Top Economists Say War Is Bad for the Economy
Preface: Many Americans – including influential economists and talking heads - still wrongly assume that war is good for the economy. Many congressmen assume that cutting pork-barrel military spending would hurt their constituents’ jobs.
As demonstrated below, it isn’t true.
Nobel-prize winning economist Joseph Stiglitz says that
war is bad for the economy:
Stiglitz wrote in 2003:
War is widely thought to be linked to economic good times.
The second world war is often said to have brought the world out of
depression, and war has since enhanced its reputation as a spur to
economic growth. Some even suggest that capitalism needs wars, that
without them, recession would always lurk on the horizon. Today, we know that this is nonsense. The 1990s boom showed that peace is economically far better than war. The Gulf war of 1991 demonstrated that wars can actually be bad for an economy.
Stiglitz has also said that this decade’s Iraq war has been very bad for the economy. See this, this and this.
Former Federal Reserve chairman Alan Greenspan also said in that war is bad for the economy. In 1991, Greenspan said that
a prolonged conflict in the Middle East would hurt the economy. And he
made this point again in 1999:
Societies need to buy as much military insurance as they
need, but to spend more than that is to squander money that could go
toward improving the productivity of the economy as a whole: with more
efficient transportation systems, a better educated citizenry, and so
on. This is the point that retiring Rep. Barney Frank (D-Mass.) learned
back in 1999 in a House Banking Committee hearing with then-Federal
Reserve Chairman Alan Greenspan. Frank asked what factors were producing
our then-strong economic performance. On Greenspan’s list: “The
freeing up of resources previously employed to produce military
products that was brought about by the end of the Cold War.” Are you saying, Frank asked, “that dollar
for dollar, military products are there as insurance … and to the
extent you could put those dollars into other areas, maybe education and
job trainings, maybe into transportation … that is going to have a good
economic effect?” Greenspan agreed.
Economist Dean Baker
notes:
It is often believed that wars and military spending increases are good for the economy. In fact, most
economic models show that military spending diverts resources from
productive uses, such as consumption and investment, and ultimately
slows economic growth and reduces employment.
The Proof Is In the Pudding
Mike Lofgren
notes:
Military spending may at one time have been a genuine job
creator when weapons were compatible with converted civilian production
lines, but the days of Rosie the Riveter are long gone. [Indeed, WWII
was different from current wars in many ways, and so its economic effects are not comparable
to those of today's wars.] Most weapons projects now require
relatively little touch labor. Instead, a disproportionate share is
siphoned into high-cost R&D (from which the civilian economy
benefits little), exorbitant management expenditures, high overhead, and
out-and-out padding, including money that flows back into political
campaigns. A dollar appropriated for highway construction, health care,
or education will likely create more jobs than a dollar for Pentagon
weapons procurement.
***
During the decade of the 2000s, DOD budgets, including funds spent on
the war, doubled in our nation’s longest sustained post-World War II
defense increase. Yet during the same decade, jobs were created at the slowest rate since the Hoover administration. If defense helped the economy, it is not evident. And just the wars in Iraq and Afghanistan added over $1.4 trillion to deficits, according to the Congressional Research Service.
Whether the wars were “worth it” or merely stirred up a hornet’s nest
abroad is a policy discussion for another time; what is clear is that
whether you are a Keynesian or a deficit hawk, war and associated
military spending are no economic panacea.
The Institute for Economics & Peace (IEP)
shows
that any boost from war is temporary at best. For example, while WWII
provided a temporary bump in GDP, GDP then fell back to the baseline
trend. After the Korean War, GDP fell
below the baseline trend:
IEP notes:
By examining the state of the economy at each of the major conflict periods since World War II, it can be seen that the positive effects of increased military spending were outweighed by longer term unintended negative macroeconomic consequences.
