LilyMusselman

Econ.2020
DennisWilson
TheImpactofWarontheMacroeconomy
Warcantakequiteadevastatingimpactonthemacroeconomyonaworldwide
level,butatthistimewearegoingtofocusontheimpactithashadontheUSeconomy
throughouthistory.Wehaveexamplesofhowwarhasaffectedoureconomydatingclear
backtoWorldWarII,andevenearlierthanthat,andasrecentasAfghanistan/Iraq.We
willtakealookathowtheUShadtopayforthesewarseitherthroughdebt,taxation,or
inflation,andtakealookathowoverallthoseallthreecantakeanegativeimpact.Some
exampleswewilllookatwillbehowthepublicdebtandlevelsoftaxationincreased
duringconflicts,asapercentageofGDPdecreasedasconsumptionandinvestment,and
howinflationincreaseddutoalloftheseasadirectconsequence.Throughthiswewill
highlighttheeffectonsevenmacroeconomicfactors,namely:debt,consumption,
investment,jobs,taxes,governmentdeficitsandinflation.Oftheseseven,wearegoingto
focusprimarilyonthreemainones,debt,taxation,andinflation.
Debtinanaccountingentrythateitherdecreasesthevalueofanassetor
increasesthevalueofaliability,byincreasingthesizeofanamountalreadyowed.The
USpaidforafewwarsthroughdebt.WemadeitthroughWorldWarII,theColdWar,
andAfghanistan/Iraqbypayingwithdebt.ForWorldWarII,bythetimeoftheendof
thewar,thedebttoGDPratiohitanalltimerecordof113%.By1946,thedebtwasat
$241.86billion,withabout$2.87trillionincurrentdollars.TheUSneverreallytriedto

paydownmuchofthedebtweincurredafterthewarlikewewouldinpreviouswars,and
astheeconomygrew,thatdebtstillshrank.But,itdidtakeuntil1962justtogetthedebt
toGDPratiotowhereitwasbeforethewar.Fromthere,thedebtlevelcontinuedto
decline,hittingalowin1974at24%ofoutstandingdebtequaling$343.7billion,with
$1.61trillionincurrentdollars.
ThesamestorythengoesfortheColdWar,beingat$2.1trillionindebtby1986
andthenintoAfghanistan/Iraq,whichskyrocketedourdebtto$10trillionbytheyear
2008.Now,intheyear2015,ournationaldebtintheUSisnowabout$18.2trillion,and
isonlyonanupwardrise,growingtomoreandmorebythesecond.
Thenextoneofthesevenfactors,thatwasalargeoneinpayingfortheKorean
War,istaxation.Taxation,ortax,isaninvoluntarypaymentofmoneytothegovernment
byahouseholdorfirmforwhichthesaidhouseholdorfirmreceivesnogoodorservice
directlyinreturn.Thereisanessayist,RandolphBournewhooncesaid,waris
essentiallythehealthoftheState.Thereasoningforthatisbecausetheeffectinwhich
taxesandspendinggrowduringawar,bytheendofit,wenevergobacktothestatus
quoante.Historyshowsusthatwarsfinancedheavilybyhighertaxes,suchasthe
KoreanWar,endquickly,whilethosewarsfinancedbydeficits,dragonforyears.John
F.Kennedysaidpayanyprice,bearanyburden,meetanyhardshiptofightawar.By
followinghissimplewords,thatisonlyreallytheonlywaywecanmakeitthroughsuch
terribletimesandhardship,nomattertheconsequences.
Athirdfactorthathelpsuspayforwarsininflation.Inflationisariseinthe
generallevelofpricesinaneconomy;anincreaseinaneconomyspricelevel.An

economyspricelevelistheweightedaverageofthepricesofallthefinalgoodsand
servicesproducedinaneconomy.TheUSgotthroughpayingfortheVietnamWardue
toinflation.TheVietnamWarwasconsideredthemostexpensivewarintheColdWar
era.Equaling$140billiondollarsfortheentirewar,includingourownmilitarycostand
theeconomicandmilitaryaidtotheSaigonregime.The$140billionwasonlyadirect
costthough.TheUSspentanywherefrom$350to$900billiontopayforveterans
benefitsandinterest.EverythingintheUSwasconvertedtosomekindofwareffort.
Factorieswhichnormallyproducedconsumergoodsstartedtoproducemilitary
equipment,hurtingtheeconomyathomebecauseitcausedadecreaseinshopping.
Becauseofthiswarandthemajorconversionswehadtotakehereathometosupportthe
warefforts,theAmericaneconomywasbroughtdownfromagreatgrowthintheearly
1960stocompleteeconomiccrisisinthe1970s.
Warsthroughouthistory,nomatterwhateffectonthesevenmacroeconomic
factorstheyhave,allareverycostlyinmanydifferentaspectsintheUSeconomyandthe
livesofthepeopleduringthetimeofthecrisisandthelivesofthepeopleintheaftermath
ofit,nomatterhowlongafterthewarended.Ofthesevenfactors,verylargeoneswe
tookalookatweredebtinWorldWarII,theColdWarandAfghanistan/Iraq;taxationin
theKoreanWar;andinflationduringtheVietnamWar.Allthesethingshavenegative
effectsonhugeeconomicfactorseitherduringoraftertheconflicts.Thereisarisein
publicdebtandlevelsoftaxation,aswellasariseininflation.Withthoserises,wealso
experiencesometimesmajordecreasesinconsumptionandinvestmentasapercentageof
GDP.War,nomatterhowlongittakes,hasalwayshadeverlastingeffectsonourlives

andtheeconomy,withnationaldebtstillonaconstantrise,itcanbeveryhardtorecover
fromtherepercussionsfromtheseevents.

Bibliography
Debt

http://www.huffingtonpost.com/michael-shank/economicconsequences-of-_b_1294430.html
http://www.theatlantic.com/business/archive/2012/11/the-longstory-of-us-debt-from-1790-to-2011-in-1-little-chart/265185/
http://www.investopedia.com/financial-edge/0710/governmentdebt-from-billions-to-trillions.aspx
http://www.forbes.com/sites/mikepatton/2015/04/24/nationaldebt-tops-18-trillion-guess-how-much-you-owe/

Tax

http://www.forbes.com/2009/11/25/shared-sacrifice-war-taxesopinions-columnists-bruce-bartlett.html

Inflation

http://thevietnamwar.info/how-much-vietnam-war-cost/