The economic benefits of war outweigh the costs. Discuss.

The economic benefits of war outweigh the costs. Discuss.

22nd August 2015 Ideas, Uncategorized 0
By Alex Ho, Tonbridge School

War benefits some people economically. American defence and technology company Lockheed Martin recorded net profits of $2.7 billion in 20111 alone as a result of the US’ growing military involvement in the Middle East; going back nearly a decade to World War One, unofficial reports have claimed that 21,000 new millionaires and billionaires were created in America alone2. It appears undeniable that the business of war is lucrative; yet in response to the title of this essay, it is in my opinion that these economic benefits only apply to a minority and the overall economic costs far outweigh the benefits.

It is impossible to look past the notable profits achieved by the technology and arms industries as merely coincidental with the surge of military activity in their respective countries. This Military-industrial Complex was even acknowledged by President Eisenhower in his farewell speech to the nation, when he warned that the United States government “must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex”3. Putting aside the ethical debate surrounding the morality of war, this special relationship between the legislators and the industries evidently has a directly proportional effect. In Dan Briody’s book The Halliburton Agenda, he stated that “in the decade after the first Gulf war, the number of private contractors used in and around the battlefield increased tenfold”. The company which he focused on, Halliburton, “became the fifth largest defence contractor in the nation during the 1990s” and “soared from 73rd to 18th on the Pentagon’s list of top contractors” in the period of the Gulf War. The head of company then, Dick Cheney, received payments of over $300,000 in 2001 and 2002 even after he had left Halliburton to become Vice- President of the United States. Not only does fighting in wars benefit certain industries, the aftermaths of conflict would also present opportunities for construction companies and equipment producers to carry out postwar rebuilding. Arms makers would also benefit as countries restock their arsenals4.

A Keynesian argument would be that military spending is the stimulant countries needed to boost their economies in periods of economic stagnation. According to an report by Stockholm International Peace Research Institute carried out in 2013, the total military spending of the world exceeds $1740 billion. Economists who believe in this form of Military-Keynesianism will argue that military spending will manage to stimulate the economy to grow. Following World War One, Keynes wrote to President Roosevelt to urge him to increase military spending to increase economic growth. Keynes’ opinion was that “in a slump governmental loan expenditure is the only sure means of securing quickly a rising output at rising prices. That is why a war has always caused intense industrial activity”. Since 1981, the US has spent over $2 trillion on the military5 and $640 billion in 2013 alone, which was 3.8% of the US GDP that year6. These increases in military spending also appeared to have registered a positive impact in the national economy; for instance, President Reagan’s participation in the ‘Arms Race’ during the Cold War has caused a 7.6% GDP growth in 19847. It is clear to see that wars tend to have a significant improvement on a country’s GDP in the short-run. Moreover, rival nations have historically adjusted their military spending according to the levels of their competitors; hence I believe that an increase in war-related spending in one country would lead to a spiralling effect in other countries as well, which results in a widespread improvement in world GDP levels.

Another way in which wars have had financial benefits macro-economically is the positive impact it has on the level of national output through employment. It is estimated that in 2011, $1 billion of military spending alone has created 11,200 jobs both directly and indirectly in the US. 8 On the other side of the Pacific Ocean, the volatile North Korea employs over 7 million people in the military in 2013 which forms a staggering 31% of their total population. Obviously the totalitarian North Korea is an outlier compared to other countries in the world; but it does effectively reveal that military spending, irrespective of whether a country is in war or not, does in fact provide employment and a source of living for many. The injection in the form of government spending into the economy would have a Multiplier Effect on the economy which contributes to a spiralling boost in the GDP of a nation in the short-term. The reduction in unemployment also increases the total level of national output and closes the negative output gap in an economy.

A perhaps more subtle way in which wars seem to improve the economy is through the stock market; journalist Larry Kudlow has expressed his opinions that “the shock therapy of decisive war will elevate the stock market by a couple-thousand points.”9 Kudlow blamed the “slumping” stock market on the “big drop in the American spirit” caused by the “gnawing fear that Osama bin Laden and his evil followers have survived, regrouped, and are getting ready to hit us [United States] again.” Kudlow’s stance might be a tad overly patriotic and optimistic, but the idea that the confidence resulting from military victory causes a boost to the stock market seems to carry an element of truth. In the latter stages of World War Two, for instance, the Dow Jones Industrial Average plummeted as a direct consequence of the bombing of Pearl Harbour in 1941. However, as the allies rallied and the belief in victory grew, the stock market recovered to pre-war levels (150 points) in 1945 and after the armistice which sealed an allied victory, the stock market hit 200 points in 1946 which was the highest since the Great Depression10. This concept obviously relies on winning the war and the stock markets only came into existence in the 17th century which makes it inapplicable to wars before then; however, we can perhaps draw a conclusion from these examples: wars do not directly improve the stock market, but the sense of euphoria caused by victory would encourage spending and/or investment which would then trigger an upward spike in any forms of exchange and benefit the economy.