While the stimulatory effect of military outlays is evidently
associated with boosts in economic growth, adverse effects show up
either immediately or soon after, through higher inflation, budget deficits, high taxes and reductions in consumption or investment. Rectifying these effects has required subsequent painful adjustments
which are neither efficient nor desirable. When an economy has excess
capacity and unemployment, it is possible that increasing military
spending can provide an important stimulus. However, if there
are budget constraints, as there are in the U.S. currently, then
excessive military spending can displace more productive non-military
outlays in other areas such as investments in high-tech industries,
education, or infrastructure. The crowding-out effects of
disproportionate government spending on military functions can affect
service delivery or infrastructure development, ultimately affecting long-term growth rates.
***
Analysis of the macroeconomic components of GDP during World War II
and in subsequent conflicts show heightened military spending had
several adverse macroeconomic effects. These occurred as a direct
consequence of the funding requirements of increased military spending.
The U.S. has paid for its wars either through debt (World War II, Cold
War, Afghanistan/Iraq), taxation (Korean War) or inflation (Vietnam). In
each case, taxpayers have been burdened, and private sector consumption and investment have been constrained as a result. Other negative effects include larger budget deficits, higher taxes, and growth above trend leading to inflation pressure. These effects can run concurrent with major conflict or via lagging effects into the future. Regardless of the way a war is financed, the overall macroeconomic effect on the economy tends to be negative.
For each of the periods after World War II, we need to ask, what would
have happened in economic terms if these wars did not happen? On the
specific evidence provided, it can be reasonably said, it is likely taxes
would have been lower, inflation would have been lower, there would
have been higher consumption and investment and certainly lower budget
deficits. Some wars are necessary to fight and the negative
effects of not fighting these wars can far outweigh the costs of
fighting. However if there are other options, then it is prudent to
exhaust them first as once wars do start, the outcome, duration and
economic consequences are difficult to predict.
We
noted in 2011:
This is a no-brainer, if you think about it. We’ve been
in Afghanistan for almost twice as long as World War II. We’ve been in
Iraq for years longer than WWII. We’ve been involved in 7 or 8
wars in the last decade. And yet [the economy is still unstable]. If
wars really helped the economy, don’t you think things would have
improved by now? Indeed, the Iraq war alone could end up costing more than World War II.
And given the other wars we’ve been involved in this decade, I believe
that the total price tag for the so-called “War on Terror” will
definitely support that of the “Greatest War”.
Let’s look at the adverse effects of war in more detail …
War Spending Diverts Stimulus Away from the Real Civilian Economy
IEP
notes that – even though the government spending
soared – consumption and investment were
flat during the Vietnam war:
The New Republic
noted in 2009:
Conservative Harvard economist Robert Barro has argued that increased military spending during WWII actually depressed other parts of the economy.
(New Republic also
points out
that conservative economist Robert Higgs and liberal economists Larry
Summers and Brad Delong have all shown that any stimulation to the
economy from World War II has been greatly exaggerated.)
How could war actually hurt the economy, when so many say that it stimulates the economy?
Because of what economists call the “broken window fallacy”.
Specifically, if a window in a store is broken, it means that the
window-maker gets paid to make a new window, and he, in turn, has money
to pay others. However, economists long ago showed that – if the window
hadn’t been broken – the shop-owner
would have spent that money on other things, such as food, clothing, health care, consumer electronics or recreation, which would have helped the economy
as much or more.
If the shop-owner hadn’t had to replace his window, he might have
taken his family out to dinner, which would have circulated more money
to the restaurant, and from there to other sectors of the economy.
Similarly, the money spent on the war effort is money that cannot be
spent on
other sectors of the economy. Indeed, all of the military spending has just created military jobs,
at the expense of the civilian economy.
As Austrian economist Ludwig Von Mises
pointed out:
That is the essence of so-called war prosperity; it
enriches some by what it takes from others. It is not rising wealth but a
shifting of wealth and income.
We
noted in 2010:
You know about America’s unemployment problem. You may have even heard that the U.S. may very well have suffered a permanent destruction of jobs.
But did you know that the defense employment sector is booming?
