War in the past and modern times is accompanied by increased military spending and widespread governmental intervention in different aspects of the economy. Aside from the humanitarian aspect that include the loss of life and destruction of property, most Americans believe that war has positive effects on the economy. First, the increased government spending on the military increases economic activity while creating newer employment opportunities (Institute for Economics and Peace, 2013). Secondly, the investment into new technologies during war time end up benefiting other industries for a long time later. Note, however, that the same effects can be achieved by implementing programs that target different industries and accelerate their research and development cycles. Even then, those who view war as a positive thing on the economy cite the benefit of increased GDP growth (Carvalho et al. 2019). Through all the wars the US has been engaged with since World War II (WWI), the country’s GDP received a corresponding increase. Most importantly of all, wars, especially WWII create the proper conditions to overcome economic downturns. Unfortunately, the positive economic benefits of war are short lived. In most cases, the negative economic consequences are felt as the war progresses with residual effects harming the economy in the long-term.
World War II (WWII)
The main cause for the short-term benefits but long-term consequences of war on the economy is largely associated with different government policies that are instituted to fund the war. Different indicators provide evidence of these negative consequences. For instance, during most wars the US has been engaged with, public debt increased (Institute for Economics and Peace, 2013). Furthermore, taxation levels increased to fund military spending. As a consequence of these activities, the country’s consumption and investment as a function of its GDP almost always drops (Novta & Pugacheva, 2021). Through all the conflicts, however, the level of inflation increases during the war or as a direct and indirect consequence. The following sections prove that the long-term consequences of war outweigh their short-term benefits by citing statistics from the major wars in US history.
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The economic impact of WWII, especially its role in ending the Great Depression can be analysed by looking into the country’s GDP in the corresponding period. From the data released by the Bureaus of Economic Analysis, it is evident that the four-year war between 1941 – 1945 resulted in the most significant short-term growths in US history. This data is summarized in the figure below.
Figure 1 . US GDP between 1929 and 2013. Source: Institute for Economics and Peace (2013)
From the above figure, a few things are clear. First, economic growth in terms of GDP between 1941 – 1945 was mainly driven by a growth in government spending to fund the war. This funding came from taxes, which increased by up to 6% by the end of the war (Institute for Economics and Peace, 2013). Even then, the country’s unemployment fell significantly, where it was at 14.6% in 1940 and 1.9% in 1945 (Institute for Economics and Peace, 2013). Note, however, the main reason for the drop was that most people were joined the armed forces to contribute to the war in one way or another. Unfortunately, even though unemployment rates dropped to the lowest levels in US history, the country’s per capita consumption did not increase. The government’s spending on the war was significantly high. In 1941, for instance, government spending was 30% of the GDP. By 1944, government spending had increased to 79% of the year’s GDP (Institute for Economics and Peace, 2013). Correspondingly, consumption experienced a 21% drop from 67% while investment experienced an 8% drop from 11% (Institute for Economics and Peace, 2013). These statistics are summarized in the figure below.
Figure 2 . Consumption and investment trends years after the war. Source: Institute for Economics and Peace (2013)
All these economic consequences were as a result of other government policies made to reduce consumption. For instance, through the War Production Board and the Office of Price Administration, priorities for war materials were set. As a result, common raw materials like metals and rubber were redirected to support military production rather than being sent to commercial industries like in peace times. Furthermore, there was little to no upward economic and social movement was wages and salaries were controlled to minimize consumption. Furthermore, personal savings were encouraged not in terms of having them in the bank or government treasury bonds but in war bonds (Institute for Economics and Peace, 2013). As a result, individual disposable income was significantly limited.
Some might argue that one of the positive outcomes of WWI was a large scale and even redistribution of wealth. In the 1920s and 40s, the top ten percent in the country claimed approximately 45% of the country’s income share (Institute for Economics and Peace, 2013). By the end of WWII until the Vietnam War, the figure has dropped to 32.5%. The long-term effects of WWII and subsequent wars increased it to 33% by the 1970s and back to 45% by 2007 (Institute for Economics and Peace, 2013). Therefore, though people enjoyed more income, contributing to the rise of the advanced consumer economy, the combined effect of the war did not make the benefits sustainable in the long term.
Korean War
Like WWII, the Korean War’s most significant impact on the country’s economy was an increase in the GDP which maxed out at 14.1% by 1953. Though it had a lower impact on the economy compared to WWII, the Korean War was still funded through government spending. As opposed to the debt financing that funded WWII, the Korean War was primarily funded via increased taxation (Institute for Economics and Peace, 2013). During the same time period, the economy’s growth was primarily driven by government spending on the war while investment and consumption had yet to recover from their pre-war levels. However, it is the government policies that exacerbated the situation.
To increase funding, President Truman enacted the Revenue Act of 1950 that returned the taxation rates back to the levels they were during WWII, followed by increased taxes on individuals and corporations. Though the extra taxes boosted the economy by another 1.3%, inflation levels were at 5.3% by 1951. To control inflation, the government engaged in large scale price and wage controls. In spite of these actions, the economy still fell into a brief recession as the country’s GDP fell to the level it was in 1950. These statistics are summarized in the figure below.
Figure 3 . Investment and taxes in the Korean War compared to WWII. Source: Institute for Economics and Peace (2013)
A few observations can be made from the above figure. First, investment and consumption at the end of the Korean War and did not increase immediately to exceed WWII levels. Furthermore, the gap between the two increased substantially. Between 1948 and 1959, there was no growth in investment and consumption, resulting in a stagnant economy whose GDP was no longer driven by government spending (Institute for Economics and Peace, 2013). This goes to show that though the short-term economic growth during the two war (primarily driven by government spending) resulted in transient economic growth, the benefits were not sustainable. Instead, the consequences could be felt years after the end of the wars.
Conclusion
In summary, the benefits of a war on the economy are clear and inarguable. World War II (WWI)and the Korean War are a good example, where the country’s GDP received a corresponding growth in different aspects. Unfortunately, the positive economic benefits of war are short lived. In most cases, the negative economic consequences are felt as the war progresses with residual effects harming the economy in the long-term. During WWII, for instance, consumption experienced a 21% drop from 67% while investment experienced an 8% drop from 11% while government spending increased to 79% of the GDP 1944. These consequences bled over to the Korean War. Between 1948 and 1959, there was no growth in investment and consumption, resulting in a stagnant economy whose GDP was no longer driven by government spending. This goes to show that though the short-term economic growth during the two war (primarily driven by government spending) resulted in transient economic growth, the benefits were not sustainable. The long-term consequences of the wars will continue to be felt long into the future.
References
Carvalho, M., Azevedo, A., & Massuquetti, A. (2019). Emerging Countries and the Effects of the Trade War between US and China. Economies , 7 (2), 45.
Institute for Economics and Peace. (2013). ECONOMIC CONSEQUENCES of WAR on the U.S. ECONOMY . Institute for Economics and Peace. Retrieved from https://www.economicsandpeace.org/wp-content/uploads/2015/06/The-Economic-Consequences-of-War-on-US-Economy_0.pdf
Novta, N., & Pugacheva, E. (2021). The macroeconomic costs of conflict. Journal of Macroeconomics , 68 , 103286.
