesebenets, one must also examine counteractuals, hee consideration must be ien to the opportunitcost and unintended consequences o military spendin on conict.

B examinin the state o the econom at each o the majo conict peiods since Wold Wa II, it can be seenthat the positie eects o inceased military spendin ee outeihed b lone tem unintended negatiemacoeconomic consequences. While the stimulatory eect o military outlas is eidentl associated ithboosts in economic oth, adese eects sho up eithe immediatel o soon ae, thouh hiheination, budet decits, hih taxes and eductions in consumption o inestment. Rectiin these eectshas equied subsequent painul adjustments hich ae neithe ecient no desirable.

When an econom has excess capacit and unemploment, it is possible that inceasin military spendincan poide an important stimulus. Hoee, i thee ae budet constraints, as thee ae in the U.S.cuentl, then excessie military spendin can displace moe poductie non-military outlas in otheaeas such as inestments in hih-tech industies, education, o inrastuctue. Te codin-out eectso dispoportionate oenment spendin on military unctions can aect service deliery o inrastuctuedeelopment, ultimatel aectin lon-tem oth rates.

While military and deense spendin is important in poidin secuit o the nation as ell as helpin tosupport and potect its national allies, like othe oms o oenment expenditue, it should be analzedo its ecienc and hethe it ullls its pimary objectie. Cuentl, the U.S. Goenment spendsUS$670 billion 3 on its deense budet hich is used to emplo tens o thousands o okes in the militaryand deense contractin industry. Te act that these inestments enerate jobs, economic oth andsometimes esult in aluable spin-o technoloies is not doubted. Hoee, the ke question that needs tobe addessed in ode to undestand i military spendin emains cost-eectie is hethe it is achieinits pimary pupose o impoin national secuit as opposed to secondary objecties hich ma be in thepoision o jobs o the deelopment o ne technoloies o industial use. Tis is simpl because otheoms o spendin chaed ith the pimary pupose o poidin emploment o to conduct eseach anddeelopment ae likel to be moe ecient in achiein those oals than spendin taeted at nationalsecuit. Tis has been einoced in aious studies, hich sho, hen compain the diect multiplieeects o military spendin to othe oms o oenment spendin, it is not as poductie in economic

tems as spendin in inrastuctue, education, o een as tax cuts to incease household consumption.4

Tis analsis does not seek to place alue judments on the ecac o justication o an particulaconict but to hihliht the macoeconomic eects o a spendin. 5 Secuit is not onl dependent onan adequate military capabilit but also on economic stabilit. As eseach conducted b the Institute oEconomics and Peace has shon, economic conditions ae hihl inteconnected ith the institutions thatsupport peaceul enionments. It is o this eason the economic implications o a should be consideed,as the economic oundations o societ do help detemine its secuit.

3. U.S. Department o Deense Fiscal Yea 2012 Budet Request Oervie, Febuary 2011, Oce o the Unde Secetary o Deense(Comptolle)/CFO; http://comptolle.deense.o/defudet/2012/FY2012_Budet_Request_Oervie_Book.pd

4. Gaett-Peltie, H. & Pollin, R. (2009), Te U.S. Emploment Eects o Military and Domestic Spendin Pioities: An UpdatedAnalsis, Political Econom Reseach Goup (PERI), Uniesit o Massachusetts, ieed 1 Octobe 2011.

5. A puel utilitaian appoach to assessin the ecac o particula conicts ould ask ho much secuit as gained inexchane o the size o spendin o that secuit this equies subjectie easonin and is not ithin the scope o the pape.

6. Institute o Economics and Peace (2011) Stuctues o Peace, Reseach Bie


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WORLD WAR II AND HE GREA DEPRESSION

Te ole that Wold Wa II plaed in endin the Geat Depession can be analzed b inestigatin the

histoic composition o U.S. GDP om 1929 thouh to the post-a peiod. Wold Wa II is a hihl uniquepeiod in tems o the shee size o the esouces committed to the conict and the associated chanes tothe stuctue o the maket econom.

Usin data om the Bueau o Economic Analsis, ue one shos the composition o U.S. GDP inconsumption, inestment, oenment spendin and net exports and imports in pe-capita tems. It canbe seen the a eas o 1941 to 1945 sa one o the most sinicant short tem inceases in economicoth in the history o the U.S. econom. Te top line in blue is GDP, and the incease aound Wold WaII is ery isible. Tis as dien b oenment spendin denominated in puple.