[P]ublic sector spending – and mainly defense spending – has
accounted for virtually all of the new job creation in the past 10
years:
The U.S. has largely been financing job creation for ten
years. Specifically, as the chief economist for BusinessWeek, Michael
Mandel, points out, public spending has accounted for virtually all new
job creation in the past 1o years:
Private sector job growth was almost non-existent over the past ten years. Take a look at this horrifying chart:
Between May 1999 and May 2009, employment in the private sector
sector only rose by 1.1%, by far the lowest 10-year increase in the
post-depression period.
It’s impossible to overstate how bad this is. Basically speaking, the
private sector job machine has almost completely stalled over the past
ten years. Take a look at this chart:
Over the past 10 years, the private sector has generated roughly 1.1
million additional jobs, or about 100K per year. The public sector
created about 2.4 million jobs.
But even that gives the private sector too much credit. Remember that
the private sector includes health care, social assistance, and
education, all areas which receive a lot of government support.
***
Most of the industries which had positive job growth over the past
ten years were in the HealthEdGov sector. In fact, financial job growth
was nearly nonexistent once we take out the health insurers.
Let me finish with a final chart.
Without a decade of growing government support from rising health and
education spending and soaring budget deficits, the labor market would
have been flat on its back. [120]
***
So most of the job creation has been by the public sector. But
because the job creation has been financed with loans from China and
private banks, trillions in unnecessary interest charges have been
incurred by the U.S.
And this shows military versus non-military durable goods shipments: 
[Click here to view full image.]
So we’re running up our debt (which will eventually decrease economic
growth), but the only jobs we’re creating are military and other public
sector jobs.
PhD economist Dean Baker points out that America’s massive military spending on unnecessary and unpopular wars lowers economic growth and increases unemployment:
Defense spending means that the government is pulling
away resources from the uses determined by the market and instead using
them to buy weapons and supplies and to pay for soldiers and other
military personnel. In standard economic models, defense spending is a
direct drain on the economy, reducing efficiency, slowing growth and
costing jobs.
A few years ago, the Center for Economic and Policy
Research commissioned Global Insight, one of the leading economic
modeling firms, to project the impact of a sustained increase in defense
spending equal to 1.0 percentage point of GDP. This was roughly equal
to the cost of the Iraq War.
Global Insight’s model projected that after 20 years the economy
would be about 0.6 percentage points smaller as a result of the
additional defense spending. Slower growth would imply a loss of almost
700,000 jobs compared to a situation in which defense spending had not
been increased. Construction and manufacturing were especially big job
losers in the projections, losing 210,000 and 90,000 jobs, respectively.
The scenario we asked Global Insight [recognized as the most consistently accurate
forecasting company in the world] to model turned out to have vastly
underestimated the increase in defense spending associated with current
policy. In the most recent quarter, defense spending was equal to 5.6
percent of GDP. By comparison, before the September 11th attacks, the
Congressional Budget Office projected that defense spending in 2009
would be equal to just 2.4 percent of GDP. Our post-September 11th
build-up was equal to 3.2 percentage points of GDP compared to the
pre-attack baseline. This means that the Global Insight projections of
job loss are far too low…
The projected job loss from this increase in defense spending would be close to 2 million.
In other words, the standard economic models that project job loss from
efforts to stem global warming also project that the increase in
defense spending since 2000 will cost the economy close to 2 million
jobs in the long run.
The Political Economy Research Institute at the University of Massachusetts, Amherst has also shown that non-military spending creates more jobs than military spending.
So we’re running up our debt – which will eventually decrease
economic growth – and creating many fewer jobs than if we spent the
money on non-military purposes.
