I thought war was supposed to be good for the economy?

Factual Questions
1

When I was a kid, I remember that the conventional wisdom (at least as it was told to me) was that World War II brought the country out of the Great Depression. The explanation seemed to be that the war got the country moving again because we were all pulling in the same direction.

Is there anything to this view? Because it seems to be directly contrary to every article now in the business press, saying that a war in the Persian Gulf would be bad for the economy. Of course the pros and cons of war are a topic for another time (and in another forum) but I’m wondering just about the narrower question of the effect of a war on the economy of the US.

Constantine

2

One reeason would be the likely impending shortage of oil, which will have a big effect on gas prices, which in turn will have a big effect on the economy as a whole.

3

It’s urban myth. War is not good for the economy. There’s no correlation between wars and good economic times.

In the SPECIFIC case of World War II, it is likely true that The United States and Canada were helped out of the Great Depression by war. However, it’s a very special case; both nations were fighting popular wars on other people’s territory and suffered far less in terms of death and injury, proportionately speaking, than many of the countries they were blowing up. Furthermore, the devastation wrought by the war left the U.S. and Canada in a stronger competitive position, industrially and commercially speaking, than they had been in 1939. A lot of their competition had been blown to smithereens.

Even then, it’s dubious that either country ended up BETTER OFF than they would have been in the long run had there been no war.

4

The only economic reflections pertaining to a possible (read: likely) war in the Persian Gulf are solely about oil prices. Right now, because there is uncertainty (and fear) about the situation, gas prices are starting to rise. Some analysts say that a very short war would lower gas prices, based on the assumption that the uncertainty of the situation would be resolved, and we would all know who’s the pimp and who’s the bitch. A long war, however, would most likely make gas prices sky-rocket, as the roles in the pimp-bitch relationship would be more unclear.

5

World War II was completely different than the wars we’re fighting right now. The US had a tiny army during the 1930s and the domestic economy was clobbered during the Great Depression. When the US joined the war, the armed forces went on a massive recruitment drive, and hundreds of thousands joined up. In addition, the government hired thousands of contractors to build equipment and weapons for the war. This put a tremendous amount of tax and war-bond money directly in the hands of corporations which hired people to build stuff for the war, which led to less unemployment, which led to greater wealth and more tax revenue and so on, until by the end of the war the economy was back on solid footing.

However, ever since Vietnam, the US has maintained an all-volunteer army and a very large one at that. All military mobilizations since WWII have been quite small in comparison, requiring at most the displacement of a few reserves and national guard toops, and have not had a significant effect on the economy.

6

In WW II, the US was working full tilt, making its own ships, Jeeps, tanks, guns, mortars, and planes. The same factories were cranking out the same for several other nations. Though young able-bodied men were removed from the economy, able-bodied women took their places as wage earners. Eleven years ago, in GHWB’s Gulf War, many things were different. The armed forces were already armed to the teeth, so no surge of war production was necessary. Most able-bodied women were already working, so when the reservists were removed from the work force (most of them men,) the effect on the economy was crippling. The families of a quarter of a million young wage earners suddenly were spending as little money as they could get away with.

The bill for the war itself was about a quarter of a Trillion dollars. Unlike the WW II soldiers, who returned to a newly vital economy, Gulf War vets returned to an economic slump and higher taxes.

There’s a good chance that Bush The Younger’s war will not help the economy, either.

7

It’s a Keynesian myth.

8

That makes sense. If it really were good for the economy we’d simply make the weapons on our side, they’d make theirs, we all hook up remote controls and blow each other up. Repeat as needed.

9

That’s only just wars. :wink:

10

Counterexample: Great Britain 1945 (and since).

11

Excellent point, ftg! I’ve wondered before why the U.S. put so much effort after WWII into rebuilding its former enemies and so little into shoring up its allies.

12

Wars are bad for the economy. The markets hate uncertainty. Nothing is more uncertain than war. The government spends large amounts of capital without getting much in return for it’s investment. Much of that money is spent overseas, which amounts to exporting money.

Perhaps an exception would be conquering other peoples and stealing their resources, such as Britain did for a long time.

13

If you look at the stock market and the Vietnam war, you would see that for the most part, the market soared whenever people thought peace would “break out,” and tanked whenever things looked bad. The companies that profit from war (these days, WWII was an exception) are relatively few and far in between - I think that there is only one or two factories in the US that make ammunition for the US military, and (at one time at least) only Dow (I think) would make napalm - and tried to get out of that contract too. (It amounted to a fraction of a percent of their business). Don’t look at cliche’s and slogans - look at the facts. The economy and the stock market do not like war - despite what your French literature professor might tell you.

14

Exactly.

A war in Iraq which could disrupt oil supplies and significantly raise oil prices, would be a disastor for the American and European economies which are already in a recession.

The airlines are already nearly bankrupt and higher oil prices will bankrupt them all.

More retailitory vengeful acts by terrorists like what they did at the world trade center and the pentagon, will cause even more uncertainty and recession.