It is ery clea that oth duin this peiod as dien b oenment spendin and accompanied bdeclines in consumption and inestment in compaison to the pe-a tend. Te undin o the a aspedominatel ia oenment debt and taxation, hich inceased b 5 and 6 times espectiel, oe thecouse o 1941 to 1945. Unemploment ell to 1.9% b 1945 as up to 20% o the population as emploed inthe amed oces. So hile it can be said that the a diectl lead to a decline in unemploment, the leelo consumption did not see an coespondin incease, despite the act that the unemploment rate hadsinicantl allen om 14.6% in 1940 to 1.9% in 1945. In eal tems, pe capita consumption as loe in1945 than it as in 1941.

In 1941, oenment spendin epesented appoximatel 30% o GDP, o almost US$408 billion. At itspeak in 1944, this had isen to oe US$1.6 tillion o 79% o total GDP isin b 394% in just thee eas.B contrast, consumption ell om 67% to 46% o GDP and inestment ell om 11% to 3% o GDP oe thesame peiod. Tis is shon in ue to, hee it can be seen ia the tend lines dran om 1933 thatconsumption and inestment in the immediate eas ae the a ee ell belo the pe-a tend.

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7. Fiue 1 shos eal GDP, that is, U.S. GDP and its composition in ination-adjusted pe-capita tems, 1929-2009.


Figure 1: History o U.S. Growth 7

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Pice contols and rationin had a sinicant ole to pla in holdin back consumption. It as diculto households to puchase oods such as ashin machines, ions o ate heates because the raesouces and poduction capabilities needed to poduce these oods ee needed o the a eort.Ne administratie bodies ee established such as the Wa Poduction Boad and Oce o PiceAdministration. Te Wa Poduction Boad as able to assin pioities to scace mateials such as ubbe,steel and aluminum to ensue the ent to poduction o the military, rathe than to ciilian oods. Inaddition, aes ee contolled and pesonal sains ee encouraed thouh the puchase o a bondshich urthe limited the size o indiiduals disposable income.

People ee also encouraed to conserve ood and poduce as much o thei on ood as possible becauseood items ee enerall scace. Feezes ee also instigated o aes. Combined ith a eneral eductionin consumption, it can be said liin standads o those alead emploed, at least in mateial tems, didnot impoe. Een in tems o total GDP, Wold Wa II did not ceate a pemanent incease o chane inthe oth tend ae the a had ended. Tis is shon in ue thee hee it can be seen that ae theincease in GDP, hich as unded b oenment spendin om 1941 to 1945, the post-a peiod ellback to the same oth tend line as as expeienced beteen 1933 and 1937.


Figure 3: Aer the war growth bubble, GDP growth returned to its pre-war trend

Figure 2: Consumption and Investment were well o trend aer the war years

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he tend line o GDP in iue thee is poduced b takin the data o 1933 to 1941 and 1946to 1960 and estimatin a linea eession line thouh the data points. he esultin eessionequation is then used to estimate the imputed data o 1942 to 1945 in ode to simulate hatU.S. GDP ould hae been expected to look like had the econom on at the same ate duin

the a eas as it did duin the immediate pe and posta eas.

Fom this aph it is eident that the U.S. econom had alead expeienced seeal eas opost-Geat Depession oth beoe the Japanese attack on Peal Habo in Decembe 1941,and that the a bubble as indeed no moe than a bubble as post-a oth eeted to base-line oth. 8 Despite small ises in consumption, inestment and net expots at the end othe a, the GDP bubble declined in line ith the eduction in oenment spendin. Ate thebubble o a oth, Robet His ound U.S. GDP oth in 1946 alone deceased b 20.6%,ith a contaction lastin to 1948. 9 In spite o this contaction, His aues it as onl untilate the a that the Geat Depession tul ended.

he hue size o the milita opeation in Wold Wa II and the lael debt-dependent inancinmethod esulted in publicl held oss debt eachin 120% o GDP and the end o excess capacit.

he political ill equied o this to occu could onl hae happened in the ace o the enomousuenc and the size o the existential theat the Axis poes ceated. In this sense, the maincontibution o the a as the ceation o a necessa existential theat to enable the politicalill o the oenment to spend oe 37% o GDP on milita outlas o the last thee eas othe a. his emoed excess capacit and enabled peiousl unemploed people to ente theokoce. Hoee, this as auabl alead happenin pio to the a hen the econom ason a oth tend om 1933 to 1937 hich as suppoted b Ne Deal spendin that aeaed amuch loe 15.4% o GDP ith unemploment 10% loe in 1940 than in 1933.