High Military Spending Drains Innovation, Investment and Manufacturing Strength from the Civilian Economy
Chalmers Johnson
notes that high military spending diverts innovation and manufacturing capacity from the economy:
By the 1960s it was becoming apparent that turning over
the nation’s largest manufacturing enterprises to the Department of
Defense and producing goods without any investment or consumption value
was starting to crowd out civilian economic activities. The historian
Thomas E Woods Jr observes
that, during the 1950s and 1960s, between one-third and two-thirds of
all US research talent was siphoned off into the military sector. It is,
of course, impossible to know what innovations never appeared as a
result of this diversion of resources and brainpower into the service of
the military, but it was during the 1960s that we first began to notice
Japan was outpacing us in the design and quality of a range of consumer
goods, including household electronics and automobiles.
***
Woods writes:
“According to the US Department of Defense, during the four decades
from 1947 through 1987 it used (in 1982 dollars) $7.62 trillion in
capital resources. In 1985, the Department of Commerce estimated the
value of the nation’s plant and equipment, and infrastructure, at just
over $7.29 trillion… The amount spent over that period could have doubled the American capital stock or modernized and replaced its existing stock”.
The fact that we did not modernise or replace our capital assets is
one of the main reasons why, by the turn of the 21st century, our manufacturing base had all but evaporated.
Machine tools, an industry on which Melman was an authority, are a
particularly important symptom. In November 1968, a five-year inventory
disclosed “that 64% of the metalworking machine tools used in US
industry were 10 years old or older. The age of this industrial
equipment (drills, lathes, etc.) marks the United States’ machine tool
stock as the oldest among all major industrial nations, and it marks the
continuation of a deterioration process that began with the end of the
second world war. This deterioration at the base of the industrial
system certifies to the continuous debilitating and depleting
effect that the military use of capital and research and development
talent has had on American industry.”
Economist Robert Higgs makes
the same pointabout World War II:
Yes, officially measured GDP soared during the war.
Examination of that increased output shows, however, that it consisted
entirely of military goods and services. Real civilian
consumption and private investment both fell after 1941, and they did
not recover fully until 1946. The privately owned capital stock actually
shrank during the war. Some prosperity. (My article in the peer-reviewed Journal of Economic History, March 1992, presents many of the relevant details.)
It is high time that we come to appreciate the distinction between
the government spending, especially the war spending, that bulks up
official GDP figures and the kinds of production that create genuine
economic prosperity. As Ludwig von Mises wrote in the aftermath of World War I, “war prosperity is like the prosperity that an earthquake or a plague brings.”
War Causes Inflation … Which Keynes and Bernanke Admit Taxes Consumers
As we
noted in 2010, war causes inflation … which hurts consumers:
Liberal economist James Galbraith wrote in 2004:
Inflation applies the law of the jungle to war finance. Prices and profits rise, wages and their purchasing power fall. Thugs,
profiteers and the well connected get rich. Working people and the poor
make out as they can. Savings erode, through the unseen mechanism of
the “inflation tax” — meaning that the government runs a big deficit in nominal terms, but a smaller one when inflation is factored in.
***
There is profiteering. Firms with
monopoly power usually keep some in reserve. In wartime, if the climate
is permissive, they bring it out and use it. Gas prices can go up
when refining capacity becomes short — due partly to too many mergers.
More generally, when sales to consumers are slow, businesses ought to
cut prices — but many of them don’t. Instead, they raise prices to meet their income targets and hope that the market won’t collapse.
Ron Paul agreed in 2007:
Congress and the Federal
Reserve Bank have a cozy, unspoken arrangement that makes war easier to
finance. Congress has an insatiable appetite for new spending, but
raising taxes is politically unpopular. The Federal Reserve, however, is
happy to accommodate deficit spending by creating new money through the
Treasury Department. In exchange, Congress leaves the Fed alone
to operate free of pesky oversight and free of political scrutiny.
Monetary policy is utterly ignored in Washington, even though the
Federal Reserve system is a creation of Congress.
The result of this arrangement is inflation. And inflation finances war.
Blanchard Economic Research pointed out in 2001:
War has a profound effect on the economy, our government
and its fiscal and monetary policies. These effects have consistently
led to high inflation.
