Independent, Fee-Only Financial Advisor
Monday, October 09, 2017
"The best thing for the economy is a war."
This is a thing that people say.
With North Korea provoking the US and Allies in Asia, separatist movements gaining steam in Europe and the Syrian Civil War working on it's 7th year, a large war sometimes feels right around the corner. Of course, the US military is deployed around the world, from the obvious spots in Iraq and Afghanistan, to some you may have forgotten about like Estonia and South Sudan, a few Ally countries like Japan, South Korea and Poland and a few others just for kicks like Norway and Spain. Our military is ready to strike at a moment's notice (ok, a day or two's notice) anywhere in the world.
While I don't prognosticate on the likelihood of war, nor even the scale of what is possible, I would like to examine the belief that a good ol' war would be good for the economy.
Is war good for the economy? If you don't have time to read through this, my answer is no. More specifically, not really.
First lets look at the source of this belief. People often cite the economic boom during and after WWII as why war is good for the economy. WWII was indeed a boon for the economy. America massively ramped up government spending, trained and provided for future education and healthcare of millions of workers and after it was all over everyone came home and began a series of activities that economists call "household formation."
So that is three different parts. One at a time now.
Spending. WWII saw the US ramp up military spending dramatically. The US manufacturing might dedicated itself to cranking out hundreds (thousands?) of ships (y'all, ships are huge), tens (hundreds?) of thousands of airplanes and millions (millions, I say) of wheeled vehicles (including over 600,000 Jeeps). This sort of mammoth production of course spurs economic activity. People working in those factories need to buy food and pay for their shelter. Technological growth and efficient systems put in place provided lasting value that made future growth easier. New chemicals were developed or produced that made it easier to kill enemies or revive friends.
The Congressional Research Service estimates that WWII cost about $296 Billion in the dollars of the day (not inflation adjusted). This was a HUGE amount of money to an economy that was only about $103 Billion on the eve of war. Again, according to the CRS, war spending was 35% of GDP at its peak.
Workforce Development. Some sixteen million men and women served in the armed forces during WWII. Sixteen million men and women received fast tracked training and on the job experience. Teamwork, group management and leadership skills were all developed. In addition, many soldiers enhanced their technical skills like computing, electronics, mechanics, construction and more were developed. More people were exposed to newer and better technologies than had been before. After the war, veterans had increased opportunity to go to college, and for many, their health care was included in the deal. Training, education, workforce participation and access to health care are all critical to economic growth.
On top of all of that, more women entered the workforce, bringing step change improvements to our total productive capacity. Before the war, about 22% of women over 14 held jobs, and by the end of the war, 37% did. In people numbers, around 7 million more women worked for pay by the end of the war than had before. Even non-paid effort was huge, with scrap drives and community support of troops evidenced everywhere (citation: My Dog Skip, a book about a dog that is actually about WWII).
Household Formation. It does not take a lot of imagination to see where the "baby boom" came from. Fifteen and a half million returning soldiers were mostly young and ready to settle down. The baby boom saw 38 million children born in the 10 years after WW2. That works out to a little more than one child per fertile aged adult, or two children per two fertile adults, biologically speaking.
Household formation is important because the scale and level of spending that comes with it. Families buy houses, cars and food to support everyone. Given that a family is more efficient at consuming these basic needs, they have discretionary income to spend on entertainment and new technologies. This can have a huge economic multiplier effect as more economic dollars are dedicated to finding the next big advance.
So WWII was a magnificent boost to the US economy. On the spending front, of course adding 50% of last years GDP in spending would provide an economic boost. With workforce development, pushing a huge portion of the population back into the labor force, as well as providing billions of dollars worth of training, education and guaranteed healthcare would expand the possibilities and resiliency of our economy for years to come. Households were formed and more productive units (humans) were cranked out than had ever been before.
But what has happened since? Wars got smaller and cheaper and the effects moved further away from economic growth figure. Looking back at the Congressional Research Service data, the Korean war was 4.2% of the economy, Vietnam was 2.3% and the total post 9/11 wars (morass? quagmire?) only come to 1.7% of the economy. The number of troops as a proportion of population has declined too, and increasing professionalism of the military extends military careers and shortens civilian careers.
For a war to have an outsized impact on the economy it would need to be particularly ferocious and long and probably involve a lot of casualties and a few shift changes in technological advancement, worker productivity and social fabric.
There is also a flip side to all of this. Wars kill people, destroy buildings, and wipe out invested capital. Sure, rebuilding after a disaster or a war is economic activity, but it detracts from more advanced and efficient capital allocation. If we spent all of our money constantly rebuilding our homes, we would not have a very advanced economy. Dying soldiers mean fewer people returning to the workforce after the conflict subsides.
It is not war itself that drives economic growth. WWII just happened to have a huge dose of three key economic drivers. We could try to generate those in other ways without a destructive war.
Posted by Ryder Taff, CFA