War: Effects of War on the Economy

The most persistent and perhaps most important question relating to the effects of America's wars and their related costs on the U.S. economy is whether military expenditures have been a prop or a burden for economic growth. This question has continued relevance because the United States in the 1990s spent a larger part of its gross domestic product (GDP) on defense (3.8% in 1995) than any other G7 industrial nation, almost four times Japan's expenditure and nearly twice as much as Germany's—America's two most important economic competitors. The fact that Russia in the 1990s spent almost three times more of its GDP on defense—and was in economic chaos—only strengthened this concern.

Historians and economists have waxed and waned with regard to the effect of military expenditures on the U.S. economy. Charles and Mary Beard in The Rise of American Civilization (1927) and Louis Hacker in The Triumph of American Capitalism (1940) argued that the Civil War destroyed not only slavery but also the Southern slaveocracy, thus allowing the balance of political power to shift to Northern industrialists and hence spurring American economic growth. Prior to these accounts, the classical economists (Adam Smith, David Ricardo, and Thomas Malthus) were concerned with the effects of war on aggregate demand. The eighteenth and early nineteenth centuries saw very high levels of military expenditures in Britain, for example, which these economists believed had a negative impact on industrial growth. The national debts resulting from war, Smith believed, “enfeebled every state … enriching in most cases the idle and profuse debtor at the expense of the industrious and frugal creditor.”

Critics of the capitalist system in more recent years have argued that capitalist societies are prone to periodic stagnation, and that only wars of the magnitude of World War II are capable of curing massive unemployment. Alternatively, liberal economists argue that war, and particularly World War II, was the strongest influence establishing Keynesian economics as a guideline and a justification for U.S. government fiscal policies for the postwar era—policies that led to widespread employment, high earnings, and a modest measure of income redistribution. Even some strong opponents of the Vietnam War began to argue in the mid‐1990s that full employment was only possible in the late 1960s because of that war.

Paul Kennedy, in his widely read Rise and Fall of the Great Powers (1987), is perhaps the best known historian for the view that persistent and high military expenditures have played an important role in the relative economic decline of major nations since 1500. In this and subsequent works, he argues that the United States now runs the risk of “imperial overstretch”; that America's global commitments are greater than its capacity to fund them. For him, war is not only a burden, but continuous high levels of defense spending can and generally have turned major nations into minor ones. Although his is a popular view, he had yet to persuade the experts that the United States was well down the road to relative economic decline.

The most sophisticated studies on the prop v. burden issue—whether defense spending contributes to economic growth and well‐being by stimulating the economy, or whether defense spending uses up scarce resources or diverts resources into less productive channels—tend to emphasize that growth in the GDP has been rather constant, with little lasting impact from the nine major wars America has fought since independence. Wars temporarily reduce long‐run productive capacity by reducing the growth of population and the inflow of immigrants; but the general burden of any given war falls largely on the current generation, according to Chester Wright in a seminal study on the more enduring economic consequences of American wars to 1940. More recently, Todd Sandler and Keith Hartley demonstrated that defense spending generally inhibits economic growth in developed countries by crowding out public and private investment, and siphoning off of R & D resources. Indeed, since the late 1980s, world military expenditures as a percentage of GDP have decreased dramatically without any evidence of harmful effects on the world economy. In truth, the overall economic burden of America's wars is less significant than the inequitable manner in which so much of that burden has been placed upon the working class and those with modest education, while others largely escape or even profit from such wars.

If the effect of military spending during the war years is the most obvious point of impact on the economy, the most lasting one has to do with veterans' benefits paid after the war to veterans and their dependents. Veterans' benefits have been paid for every war since the American Revolution. They amounted to about two‐thirds of the total dollar cost of the Revolutionary War; more than half the cost of the War of 1812; and 3.7 times the cost of mobilizing the Union forces in the Civil War. Surprisingly, these benefits continued to rise for about forty to sixty years after the end of each of these wars and did not cease until well over a century later. Benefits for Civil War veterans and spouses ceased only in the 1980s; World War II benefits will be paid until sometime after 2070. To date, World War II veteran's benefits have amounted to more than $300 billion, only somewhat less than the original cost of that war in current dollars. Clearly, veterans' benefits have been a major infusion of funds into the economy, and were the major direct federal subsidy to families prior to the welfare state. Compared to other countries, American soldiers and their dependents received benefits much earlier (since 1783) and in more generous amounts than elsewhere. The average payment to a still‐living World War I veteran, for example, was $6,500 in 1992. Confederate soldiers, of course, received no federal veterans benefits, although some southern states sought to add them.

The most troubling problem concerning the impact of war on the economy has to do with rapidly rising public debt. Large but temporary public debts have occurred in all of America's wars; all were paid off in time until the 1970s, when U.S. public debt rose dramatically owing to large defense increases and major tax cuts under President Ronald Reagan. In the 1990s, U.S. net public debt (most of which is war‐related) was at an unprecedented peacetime level. High public debt levels—a problem in all G7 nations—boost real interest rates, retard the accumulation of private capital, and limit gains in living standards, according to the International Monetary Fund. Reducing this unsustainable public debt, the most significant legacy of recent American wars, will be one of the United States's greatest challenges in the twenty‐first century.


Bibliography

Charles and Mary Beard, The Rise of American Civilization, 1927.
Louis Hacker, The Triumph of American Capitalism, 1940.
Chester W. Wright, The More Enduring Economic Consequences of America's Wars, in the Journal of Economic History (1943).
James L. Clayton, ed., The Economic Impact of the Cold War, 1970.
Steven Rosen, ed., Testing the Theory of the Military‐Industrial Complex, 1973.
Paul Kennedy, The Rise and Fall of the Great Powers, 1987.
Paul Kennedy, Preparing for the Twenty‐First Century, 1993, esp. chaps. 13 and 14.
Todd Sandler and Keith Hartley, The Economics of Defense, 1995.
International Monetary Fund, World Economic Outlook May 1996, “Focus on Fiscal Policy,” 1996