***
David Hackett Fischer is a Professor of History and Economic History
at Brandeis. [H]is book, The Great Wave, Price Revolutions and the
Rhythm of History … finds that … periods
of high inflation are caused by, and cause, a breakdown in order and a
loss of faith in political institutions. He also finds that war is a
triggering influence on inflation, political disorder, social conflict
and economic disruption.
***
Other economists agree with Professor Fischer’s link between inflation and war.
James Grant, the respected editor of Grant’s Interest Rate Observer,
supplies us with the most timely perspective on the effect of war on
inflation in the September 14 issue of his newsletter:
“War is inflationary. It
is always wasteful no matter how just the cause. It is cost without
income, destruction financed (more often than not) by credit creation.
It is the essence of inflation.”
Libertarian economics writer Lew Rockwell noted in 2008:
You can line up 100 professional war historians and
political scientists to talk about the 20th century, and not one is
likely to mention the role of the Fed in funding US militarism. And yet
it is true: the Fed is the institution that has created the money to fund the wars. In this role, it has solved a major problem that the state has confronted for all of human history. A
state without money or a state that must tax its citizens to raise
money for its wars is necessarily limited in its imperial ambitions.
Keep in mind that this is only a problem for the state. It is not a
problem for the people. The inability of the state to fund its unlimited
ambitions is worth more for the people than every kind of legal check
and balance. It is more valuable than all the constitutions every
devised.
***
Reflecting on the calamity of this war, Ludwig von Mises wrote in 1919
One can say
without exaggeration that inflation is an indispensable means of
militarism. Without it, the repercussions of war on welfare become
obvious much more quickly and penetratingly; war weariness would set in
much earlier.***
In the entire run-up to war, George
Bush just assumed as a matter of policy that it was his decision alone
whether to invade Iraq. The objections by Ron Paul and some other
members of Congress and vast numbers of the American population were
reduced to little more than white noise in the background. Imagine if he
had to raise the money for the war through taxes. It never would have
happened. But he didn’t have to. He knew the money would be
there. So despite a $200 billion deficit, a $9 trillion debt, $5
trillion in outstanding debt instruments held by the public, a federal
budget of $3 trillion, and falling tax receipts in 2001, Bush
contemplated a war that has cost $525 billion dollars — or $4,681 per
household. Imagine if he had gone to the American people to request
that. What would have happened? I think we know the answer to that
question. And those are government figures; the actual cost of this war
will be far higher — perhaps $20,000 per household.
***
If the state has the power and is asked to choose between doing good
and waging war, what will it choose? Certainly in the American context,
the choice has always been for war.
And progressive economics writer Chris Martenson explains as part of his “Crash Course” on economics:
If we look at the entire sweep of history, we can make an utterly obvious claim: All wars are inflationary. Period. No exceptions.
***
So if anybody tries to tell you that you haven’t sacrificed for the war, let them know you sacrificed a large portion of your savings and your paycheck to the effort, thank you very much.
The bottom line is that war always causes inflation, at least when it
is funded through money-printing instead of a pay-as-you-go system of
taxes and/or bonds. It might be great for a handful of defense
contractors, but war is bad for Main Street, stealing wealth from people by making their dollars worth less.
IEP
gives a graphic example – the Vietnam war helping to push inflation through the roof:
War Causes Runaway Debt
We
noted in 2010:
All of the spending on unnecessary wars adds up.
The U.S. is adding trillions to its debt burden to finance its multiple wars in Iraq, Afghanistan, Yemen, etc.
Indeed, IEP – commenting on the war in Afghanistan and Iraq – notes:
This was also the first time in U.S. history
where taxes were cut during a war which then resulted in both wars
completely financed by deficit spending. A loose monetary
policy was also implemented while interest rates were kept low and
banking regulations were relaxed to stimulate the economy. All of these
factors have contributed to the U.S. having severe unsustainable
structural imbalances in its government finances.
We also
pointed out in 2010:
It is ironic that America’s huge military spending is
what made us an empire … but our huge military is what is bankrupting us
… thus destroying our status as an empire.