War in Iraq will not help the millions of unemployed engineers and computer programmers who have been out of work for 2 years now, nor will it bring back Kmart, Montgomery Wards, nor will it bring back all the manufacturing jobs lost to Mexico or china.

War in Iraq could make the stock market will take a bog dive, which would mean less and less future investment for american businesses and would give american citizens less money to buy anything.

… and that is the “sugar coated” scenario, that is what might happen if we win in Iraq.

If things got nasty in the middle east, or if it becomes a protracted war, or a lot of casualties, then things could get worse.

15

The average citizen gets no benefit from government spending on war, on tanks and bombs and ammunition and missles.

All that government spending is money down the drain that will not be spent on useful items like televisions, furnature, cars, medical care, etc. The money spent on a war is lost money and results in a lower standard of living, and less goods and services that people really want and can use.

16

To add to what friedo said, WWII was a prolonged affair lasting for several years that involved driving occupying forces out of several nations. Weapons stockpiles were quickly exhausted, and keeping up with the huge new demand created more jobs. There were more jobs than there were people to fill them.

Not only was WWII prolonged, but two-high technology adversaries were involved. Huge sums were spent on research to turn novelties like radar, rockets, jet aircraft, computers, and nuclear fission into useable tools. Once refined, factories were built to produce them in quantity. After the war the factories kept going not only by returning to domestic production, but also by developing civilian adaptations such as microwave ovens, space probes, commercial jet aircraft, and nuclear power plants.

There was also rationing of almost everything in WWII. While everyone was working in defense plants, there were few consumer products being produced that they could buy. Even shoelaces were hard to find. When the war was over everyone had saved up plenty of money for the new domestic products that factories started turning out, so there was no post-war economic slump.

Then there came the cold war, where many of our allies had suddenly turned to enemies. Spending stayed high for for decades, funding both defense and prestiege, such as the “space race.”

Iraq is a situation that could be resolved with one bullet.

So I look for a short war where the overall effect on the economy will be temporary and not terribly dramatic. It will cause various markets to fluctuate that might not have otherwise seen much effect. At the end I think it will average out and the economy will be better, but only a little.

At the end, the question is “what happens to investor confidence?” Ultimately the market is driven by how good investors feel about things in general. If the feeling is that September 11 is pretty much over and it’s time to get back to business, I think we’ll see a steady increase lasting for several years.

17

War itself is never good for the economy. Money to pay for a war comes from taxes. If the taxes were not spent on the war, then they would (hopefully) be spent by you and me on economically productive enterprises.

Let me give you an analogy: Remember Hurricane Floyd? There are those who said (in essence), “It was such a terrible event. But on the plus side, it boosted the economy!” Nonsense. It was a zero-sums game. Just like war.

Read the following for more insight:

http://www.jewishworldreview.com/cols/williams051000.asp

To help an economy, value must be traded among producers. This results in a “multiplier effect.” Attend an Econ 101 course to learn more.

18

not necessarily either way. the war could also destabilize a regime that is screwing up the economy. who knows (rhetorical question) what kind of price manipulation saddam is doing with the oil. or, he could be doing a lot of crap which hinders a good economy in his country. conversely, he could be the one who is the last link to normalcy and the international bankers want to put him down so that they can etc… he could be the reason that the oil prices are so high. there are more double dealings in oil/politics than are dreamt of in our philosophy.
unless one has all the details, one can’t quite project the economic consequences accurately.
iirc, in the gulf war, the prices went down a bit. either then, or when we had some other war crisis.

19

To understand the effect of government spending during WWII you have to understand what happened in the 1930’s. The depression was made much worse by government finance policies. The injection of govt money into the economy was a one-time event that got money circulating again. The situation today is completely different.

The US economy was far greater than Great Britain’s. Britain was almost starved into defeat. It took decades to recover.

The Vietnam war caused various crises in the US monetary system, upset balances of trade, depleted gold reserves, and probably triggered inflation and stagflation in the 1970’s. War is not free.

20

That is exactly right.

What happened in the case of WWII was that war spending allowed governments to run deficits and expand the money supply, which was a stimulus to growth in the existing circumstances of demand-deficit recession in the absence of inflationary expectations. The same macroeconomic wool-over-eyes-pulling in the conditions of the late 'Sixties produced stagflation instead. And it will do the same now.

Besides which, the economic indicators used as evidence of the benefits of war do not discriminate between output that is invested to produce capital broadening and deepening, output that is consumed in satisfying people’s wants and needs, output that is destroyed by the enemy, and output that is expended destroying things and killing people.

Sure, output may go up during a victorious war fought in other people’s homes. But generally, during war, that part of the population that does not live austere lives dies hideous deaths. And in the aftermath you generally find the public and private capital of the country run down. If you know a few couples who got married during WWII, ask them how easy they found it to get somewhere of their own to live before 1950.

Unfortunately my copy of Smith’s The Wealth of Nations is packed at the moment, so I can’t get this verbatim. But the gist of the apposite quote is “No country can be considered thriving and prosperous if the majority of its people are destitute and miserable”. And to that you can add “or maimed or dead”.

Regards,
Agback