War Makes Us Poor

Thursday, June 24, 2010
By Paul Martin

Far from rescuing the economy from recession or depression, needless conflicts drain capital from productive uses.

by David R. Henderson
AmConMag.com

Many people who aren’t comfortable with the U.S. invading other countries reassure themselves with the belief that at least war creates jobs for Americans. But is military conflict really good for the economy of the country that engages in it? Basic economics answers a resounding “no.”

In a 1953 speech, President Dwight Eisenhower noted, “The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some 50 miles of concrete highway. We pay for a single fighter plane with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.” His point, quite simply: money not spent on the military could be spent elsewhere.

This also applies to human resources. The more than 200,000 U.S. military personnel in Iraq and Afghanistan could be doing something valuable at home.

Why is this hard to understand? The first reason is a point 19th-century French economic journalist Frederic Bastiat made in his essay, “What Is Seen and What Is Not Seen.” Everyone can see that soldiers are employed. But we cannot see the jobs and the other creative pursuits they could be engaged in were they not in the military.

The second reason is that when economic times are tough and unemployment is high, it’s easy to assume that other jobs could not exist. But they can. This gets to an argument Bastiat made in discussing demobilization of French soldiers after Napoleon’s downfall. He pointed out that when government cuts the size of the military, it frees up not only manpower but also money. The money that would have gone to pay soldiers can instead be used to hire them as civilian workers. That can happen in three ways, either individually or in combination: (1) a tax cut; (2) a reduction in the deficit; or (3) an increase in other government spending.

If taxes are cut, more money remains in the hands of taxpayers, who can use it to hire the people who were previously soldiers. If taxes aren’t cut but the deficit is, then the government doesn’t need to borrow as much. The money that the government would have borrowed is now available to hire these former soldiers. Finally, if neither taxation nor the deficit is cut, government has more money to hire these former soldiers in civilian pursuits.

Of course, those who get this money will not necessarily want to spend it on what these particular former soldiers produce. But a complex chain of substitutions will take place, and the former soldiers will gradually be reemployed. Consider the U.S. experience after World War II. Between 1945, when the war ended, and 1947, when substantial demobilization occurred, the military fell from about 11.4 million people to around 1.6 million, a drop of 9.8 million people. But the number of unemployed people increased by only 1 million, about 10 percent of those demobilized. To be sure, many women who had entered the labor force during the war to replace men who were drafted decided to return to work in the home. But the number of females in the labor force fell by only 2.4 million. And remember that before demobilization, the military employed a whopping 17 percent of the U.S. labor force. Today, it employs less than 1 percent, if we count active-duty military, and less than 2 percent if we count active-duty plus reserves. That smaller percentage makes laid-off troops that much easier to integrate into the civilian economy today.

Most people still believe that World War II ended the Great Depression. Their case makes sense on the surface. In 1941—essentially a peacetime year because Congress did not declare war until Dec. 8—the average unemployment rate was a hefty 9.9 percent. By 1944, the year of peak military spending, the unemployment rate was a piddling 1.2 percent.

But look deeper. The government imposed military conscription in 1940 and got the draft machinery moving early in 1942. Between 1940 and 1944, the size of the military increased by almost 11 million people. Of the 16 million who were in uniform at some time during World War II, 10 million were conscripted. They had “jobs” because the alternative was jail. And many of the 6 million who volunteered were what military manpower economists call “draft-induced.”

When we say that an economy is doing better than it was, we are saying that people are better off. Can we judge these workers in the military to be better off? No. The only way anyone has to figure out whether a person is better off having a job than being unemployed is to know that he chose the job. But conscription is the antithesis of choice.

To put all this into numerical perspective, the civilian labor force during World War II was only 54 to56 million. It’s not hard to reduce unemployment by 5 million people if you use conscription to raise the size of the armed forces by almost 11 million.

Next, consider Gross National Product. (The U.S. government didn’t switch to measuring Gross Domestic Product until the early 1990s.) Between 1941 and 1944, real GNP rose by 40 percent. But GNP during an all-out war is not the same as GNP during peacetime. GNP is defined as consumption spending, plus investment spending, plus government spending on goods and services. In fiscal year 1945, the government spent 38 percent of GNP on war alone. So, yes, GNP rose—but the increase is misleading.

The government-spending component of GNP went for guns, trucks, airplanes, tanks, gasoline, ships, uniforms, parachutes, and labor. What do these things have in common? Almost all of them were destroyed. Not just these goods but also the military’s billions of labor hours were used up without creating value to consumers. Much of the capital and labor used to make the hundreds of thousands of trucks and jeeps and the tens of thousands of tanks and airplanes would otherwise have been producing cars and trucks for the domestic economy. The assembly lines in Detroit, which had churned out 3.6 million cars in 1941, were retooled to produce the vehicles of war. From late 1942 to 1945, production of civilian cars was essentially shut down.

And that’s just one example. Women went without nylon stockings so that factories could produce parachutes. Civilians faced tight rationing of gasoline so that U.S. bombers could fly over Germany. People went without meat so that U.S. soldiers could be fed. And so on.

These resources helped win the war—no small issue. But the war was not a stimulus program, either in its intentions or in its effects, and it was not necessary for pulling the U.S. out of the Great Depression. Had World War II never taken place, millions of cars would have been produced; people would have been able to travel much more widely; and there would have been no rationing. In short, by the standard measures, Americans would have been much more prosperous.

Today, the vast majority of us are richer than even the most affluent people back then. But despite this prosperity, one thing has not changed: war is bad for our economy. The $150 billion that the government spends annually on wars in Iraq and Afghanistan (and, increasingly, Pakistan) could instead be used to cut taxes or cut the deficit. By ending its ongoing wars in Asia, not only would the U.S. government be adopting a more realistic foreign policy, but also it would be developing a more prosperous economy.

And war has another burdensome long-run cost that is rarely taken account of in the decision to get into a conflict: the cost of a permanently expanded government. As economist Robert Higgs notes in Crisis and Leviathan, war hurts economies by giving governments the opportunity and the excuse to take on new powers. These powers diminish after the war ends—but do not fall back to their earlier levels. During World War II, for example, the income tax, which previously had applied only to high-income people, was imposed even on those with low incomes. The federal government also introduced withholding to make it easier to collect tax money. After the war, income taxes remained a “normal” part of everyone’s life, and so did withholding. Flush with revenue, the government found other things to spend the people’s money on, including nuclear weapons, NATO, and welfare. This reduced economic well-being because a dollar spent by government typically produces much less value than a dollar spent by the person who earned it—Washington spends our money much less carefully than we do.

Whatever other reasons there may be for war, strengthening the economy is never one of them.

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