<blockquote>
'...War is a great way to destroy things, but it's a terrible way to grow an economy.
What is often overlooked is that war creates hardship, and not just for those who endure the violence. Yes, U.S. production increased during WW II, but very little of that was of use to anyone but soldiers. Consumers can't use a bomber to take a family vacation.
The goal of an economy is to raise living standards. During the War, as productive output was diverted to the front, consumer goods were rationed and living standards fell. While it's easy to see the numerical results of wartime spending, it is much harder to see the civilian cutbacks that enabled it.
The truth is we cannot spend our way out of our current crisis, no matter how great a spectacle we create. Even if we spent on infrastructure rather than war, we would still have no means to fund it, and there would still be no guarantee the economy would grow as a result.
What we need is more savings, more free enterprise, more production, and a return of American competitiveness in the global economy. Yes, we need Rosie the Riveter—but this time she has to work in the private sector making things that don't explode. To do this, we need less government spending, not more.'</blockquote>
Why Not Another World War?By Peter Schiff
July 20, 2010
SourceThere is overwhelming agreement among economists that World War II was responsible for decisively ending the Great Depression. When asked why the current wars are failing to make the same impact today, they often claim that the current conflicts are simply too small to be economically significant.
There is, of course, much irony here. No one argues that WW II, with its genocide, tens of millions of casualties, and wholesale destruction of cities and regions, was good for humanity. But the improved American economy of the late 1940s seems to illustrate the benefits of large-scale government stimulus. This conundrum may be causing some to wonder how we could capture the good without the bad.
If one believes government spending can create economic growth, then the answer should be simple: let's have a huge pretend war that rivals the WW II in size. However, this time, let's not kill anyone.
Most economists believe massive federal government spending on tanks, uniforms, bullets, and battleships, as well the jobs created to actually wage the War, finally put to an end the paralyzing "deflationary trap" that had existed since the Crash of 1929. Many further argue that war spending succeeded where the much smaller New Deal programs of the 1930s had fallen short.
The numbers were indeed staggering. From 1940 to 1944, federal spending shot up more than six times from just $9.5 billion to $72 billion. This led to a corresponding $75 billion expansion of U.S. nominal GDP, from $101 billion in 1940 to $175 billion by 1944. In other words, the war effort caused U.S. GDP to increase close to 75% in just four years!
The War also wiped out the country's chronic unemployment. In 1940, eleven years after the Crash, unemployment was still at a stubbornly high 8.1%. By 1944, it had dropped to less than 1%. The fresh influx of government spending and deployment of working-age men overseas drew women into the workforce in unprecedented numbers, thereby greatly expanding economic output. In addition, government spending on wartime technology produced many breakthroughs that impacted consumer goods production for decades.
So, why not have the United States declare a fake war on Russia (a grudge match that is, after all, long overdue)? Both countries could immediately order full employment and revitalize their manufacturing sectors. Instead of live munitions, we could build paint guns, water balloons, and stink bombs.
Once new armies have been drafted and properly outfitted with harmless weaponry, we could stage exciting war games. Perhaps the United States could mount an amphibious invasion of Kamchatka (just like in Risk!). As far as the destruction goes, let's just bring in Pixar and James Cameron. With limitless funds from Washington, these Hollywood magicians could surely produce simulated mayhem more spectacular than Pearl Harbor or D-Day. The spectacle could be televised—with advertising revenue going straight to the government.
Then the winner of the pseudo-conflict could challenge another country to an all-out fake war. I'm sure France or Italy wouldn't mind putting a few notches in the 'win' column.
But to repeat the impact of WW II today would require a truly massive effort. Replicating the six-fold increase in the federal budget would result in a nearly $20 trillion budget today. That equates to $67,000 for every man, woman and child in the country. Surely, the tremendous GDP growth created by such spending would make short work of the so-called Great Recession.
The big question is how to pay for it. To a degree that will surprise many, the U.S. funded its WW II effort largely by raising taxes and tapping into Americans' personal savings. Both of those avenues are nowhere near as promising today as they were in 1941.
Current tax burdens are now much higher than they were before the War, so raising taxes today would be much more difficult. The "Victory Tax" of 1942 sharply raised income tax rates and allowed, for the first time in our nation's history, taxes to be withheld directly from paychecks. The hikes were intended to be temporary but have, of course, far outlasted their purpose. It is unlikely that Americans would accept higher taxes today to fund a real war, let alone a pretend one.
That leaves savings, the War's primary source of funding. During the War, Americans purchased approximately $186 billion worth of war bonds, accounting for nearly three quarters of total federal spending from 1941-1945. Today, we don't have the savings to pay for our current spending, let alone any significant expansions. Even if we could convince the Chinese to loan us a large chunk of the $20 trillion (on top of the $1 trillion we already owe them), how could we ever pay them back?
If all of this seems absurd, that's because it is. War is a great way to destroy things, but it's a terrible way to grow an economy.
What is often overlooked is that war creates hardship, and not just for those who endure the violence. Yes, U.S. production increased during WW II, but very little of that was of use to anyone but soldiers. Consumers can't use a bomber to take a family vacation.
The goal of an economy is to raise living standards. During the War, as productive output was diverted to the front, consumer goods were rationed and living standards fell. While it's easy to see the numerical results of wartime spending, it is much harder to see the civilian cutbacks that enabled it.
The truth is we cannot spend our way out of our current crisis, no matter how great a spectacle we create. Even if we spent on infrastructure rather than war, we would still have no means to fund it, and there would still be no guarantee the economy would grow as a result.
What we need is more savings, more free enterprise, more production, and a return of American competitiveness in the global economy. Yes, we need Rosie the Riveter—but this time she has to work in the private sector making things that don't explode. To do this, we need less government spending, not more.
Peter Schiff is an investment advisor, financial commentator and author of Crash Proof
and the recently released illustrated fable, How an Economy Grows and Why It Crashes.