War is good for the economy?
Via Big Picture, Barry Ritholz points us to discussion on the role of ‘war’ in our economy:
Preface: Many Americans – including influential economists and talking heads – still wrongly assume that war is good for the economy. For example, extremely influential economists like Paul Krugman and Martin Feldsteinpromote the myth that war is good for the economy.
Many congressmen assume that cutting pork-barrel military spending would hurt their constituents’ jobs. And talking heads like senior Washington Post political columnist David Broder parrot this idea.
As demonstrated below, it isn’t true.
Nobel-prize winning economist Joseph Stiglitz says that war is bad for the economy:
Stiglitz wrote in 2003:
War is widely thought to be linked to economic good times. The second world war is often said to have brought the world out of depression, and war has since enhanced its reputation as a spur to economic growth. Some even suggest that capitalism needs wars, that without them, recession would always lurk on the horizon. Today, we know that this is nonsense. The 1990s boom showed that peace is economically far better than war. The Gulf war of 1991 demonstrated that wars can actually be bad for an economy.
The whole post can be read at The Big Picture.
Washington Blog covers things I have been following for years.
I worked in the DoD system acquisition system from 1985. By 1994 I rose to a management position in a “major” program one of those tracked by GAO each year, I figured out the acquisition system is welfare for the companies and thge DoD functions managing tehm. The Sec Def always has strategic objectives, common since Reagan: the health of the defense industry base which is welfare with guaranteed profit.
A shovel leaning make work job building roads is better for the economy than a shovel leaning make work job for Lockheed building the F-35, at a $1500B drag on the eocnomy.
The fact DoD cannot pass a financial audit is revealing. How can you value the F-35 when it has not been tested to see if does any of the specified performance on contract?
What war does in the USA is create a period when a great deal, a huge amount, of (inefficient) stimulus money will be spent without much debate. The reason it gets seen as good is that it’s incredibly unlikely that anywhere near as much money would be spent on other (far more effective) stimulus undertakings (for instance repairing bridges and roads, to name one possibility).
War, although costly in BLOOD&TREASURE, for some will pay off handsomely, usually those who will not engage in actual combat (The Rich), but only IF ya win.
Don’t forget Vietnam either. War works at first, but then ends up sucking life out of the economy. Iraq was pretty much in this frame as well.
I guess you could say in the 1990’s, we had a war “against” the Y2K bug and after it was over, so was the boom.
If you look at the equation for profit rates, capital destruction and the inflation tendencies after war raise profits rates.
Theflip side to this is looking at the profit equation before a war. This is where it gets interesting. If you have an economy with constrained inflation, excess capacity, constrained productivity and frustrated pressures by labor to raise unit labor costs, a war becomes a tempting option. It will resolve the excess capacity, resolve the constrained inflation. And focus labor on serving the interests of the labor on the country and not their wage demands. Also business competition on a global scale gets intense.
We have a situation like this now. Don’t get me wrong. I am not forecasting a war. War is much less possible now.
We may find out that the economy gets increasingly frustrating forpeople around the world without a war to resolve profit stalemates.
Hmmmm….Stiglitz said profits rise, but then? Profit stalemates….is that a key condition Ed?
The rise of state capitalism”in Stephen D.King’s “Losing Control”, he attributes the rise of state capitalism to the awakening of the “sleeping giants”, Russia with its gas, China and India with their cheap labour and Brazil for its commodities. They are now no longer too poor to compete for the world’s raw materials and a Malthusian calculus threatens to catch up with earlier productivity gains.
“And they also know that economic success of the developed world over the last few hundred years depended not just on the triumph of the market but also on the protection of infant industries, the exploitation of virgin lands and the willingness to use military intervention to safeguard economic interests, says HSBC group chief economist.
Greenspan admitted in 2008 that the Fed’s regime of monetary management had been based on a “flaw”. There had been an intellectual failure in mainstream economics. Markets are not self-correcting.
Lifted from comments at Naked Capitalism
The question shouldn’t be is war bad for the economy since that can be answered easily looking at the death and damage it causes, the question should be is war production and drafting of soldiers bad for the economy.
That question is a bit more nuanced
First let us ask is the economy healthy or not?
The key reason for this is finding out whether the economy is running at or below it’s production frontier, if it is then any diversion to war takes away from other parts of the economy.
This is illustrated in the guns and butter model, where production of more guns means less butter can be made.
However if the economy is running below the frontier, then producing more guns does not take away from biter production as you can increase guns without decreasing butter.
Basically in an unhealthy economy with idle capacity and resources, the broken window fallacy does not apply.
Now in purely ideal situation it would be better to focus on increasing butter as opposed to guns, but that’s not always realistic, and it’s often easier to push spending on weapons than on peaceful alternatives.
In addition when labor is idle, due to high unemployment, then drafting said excess labor also promotes economic activity, again you don’t lose domestic production by employing this excess labor, and while employment in more peaceful production would be the superior choice, again it’s often easier to push for an increase in the military than for work programs at home. Of course today with no draft such an opportunity no longer exists.
An example in the article was about car production being halted for tanks. Yes more car production would have been better than tanks, but that is assuming that the production and sales of the cars would have been healthy, possibly unlikely as the economy was still depressed and unemployment still around 10%.
So yes while it’s easy to say was is economically bad, there are situations where military production may be the best economic alternative available, especially in times where the economy is operating well below capacity.
Here’s a little insight from Edwin Starr, a name little known now. Maybe his contribution to the argument went to close to the truth.
HI Dan,
I am supposing that Stiglitz talked about profit rates rising after a war, is that right?
I am talking about when profit rates stalemate. Like profit rates have stayed steady for 2 years. So the firms that are increasing their rates, are balanced by other firms that are going down. This makes competition just that much more fierce.
Yet, many factors can start a war beyond profit rates… culture, territory, control of resources, desire for conquest, and certainly many more. Stalled profit rates is probably low on the list of reasons to go to war.
“War is good for the economy?” — Dan Crawford
“Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.” – Maynard Keynes
Exactly my point Arthurian, if the best alternative available is war spending, and usually it easier to get more spending for war, then yeah war spending can help the economy which is nor operating at a healthy level