War Makes Us Poor

Washington’s Blog
Reprinted with permission

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.


Stiglitz wrote in 2003:


Stiglitz has also said that this decade’s Iraq war has been very bad for the economy. Seethisthis 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:


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 administrationIf 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 flatduring the Vietnam war:

The New Republic noted in 2009:


(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:


We noted in 2010:


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:



longjobs1 The Military Industrial Complex is Ruining the Economy



longjobs2 The Military Industrial Complex is Ruining the Economy





Let me finish with a final chart.

longjobs4 The Military Industrial Complex is Ruining the Economy




And this shows military versus non-military durable goods shipments: us collapse 18 11 The Military Industrial Complex is Ruining the Economy[Click here to view full image.]









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 continuousdebilitating 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:



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:



Blanchard Economic Research pointed out in 2001:





Other economists agree with Professor Fischer’s link between inflation and war.



Libertarian economics writer Lew Rockwell noted in 2008:













Given that John Maynard Keynes and former Federal Reserve chair Ben Bernanke both say thatinflation is a tax on the American people, war-induced inflation is a theft of our wealth.

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.


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:


Economist Michel Chossudovsky told Washington’s Blog:


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.


Indeed, Mullen said:








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.


War Increases Terrorism … And Terrorism Hurts the Economy

Security experts — conservative hawks and liberal doves alike — agree that waging war in the Middle Eastweakens national security and increases terrorism. See thisthisthisthisthisthis 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:


The Harvard/NBER concludes:





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%.