Economist Michel Chossudovsky told Washington’s Blog:
War always causes recession. Well, if it is a very short
war, then it may stimulate the economy in the short-run. But if there is
not a quick victory and it drags on, then wars always put the nation
waging war into a recession and hurt its economy.
Indeed, we’ve known for
2,500 years that prolonged war bankrupts an economy (and remember Greenspan’s
comment.)
It’s not just civilians saying this …
The former head of the Joint Chiefs of Staff – Admiral Mullen –
agrees:
The Pentagon needs to cut back on spending.
“We’re going to have to do that if it’s going to survive at all,” Mullen said, “and do it in a way that is predictable.”
Indeed, Mullen
said:
For industry and adequate defense funding to survive … the two must work together. Otherwise, he added, “this
wave of debt” will carry over from year to year, and eventually, the
defense budget will be cut just to facilitate the debt.
Former Secretary of Defense Robert Gates agrees as well. As David Ignatius
wrote in the Washington Post in 2010:
After a decade of war and financial crisis, America has
run up debts that pose a national security problem, not just an economic
one.
***
One of the strongest voices arguing for fiscal responsibility as a
national security issue has been Defense Secretary Bob Gates. He gave a landmark speech in Kansas on May 8, invoking President Dwight Eisenhower’s warnings about the dangers of an imbalanced military-industrial state.
“Eisenhower was wary of seeing his beloved republic turn into a
muscle-bound, garrison state — militarily strong, but economically
stagnant and strategically insolvent,” Gates said. He warned that
America was in a “parlous fiscal condition” and that the “gusher” of military spending that followed Sept. 11, 2001, must be capped. “We can’t have a strong military if we have a weak economy,” Gates told reporters who covered the Kansas speech.
On Thursday the defense secretary reiterated his pitch that Congress must stop shoveling money at the military,
telling Pentagon reporters: “The defense budget process should no
longer be characterized by ‘business as usual’ within this building — or
outside of it.”
While war might make a handful in the
military-industrial complex and
big banks rich, America’s top military leaders and economists say that would be a
very bad idea for the American people.
Indeed, military strategists have known for
2,500 years that prolonged wars are disastrous for the nation.
War Increases Terrorism … And Terrorism Hurts the Economy
Security experts – conservative hawks and liberal doves alike – agree that waging war in the Middle East
weakens national security and
increases terrorism. See
this,
this,
this,
this,
this,
this and
this.
Terrorism – in turn – terrorism is bad for the economy. Specifically, a
study by Harvard and the National Bureau of Economic Research (NBER) points out:
From an economic standpoint, terrorism has been described
to have four main effects (see, e.g., US Congress, Joint Economic
Committee, 2002). First, the capital stock (human and physical) of a
country is reduced as a result of terrorist attacks. Second, the
terrorist threat induces higher levels of uncertainty. Third, terrorism
promotes increases in counter-terrorism expenditures, drawing resources
from productive sectors for use in security. Fourth, terrorism is known
to affect negatively specific industries such as tourism.
The Harvard/NBER concludes:
In accordance with the predictions of the model, higher
levels of terrorist risks are associated with lower levels of net
foreign direct investment positions, even after controlling for other
types of country risks. On average, a standard deviation increase in the
terrorist risk is associated with a fall in the net foreign direct
investment position of about 5 percent of GDP.
So the more unnecessary wars American launches and the more innocent
civilians we kill, the less foreign investment in America, the more
destruction to our capital stock, the higher the level of uncertainty,
the more counter-terrorism expenditures and the less expenditures in
more productive sectors, and the greater the hit to tourism and some
other industries.
Moreover:
Terrorism has contributed to a decline in the global economy (for example, European Commission, 2001).
So military adventurism increases terrorism which hurts the world economy. And see
this.
Postscript: Attacking a country which controls the flow of oil has
special impacts on the economy. For example, well-known economist
Nouriel Roubini says that
attacking Iran would lead to global recession. The IMF says that Iran cutting off oil supplies could
raise crude prices 30%.
