Monday, March 22, 2010

War and the Economy

Readers Comment: Causes of recessions - not one mention of the wars? the causes for the recessions have been wars. American taxpayers have paid over $1 trillion. this is just in U.S. "The recession of 1981 was caused by:" that was during the iraq-iran war. again, no mention of the war. 'Beginning July 1981, the US faced another 16-month recession, a 9.7% unemployment rate, and a 20% stock market decline.' the current Iraq war alone has cost the U.K. well over £5 billion. that's your cause.

One of the most popular misconceptions is that wars cause recessions. Wars may be unjust, they may lead to huge government borrowing / deficits and national debts. But, wars themselves don't directly cause recession. In fact military spending is often a cause of rapid economic growth. Some suggest that one motive for wars and military spending is the maintenance of full employment / higher economic growth. (for Example, pressure for the US involvement in Korea and Vietnam has been placed partly on the huge military industrial complex that existed at the end of the Second World War. "We must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex." ~Dwight D. Eisenhower (Jan 1961)

Part of the problem is a misunderstanding of what a recession is. A recession is a period of negative economic growth - falling output, rising unemployment. Recession does not mean rising government borrowing (though of course a recession, invariably leads to higher borrowing.

What Impact Do Wars Have on the Economy?

Wars invariably lead to an increase in government spending on military. This is usually financed by a combination of tax and government borrowing, but, mainly borrowing. This spending creates additional demand in the economy, creating employment in armament manufacturers.

In the midst of the Great Depression, the two countries who successfully reduced mass unemployment quickly were Japan and Germany - who aggressively re-armed. There were other reasons for falling unemployment. But, the expansion of the military sector was a key factor in boosting growth and employment.

The US and UK only really solved mass unemployment with the onset of the Second World War when they began a massive extension of military spending.

The Second World war was immensely costly for all parties. At the end of the Second World War, Britain was very nearly bankrupt. National Debt was close to 200% of GDP. A loan from the US was essential to keep economy afloat. But, huge national debt is not the same as a recession. The economy didn't contract in the war of the aftermath.

The Legacy of War on the Economy.

There are occasions when the end of a war can lead to recession. In the Napoleonic Wars, Britain had a huge increase in military spending. National debt as a % of GDP increased to 250% (Triple current borrowing levels). However, at the end of the Napoleonic wars, many soldiers were demobilised. Combined with inflation, battered world trade and unemployed ex-soldiers the economy suffered a period of contraction and high unemployment.

In this case, the prolonged wars undoubtedly contributed to this economic crisis.

The end of the First World War was similarly painful for the UK economy. The economy experienced high unemployment, and periods of deflation. Though this was exacerbated by other issues such as the damaging alignment to the Gold Standard and the subsequent deflationary pressures.

By contrast, the First World War provided a filip to the US economy. The expansion in military spending helped contribute to a decade long economic boom.

Conclusion

Every case is different, but, generally wars provide a boost to domestic demand through higher military spending. The aftermath of wars is more uncertain. Making the transition from a war economy to a peacetime economy can be difficult, though there is no clearcut effect. It depends on too many variables.

Of course, none of this justifies war. Japan and Germany reduced unemployment successfully by having a totalitarian military state. But, the same result could have been achieved from spending on hospitals and education. The problem is there is often greater political will for higher government spending and borrowing if it is fighting a war.

Related
Economy and Iraq War

2 comments:

Anonymous said...

War may seem to benefit the econoimes of the first world countries which are rich to begin with, or countries which initiated the war. But does war benefit the economy of third world countries, for example, Iraq, Afghanistan, Pakistan?

supernova said...

Going to war might be seen as an artificial support of structural inefficiencies in our economy. This "selecting of economical winners" is mostly done for political reasons.

We should keep in mind that Britain is famous and respected in the world for his reducing of economic inefficiencies when its achievements are mostly positive (e.g. the industrial revolution). Wars are very negative.

The real reason behind our foreign policy and wars is the conviction Britain is and should remain a "great power". See:
http://en.wikipedia.org/wiki/International_relations
Sounds alright but in reference to the wikipedia reference, the balance between "hard power" and "soft power" needs to be reviewed....