Yet to provide a balanced argument on the economic implications of war, we must conduct a cost-benefit analysis of different outcomes of war to assess the financial impact caused by conflict. After waxing lyrical about the benefits of war, I am going to counter most of the arguments I had just laid out and prove that these seeming benefits lack depth and are outweighed by the overwhelming costs.

According to former Republican politician, Ron Paul, “war is never economically beneficial except for those in position to profit from war expenditures”. This perhaps sums up the nature of war: huge corporations benefiting from the top, whilst the people suffer below. In 2010, CEO of Northrop Grumman, Wesley Bush, made $22.84 million whilst CEO of Lockheed Martin, Robert Stevens, made $21.89 million himself11. Putting these figures into perspective, the median household income in the United States in 2010 was $46,32612 which starkly highlights the inequality in wealth. The War Profiteering Prevention Act of 2007 was passed in an attempt to “prohibit profiteering and fraud relating to military action, relief, and reconstruction efforts”13; whilst the effectiveness of this act remains questionable, it does acknowledge the fact that only a minority is benefitting from wars. Some economists might suggest that the extra income garnered by the top percentile would be ‘trickled down’ to benefit the rest of the nation; however, it is in my opinion that ‘trickle-down economics’ would not work here. I believe that the benefiters would choose to save or invest their money and their Marginal Propensity to Consume isn’t high enough to have a significant impact on the rest of the economy. The rich do not seem to be creating jobs anymore and they appear more likely to takeover smaller firms to make the rich even richer. In contrast, the average person not only doesn’t benefit to the same extent, but they suffer from the high taxes the government imposed to fund the huge military budget. Military spending is funded either through taxation, the reallocation of budget from other crucial areas such as education, government borrowing or printing more money; all four of these options would have disastrous consequences on the economy in the long term. It is easy to forget that the people are actually the ones paying for the war and the majority of people simply do not receive enough benefits to offset the costs.

In response to Keynes’ argument that we should keep military spending high even during peace times as a Permanent War Economy, I humbly diverge from that belief and I think that military spending is not the best or even a wrong way to boost the economy. Frédéric Bastiat’s Parable of the Broken Window argues that “destruction is not profit”14. Increase production and employment is often associated with war times, yet Bastiat looks at the longer effects of war on society as a whole. Post-war rebuilding is not the solution as he argues that “society loses the value of things which are uselessly destroyed”. Professor Barro of Harvard University argued that “increased government spending at levels around 2% should help the US avoid recession in 2002” and concluded that “the war against terror would boost the economy”15. However, I disagree with Professor Barro because the use of GDP as a key macroeconomic indicator is potentially misleading. GDP is a measurement which includes military spending in its calculation, this means that countries can hide the true state of their economies by artificially increasing its military spending. On the contrary, the use of GPI takes away the impact of military spending, and appears to be a better indicator of how well the people are doing socially and economically. It is seen that the US’ GPI has remained relatively constant for the last 10 years, and one might deduce that the level of spending in other key areas such as welfare and education has not increased and the GDP growth was a direct consequence of more military spending. One might question whether the higher taxes paid by the people were only spent on military rather than other crucial aspects. Hence I feel that despite the positive figures reflected by the growth in GDP, people’s lives were not improved and they might have actually become worse off instead.

Furthermore, a negative macroeconomic impact of entering wars would be an increase in inflation. Inflation, as we know, is one of the four key economic indicators which reflect the performance of an economy; hence a higher inflation rate shows that wars also have a destructive impact macro- economically. Even back in the days of ancient China, strategist Sun Tzu remarked that “where the army is, prices are high; when prices rise the wealth of the people is exhausted”16. Warsput a huge strain on resources and balloon prices of essentials which would directly cause a fall in living standards. The Centre for Economic and Policy Research (CEPR) has conducted a model simulating the economic impacts of higher military spending, and it projected that “in the first five years, the annual inflation rate would be on average 0.3 percentage points higher in the scenario with higher military spending. Over the full twenty year period, inflation averages approximately 0.5 percentage points more in the high defence spending scenario”17. This model is backed up by historical data of wars within the last decade as seen in the Korean War, which caused inflation to increase to 5.3% in 195118. One of the main contributors to an increase in inflation is the rise in oil prices. The Iraq War, for example, was a conflict which directly caused a sky-rocketing in oil prices due to the war’s proximity to major oil supplies. The fact that countries require huge amounts of fuels to sustain their armies compounds the problem caused by the uncertainty in supply which results in a drastic excess demand and the rationing function of prices pushes the costs up, hence causing inflation. Whilst inflation does reduce the burden of debt, but it erodes the competitiveness of a country’s exports in the international trading market which worsens the economy of export-dominated nations. Hence on the whole, wars contribute to an undesirable raise in inflation.

The last part I would like to investigate is the human costs of war in terms of deaths and injuries and its long term impact on the economy. World War Two had up to 80 million deaths; 65 million in World War One and 7 million during the Napoleonic Wars19. These are just three examples of the bloodiest conflicts in our history, and each war has a devastating effect on the economies of the nations involved. As Smedley Butler described in War is a Racket, “It is the only one in which the profits are reckoned in dollars and the losses in lives.” The most direct impact would be the sudden plummet in productive capacity due to the death of millions of productive workers in battle. This impact would take decades for economies to recover from because it requires much time and training for the younger generations to mature and fill in these roles. Taking into account of injured soldiers and there would be a severe depletion in healthy and capable workers in the economy, and that causes a collapse in the national productive capacity which leads to rising inflation and falling GDP.