One o the positie lastin eects om WWII as a moe een distibution o ealth. WWII stateda tend that ould last to the end o the Vietnam Wa. It can be aued that this eallocation oincome ceated the ideal conditions o the omation o an adanced consume econom. Datapoided b Saez 10, shos that the shae o income held b the top decile aeaed aound 45%

om the mid-1920s to 1940. Duin the a eas it declined substantiall to just aboe 32.5%in ou eas duin Wold Wa II and staed stable at aound 33% till the 1970s, then aduallclimbed back to 45% in 2007. Accodinl, Saez notes the a plaed a lastin ole in incomeconcentation in the United States.

In tems o shae maket moements, the Do Jones Industial Aeae (DJIA) ell om mid-1941 onads, and continued to all ate the bombin o Peal Habo. Hoee, b Ma 1942,sentiment chaned and once icto as oeseeable, the stock maket allied, ecoein to the1939 leel nea 150 points in eal 1945. Ate V - J Da, the DJIA moed on to ne hihs, eachin200 points in eal 1946 o the ist time pio to the Geat Depession.

8. echnical note: Te time peiod in Fiue 3 includes the Koean Wa episode, 1950-1953. Tis oeestimates the tend andmakes the Wold Wa II bubble appea somehat smalle than it as.

9. His, R. (2006). Depession, Wa, and Cold Wa: Studies in Political Econom

10. 2010, Saez, E. Stikin it Riche : Te eolution o top incomes in the United States, Jul http://elsa.bekele.edu/~saez/saez-UStopincomes-2008.pd


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Figure 4: During the Korean War, GDP was slightly boosted by government spending nanced bytaxation which constrained investment and consumption

KOREAN WAR

Accodin to a Conessional Reseach Seice epot on the cost o majo U.S. as, the Koean Wa om 1950 to 1953 cost US$30 billion in 1953 dollas o US$341 billion in constant 2011

dollas.11 he size o the annual expenditue as equialent to 14.1% o GDP in the last ea othe a. 12 his is in compaison to the cost o Wold Wa II hich is estimated to hae beenUS$296 billion in 1945 dollas (US$4,104 Billion in 2011 constant dollas). As a esult, the eecto the Koean Wa as a less siniicant than Wold Wa II, but nonetheless still chaned thestuctue o oth ia its inancin.

Simila to Wold Wa II, the Koean Wa boosted GDP oth ia oenment spendin, althouhthis spendin as inanced ia taxation as opposed to Wold Wa II hich as pimail debtinanced.

As can be seen in iue ou, as in Wold Wa II, thee is an incease in the oth o GDP, albeit

smalle, o the 1950-53 time peiod. Inestment and consumption lattened hile the oealloth ate as dien b oenment spendin. Pesident uman elied lael on taxationand a eduction in non-milita outlas as opposed to booin om the public o moneceation policies to inance the conlict. In ode to acilitate this, the oenment enacted theReenue Act o 1950 hich einstituted the income tax ates o Wold Wa II, boostin taxes ban estimated 1.3% o GDP. 13 his as olloed b uthe inceases o indiidual and copoatetaxes in 1951.

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11. Conessional Reseach Service - http://.as.o/sp/cs/natsec/RS22926.pd

12. Labonte, M (2004) Financin issues and Economic Eects o Ameican Was. CRS Report o Coness

http://.ndu.edu/library/docs/cs/cs_l31176_27ap04.pd

13. Ibid.


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he econom expeienced eal GDP oth o oe 11% in 1951 ith inlation inceasin to 5.3% in1951. he oenment then esoted to pice and ae contols in an attempt to contol inlation.Notabl, the ea ate the conlict ended, 1954, thee as a shot ecession in spite o the actmilita outlas still constituted 13% o GDP. National GDP ell to be eectiel the same as it had

been to eas pio, in the middle o the a in 1952.

Mateial ell-bein as aected b tax inceases, ne pice and ae contols hich constainedpiate secto consumption and inestment. Hoee, pehaps o moe impact to the U.S.econom oe the ensuin eas as that to o the ke components o GDP, consumption andinestment, did not etun to thei pe-a tends.

B 1959, the ap beteen actual consume spendin and its pe-Wold Wa II pojection hadbecome substantial. Similal, the inestment component ailed to keep up ith its pe-atend. Duin the peiod o 1948 to 1959 it is moe o less lat, shoin no oth at all. he

subdued consume spendin can be patl explained b the inancin o the as that alsocontibuted to the stanant inestment duin the peiod.

