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March 6, 2006

War Is Good for the Economy – Isn't It?


David R. Henderson

A common theme that has emerged in critiques of my "Wartime Economist" columns on Antiwar.com is that war is good for an economy. One respondent wrote:

"Why did [Franklin D.] Roosevelt want the war [World War II] so badly? He wanted it for the same reason every American president since that time has wanted a war, and that is to prevent the US economy from slipping deeper and deeper into economic depression. Counting the Cold War, the United States has been in a continual state of war for the past 60 years, and there is no end in sight. Without war, I do not believe our economy can survive."

The people who write me to this effect seem to hate that "fact." They would prefer that war not be a plus for an economy – but, nevertheless, they think it is. This belief has led many of these people to feel hopeless because they think that, on top of all the other difficulties of opposing war, they are opposing something that makes Americans better off. If I thought that, I would feel hopeless too. Fortunately, it's not true. The actual fact is that any war, even a war that is justified, has substantial costs.

Imagine an economy whose government spends 2 percent of its GDP on its military. (On average, the world's governments spend just under 2 percent of their countries' GDP on the military, and the U.S. government spends about 4 percent.) Then, imagine that the government suddenly gets into a war and raises military spending to 7 percent of national income. How does that affect people in that country? Whether the government finances the war effort with taxes or debt or by printing money is not very important. What matters much more is that the government now takes an additional 5 percent of the real output of that economy to wage its war. The government buys tanks, trucks, fuel, clothing, parachutes, bullets, guns, airplanes, and all the other paraphernalia of war. In addition, the government hires laborers away from other uses, or it drafts them. All of the capital and labor that go to produce the "outputs" of war is capital and labor that cannot be used in their previous uses. Thus, there is a cost of all these resources used in war – what economists call the "opportunity cost." "Opportunity cost" means the value of the highest-valued opportunity foregone. The opportunity cost of resources spent on war is the value of these resources in what they would have been used for had the government not gone to war.

Take World War II. The government spent a good deal more than 7 percent of GDP on the war, and, in fact, in 1944, the peak of the U.S. government's World War II spending (as a percent of gross national product), the government spent about 38 percent1 of gross national product on the war. (Gross national product, not gross domestic product, was the widely used measure back then. For the U.S. economy, the difference between the two measures is close to rounding error.) Where did the resources come from to make the hundreds of thousands of trucks and jeeps and the tens of thousands of tanks and airplanes? Much of the capital and labor would have been producing cars and trucks for the domestic economy. In fact, the assembly lines in Detroit, which had churned out 3.6 million cars in 1941, were retooled to produce the vehicles of war. By 1942, auto production was down to under 1 million. For the years 1943 to 1945, auto production was so low that Wikipedia does not even report it. During the period from late 1942 to the 1945, in other words, almost the whole of U.S. participation in the war, production of civilian cars was essentially shut down.

Consider fuel. Because the government wanted to buy fuel at an artificially low price, it imposed price controls on gasoline and put itself first in line. Then it issued ration cards to Americans, dramatically reducing the amount that normal Americans could buy at the controlled prices. In his autobiography, the late David Brinkley tells how he was unable to continue a serious romance during World War II because he couldn't legally buy gasoline to drive to the city where his lady friend lived. Even railroad seats were rationed, writes Brinkley, with priority given to military personnel. In the government's eyes, letting congressmen and other high-level government officials have all the gasoline they wanted, with the rare "X" stickers, was so important to the war effort that the amount available to them was not rationed at all. A young congressman named Lyndon B. Johnson took advantage of this, driving home to his district in Texas from Washington almost every weekend.

In short, the resources used for the war effort were not available to the typical American and his or her previous normal pursuits.

So imagine that somehow the United States had avoided entering World War II. I don't want to talk about the consequences for the world – that is controversial and, more important, completely separable from the issue of the war's effect on the U.S. economy. Millions of cars would have been produced; people would have been able to travel much more widely; and there would have been no rationing of meat, tires, nylons, eggs, butter, and sugar. In short, by the standard measures of prosperity, Americans would have been much more prosperous. And David Brinkley would have been able to pursue his true love. I mention this last consequence not to emphasize the trivia, but, in fact, to do the opposite – to emphasize one of millions of stories of the large human cost that befell even Americans whom the U.S. government did not put at risk of dying.

But I certainly shouldn't leave the issue of human cost without mentioning the ultimate cost – the 407,000 Americans who lost their lives because of the war. As one of my students, a U.S. military officer, put it in a classroom discussion, the war was not good for their economy, to put it mildly.

To many of you, what I wrote above may sound strange. Isn't World War II, in fact, the big counterexample to all that I'm saying? Didn't World War II bring us out of the Great Depression, as the vast majority of Americans and a simple majority of economists, appear to believe? If we go merely with labels and definitions and forget what they're supposed to stand for, then yes. The Great Depression is typically defined as the period from 1929 to 1941, and America entered the war in 1941. But if we go with the idea that depressions are supposed to measure something about the real amount of goods and services available to people, then no. A complete exposition of this is the topic of my next column on Antiwar.com. Stay tuned.


1. Correction: This figure was incorrectly stated as 45 percent in the original version. I apologize for any confusion this may have caused.

Copyright © 2006 by David R. Henderson. Requests for permission to reprint should be directed to the author or Antiwar.com

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David R. Henderson is a research fellow with the Hoover Institution and an associate professor of economics in the Graduate School of Business and Public Policy at the Naval Postgraduate School. He is author of The Joy of Freedom: An Economist’s Odyssey and co-author, with Charles L. Hooper, of Making Great Decisions in Business and Life (Chicago Park Press.) His latest book is The Concise Encyclopedia of Economics (Liberty Fund, 2008.)

He has appeared on The O’Reilly Factor, the Jim Lehrer Newshour, CNN, and C-SPAN. He has had over 100 articles published in Fortune, the Wall Street Journal, Red Herring, Barron’s, National Review, Reason, the Los Angeles Times, USA Today, and the Christian Science Monitor. He has also testified before the House Ways and Means Committee, the Senate Armed Services Committee, and the Senate Committee on Labor and Human Resources. Visit his Web site.

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