Many soldiers also suffer from long term disabilities that require health care by the government. According to Linda Bilmes’ The Three Trillion Dollar War, 263,000 veterans were treated at medical facilities from the Iraq War itself, with 52,000 suffering from post-traumatic stress disorder and a further 185,000 seeking regular counselling. Bilmes’ realistic prediction of the medical cost for Iraq veterans is a staggering $250 billion and that figure excludes the disability compensations and social security costs. More than 200,000 soldiers were claiming disability benefits. In 2005, a total of 3.5 million US veterans were claiming disability benefits which resulted in a $34.5 billion annual payment from the US government. Bilmes even projected an increase in disability claims of 75,000 per year in the future even in the ‘best case scenario’.

The economic value of the loss of life is also a hidden social cost which the government does its best to downplay and ignore. According to Bilmes, the official military payout for a dead soldier is a measly $500,000, which is merely a fraction of other economic estimations. Putting aside the ethical debate on whether or how we should put a price on life, recent judiciaries rulings have shown the figure to be much higher. In 2005, a train conductor who sustained a traumatic brain injury was awarded $8.5 million in compensation; this shows that the value of life far exceeds $500,000 and the true human costs of wars is much greater than official figures. Bilmes went on to describe a systematic procedure called the “Value of Statistical Life” (VSL), which is a method used widely by economists and insurance companies to estimate the cost of a death. The VSL figure is $7.2 million per person which brings the actual human cost in Iraq and Afghanistan to over $30 billion, which is substantially higher than the US budgetary cost of $2 billion.

Even including those who return from duty unscathed, the structure of the economy would be altered for the worse and the damage would be difficult to undo. During war times, countries put all their resources into producing goods to aid the war effort such as metal for weapons or specific medicines. This economic structure would become unsustainable after wars as there will simply not be enough demand for tanks or bullets. Industries that expanded so rapidly to cope with demands during war time would implode and thousands would soon become unemployed. Some people might argue for the relocation of workers and soldiers to more mundane jobs, but many of these people have spent their lives receiving training for specific tasks and would suffer from structural unemployment. It would require much time and resources for retraining schemes to reduce occupational unemployment. Obviously I am making a sweeping generalisation by standardising all wars, past and present, and I do acknowledge the fact that the true costs of wars depend greatly on the duration of fighting and whether you are the winner or the loser; however, there is an indisputable fact that wars drag on for a long time, but its economic impacts last for generations longer.

To conclude, I believe that military spending in wars can be a source of government spending to stimulate economic growth during periods of stagnation. However, as we delve deeper into further analysis of the long term economic impacts, it appears that wars drain resources, depress markets and cause structural damage to the productive capacity of an economy. The long term financial and human costs far exceed any potential short term gains. Therefore, it is in my belief that the economic benefits of war DO NOT exceed the costs.

1 http://www.usatoday.com/story/money/business/2013/03/10/10-companies-profiting-most-from-war/1970997/
2 http://www.ww1racket.com/
3 http://en.wikipedia.org/wiki/Eisenhower%27s_farewell_address
4 http://www.nytimes.com/1991/03/13/business/us-trade-benefits-from-war.html
5 http://www.context.org/iclib/ic20/chapman/
6 http://books.sipri.org/product_info?c_product_id=476
7 http://www.thereformedbroker.com/wp-content/uploads/2012/02/Economic-Consequences-of-War.pdf
8http://www.peri.umass.edu/fileadmin/pdf/published_study/PERI_military_spending_2011.pdf
9 http://www.nationalreview.com/articles/205232/taking-back-market-mdash-force/larry-kudlow
10 http://www.thereformedbroker.com/wp-content/uploads/2012/02/Economic-Consequences-of-War.pdf
11 http://endthelie.com/2011/10/28/war-profiteering-a-cancer-upon-america/
12 http://www.fedupusa.org/2010/01/how-much-does-the-average-american-make-breaking-down-the-u-s-household-income-numbers/
13 https://www.govtrack.us/congress/bills/110/s119
14 http://en.wikipedia.org/wiki/Parable_of_the_broken_window
15 http://scholar.harvard.edu/barro/files/01_1105_waronterror_bw.pdf
16 http://www.joshuagoldstein.com/jgeconhi.htm
17 http://www.cepr.net/documents/publications/military_spending_2007_05.pdf
18 http://www.thereformedbroker.com/wp-content/uploads/2012/02/Economic-Consequences-of-War.pdf
19http://en.wikipedia.org/wiki/List_of_wars_and_anthropogenic_disasters_by_death_toll

About the author

Andrew Tan: Head of Technology and Website Development. 2nd year Economist at St. John's College. Please e-mail me with any inquiries/issues regarding the website at itofficer@marshallsociety.com!

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