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Figure 5: Aer World War II and the Korean War, consumption and investment did notreturn to the pre-war level

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VIENAM WAR

In monetary tems, the Vietnam Wa as less expensie as a pecentae o GDP than Wold Wa II and

the Koean Wa. Accodin to Daett, the military cost o the a as a pecentae o GDP as 9.5% inthe peak spendin ea o 1968. 14 Te ocial U.S. Goenment start date o the Vietnam conict isconsideed to be 1 Noembe 1955. Tis as hen the st U.S. military adises aied in Vietnam;hoee the st combat toops ee not deploed until 1965 hich is consideed the start date othe puposes o this pape.

Vietnam as dieent to the pecedin conicts in the sense thee as no spike in military outlasto mak the start o the a, as military buildup emained constant as a esult o the Cold Wa. Tepeak ea o military spendin as 1968 hen it eached 9.5% o GDP, compaed to the last ea othe conict in 1973, hen military spendin ell to 5.9% o GDP. Fiscall, non-military spendin asequall sinicant in the peak ea o the conict, compaed to the Koean Wa hee military outlasee almost thee times non-military outlas. Tis as in lae part due to Pesident Johnsons GeatSociet domestic porams.

Te Vietnam Wa, like the peious as analzed, had a lastin scal legac due to the inceasedleels o oenment expenditue hich as nanced b inceases in taxation om 1968 to 1970. 15Te bloout in budet decits as dien b both military and non-military outlas in combinationith an expansionary monetary polic that led to rapidl isin ination in the mid-1970s. Fiue sixshos the incease in oenment spendin hich peaked in 1968. Consumption emained constantand inestment emained at.

14 Ree to Daett, S (2010) http://.as.o/sp/cs/natsec/RS22926.pd pae 2 o details o the method o calculation othis costin.

15 Labonte, M (2004) http://.ndu.edu/library/docs/cs/cs_l31176_27ap04.pd


Figure 6: Government spending - the driver o growth during the Vietnam War

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... BUT CONSUMPTION GROWTH

IS CONSTANT

AND INVESTMENT

IS FLAT.

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Te sliht all in oenment spendin ae 1969 and up to 1973 can be attibuted to allin militaryexpenditue that outeihed the inceases in non-military expenditue. Consumption as negatielaected b isin unemploment and ination ae the 1973 oil shock, hile pio oenment attempts toein in ination ith pice and ae contols also kept inestment almost at thouh most o the 1970s.

As can be seen in ue seen, the nancin method o the Vietnam Wa ia ination did not helppolicmakes ho late had to deal ith staation bouht on b the 1973 oil cisis.

Duin the ten-ea peiod 1965-1975, the DJIA did uctuate. Te oil shock and ensuin peiod ostanation depessed the maket, allin to 1963 leels in 1975. It as onl once ination leeled oae 1980 that stock pices started to incease, suestin the inationary ole o the Vietnam Wa didnot help expectations in the maket.


Figure 8: Te Dow Jones Industrial Average stagnated during the infationary period o Vietnam

Figure 7: Te Vietnam War helped push up infation beore 1973

INFLATION I

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COLD WAR

Te inceasin tensions beteen the U.S. and U.S.S.R. in the late 1970s thouh to the mid-80s sa

anothe military build-up unde Pesident Reagan. Te size o military spendin, hile lae inabsolute tems, as hoee elatiel smalle than the pecedin spendin duin the hot as oWold Wa II, Koea and Vietnam. Military expenditue as a pecentae o GDP eached its peak in1986 at 6.2% o GDP hich as about hal the size o non-military expenditue hich educed om14.9% o GDP in 1981 to 12.4% o GDP in 1988.

Te dominant economic naratie at the start o this peiod as the need to educe ination omthe ery hih leels o the late 1970s. Tis had been achieed b 1983, but at the expense o economicoth, causin a shap ecession in 1980. While ination as no lone a seious poblem in 1983,unemploment had isen to 10.8% b the end o 1982 and emained aboe 10% o hal o 1983. Reaganske policies o hihe military spendin and loe taxes, inceased budet decits om 2.6% o GDPin 1981 to 6% o GDP in 1983. Te eect o Reagans dual commitments as a debt dien consumptionboom hich as accompanied b hih inteest rates hich then caused trade decits. 16

Figure 9: Cold War spending was nanced by debt, uelling infation pressures which helpedkeep interest rates high resulting in a trade decit

In spite o the oin budet decit, military expenditue emained ell aboe pe-1980 leels untilthe beakup o the Soiet Bloc. B 1984 GDP oth had eached 7.6% o GDP. Subsequentl, theUnited States had budet decits until 1998.


16. Ree t Accodin to Labonte (2004), the decit spendin that Reagan committed to esulted in debt dien oth andpessue on ination. In esponse to the theat o hih ination, the ed kept inteest rates hih. Hoee, the eect o the hiherates as to attract oein capital hich caused an incease in the trade decit.

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05$)

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GDP GROWTH IS FINANCED BY DEBT-

DRIVEN CONSUMPTION BOOMS AND TRADE

DEFICIT FINANCING; INVESTMENT IN BOTH

PERIODS IS FLAT.

... WHILE INFLATION

FIRST FALLS OFF AND THEN

RISES AGAIN

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IRAQ AND AFGHANISAN WARS

Folloin on om the ecession o 2001 to 2003, the Iraq and Ahanistan Was started amidst eak

economic conditions.

17

Te peak ea o military spendin duin the Iraq a as 2008 at 4.3% o GDP.Te commitment to the Ahanistan a e slol ith the estimated peak ea o the conict occuinin 2010 hee the cost o the Ahan a as US$297 billion o appoximatel 2% o GDP. Notabl, like allcosts quoted in this pape, this does is not include the considerable costs associated ith eterans benets,inteest on a-elated debt, assistance to allies and country econstuction. When accountin o all othese associated costs, not just the budetary costs outlined aboe, the total numbe is eidentl mucheate as descibed b Stilitz and Bilmes in thei book, the Tee illion Dolla Wa: Te ue Cost o theIraq Conict. Stilitz and Bilmes counted budetary costs, esouces spent to date, esouces expected tobe spent in the utue, budetary costs to oenment, as ell as costs bone b the est o the econom. 18Te most conservatie estimates put the cost o the a at one tillion dollas hile urthe updates on theStilitz and Blimes ok no put the cost at e tillion dollas.

Unlike the Cold Wa peiod, hee military outlas ee somehat oset b inceases in taxation rates, theIraq and Ahanistan conicts ee entiel nanced b debt. Military outlas inceased hile the Bush taxcuts sa taxation eenue all sinicantl. Tis as the st time in Ameican history that the Goenmentcut taxes as it ent to a. Tis is shon in ue ten, ith the ederal tax eceipts and military expendituelines conein.

Figure 10: Te Iraq and Aghanistan wars was the rst time taxes were lowered alongsideincreases in military expenditure

Te esultin budet decit imposed majo constraints on the econom and limited the scope o optionsthat ee aailable to policmakes. Tis esulted in seious negatie eects o the est o the decade.

17. Not consideed in this analsis is the economic eect o the Desert Stom Operation hich is unique in the sense it didactuall inole an incease in military outlas as a pecentae o GDP. Military spendin actuall ell in 1990 and 1991, anddespite the act thee as a ecession in 1990-1991, most economists do not attibute this to the a. Some hae suested the

a as a part cause o the oil shock hich aected condence in an alead eak econom.18. Stilitz, J. & Blimes, L. (2011) Estimatin the costs o a: Methodoloical issues, ith applications to Iraq and Ahanistan.Chapte 13, Oxod Handbook o the Economics o Peace and Conict pp8

FEDERAL TAXRECEIPTS AS

% OF GDP

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Sinicantl, Stilitz and Bilmes aue the Iraq Wa plaed a diect ole in inceasin the cost o oil hichent om $23 a bael just beoe the a to $140 at its peak. While not attibutin all o the incease tothe Wa, the hihe oil pice had the eect o mutin domestic demand in the U.S. hile also inceasininationary pessues loball. Te occuence o inceased oil pices duin the a is shon in Fiue 11.

While ination as muted in the U.S. due to existin eak economic conditions, policmakes ee limitedb the lae budet decit and did not use scal polic as a lee to boost eectie demand until the GlobalFinancial Cisis in 2008. Tis ensued the Federal Reserve caied the buden o keepin the economoin, hich it did ia lo inteest rates, a ood o liquidit and lax bankin eulations hich in tunhelped uel the housin bubble. Fiue 11 also shos the incease in inteest rates in 2006 and 2007 thatee implemented in an attempt to contain the housin bubble pio to the nancial crash.

Figure 11: Oil Prices signicantly increased during the Iraq War

It can be seen in ue 12 that stock maket pices ee sinicantl aected b the bustin o the speculatiebubble in inomation technology hich started in late 2000. Te collapse o the bubble and subsequentecession as closel olloed b the eents o Septembe 11. Te shae maket rallied om the start othe Iraq a in 2003 and continued its rall inceasin in alue b oe 75%. Tis Bull Run ended ith theGlobal Financial Cisis hee the stock maket ell at the heiht o the cisis to the same leels as 1997.

Figure 12: Stock market events during the period

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SEPTEMBER 11

GLOBAL FINANCIAL CRISIS

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FINANCING HE WARS

Fo each o the peiods descibed in this pape, aious nancin methods ee utilized bpolicmakes. Was ineitabl inole oenments inceasin expenditue, and this can be done in

at least ou dieent as; Increasing taxation

Reducing non-milita spending to pay for milita outlays

Government borrowing from the public through War bonds or issuance of U.S. Treasu securities (debt)

Money creation.

Te U.S. has used a combination o these methods to nance its artime actiities, as shon in ue 13.Te chart shos the history o oenment spendin and ination since 1929 and the elation beteen theaious as and the tend in ination. Note the inceases in oenment spendin hich coespond itheach majo a.

Te majo incease in debt duin Wold Wa II shos it as lael nanced b debt hile the Koean and

Vietnam as ee nanced pimail b taxation and ination, espectiel. In the latte part o the 1980sdebt leels started to ise ith inceased booin to nance the Cold Wa. Te same has happened iththe Ahan and Iraq as in ecent eas.

It can be seen in spite o the aious nancin methods, the as discussed hee hae all consistentlinceased pessue on ination. While ination ma be ood o educin the debt buden, oerall it hasman negatie and hamul eects, such as puchasin poe edistibution and eosion o intenationalcompetitieness. 20

Figure 13: Wars Boost Infationary Pressure

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inflation boost

2008/9

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collapse

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War II

KoreanWar

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Afgan/Iraq

War

20. Wh pice stabilit?, Central Bank o Iceland, Accessed on 3 January, 2012. http://.sedlabanki.is/?PaeID=195

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CONCLUSION

Milita spendin, like othe oms o oenment spendin, can be an impotant souce o

economic demand duin times o lo conidence and dontun. It can lead to the deelopmento ne technoloies, eneate ne industies and ceate souces o demand and emploment.I milita spendin is unded b poessie taxation, as it as duin Wold Wa II, it canindiectl esult in moe eicient income distibution. he lattenin o income distibutionate 1945 helped acilitate the ceation o a lae consume oiented middle class hich as theoundation stone o the lon post-a boom that undepinned the U.S.s subsequent politicaleconomic pe-eminence.

While hue spendin duin Wold Wa II ended unemploment and ebuilt conidence,consumption and inestment declined duin the peiod due to stuctual chanes that eeneeded to the maket econom to ocus on the a eot. Nonetheless, the end o excess capacitand the hih leels o unemploment as an undisputed positie.

Hoee, analsis o the macoeconomic components o GDP duin Wold Wa II and insubsequent conlicts sho heihtened milita spendin had seeal adese macoeconomiceects. hese occued as a diect consequence o the undin equiements o inceasedmilita spendin. he U.S. has paid o its as eithe thouh debt (Wold Wa II, Cold Wa, Ahanistan/Iaq), taxation (Koean Wa) o inlation (Vietnam). In each case, taxpaes haebeen budened, and piate secto consumption and inestment hae been constained as aesult. Othe neatie eects include lae budet deicits, hihe taxes, and oth aboe tendleadin to inlation pessue. hese eects can un concuent ith majo conlict o ia laineects into the utue. Readless o the a a a is inanced, the oeall macoeconomic eecton the econom tends to be neatie.

Fo each o the peiods ate Wold Wa II, e need to ask , hat ould hae happened in economictems i these as did not happen? On the speciic eidence poided, it can be easonabl

said, it is likel taxes ould hae been loe, inlation ould hae been loe, thee ould haebeen hihe consumption and inestment and cetainl loe budet deicits. Some as aenecessa to iht and the neatie eects o not ihtin these as can a outeih the costso ihtin. Hoee i thee ae othe options, then it is pudent to exhaust them ist as onceas do stat, the outcome, duation and economic consequences ae diicult to pedict.

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Madick, J. (2008). Is Wa Good o the Econom? Retieed Auust 12, 2010, om Hungton Post: http://.hungtonpost.com/je-madick/is-a-ood-o-the-econo_b_84886.html

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