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Economic Consequences of War on U.S. Economy: Debt, Taxes and Inflation Increase; Consumption and Investment Decrease

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The organization for which I work, the Institute for Economics and Peace, released a new report this week detailing the macroeconomic effects of U.S. government spending on wars and the military since World War II.

Our "Economic Consequences of War on the US Economy" report studies five periods -- World War II, the Korean War, the Vietnam War, the Cold War, and the Afghanistan/Iraq wars -- highlighting the effect on seven macro-economic factors: debt, consumption, investment, jobs, taxes, government deficits, and inflation.

It shows that U.S. has paid for its wars either through debt [World War II, Cold War, Afghanistan/Iraq], taxation [Korean War] or inflation [Vietnam].

The report shows the following economic indicators experiencing negative effects either during or after the conflicts:

  • Public debt and levels of taxation increased during most conflicts.
  • Consumption as a percentage of GDP decreased during most conflicts.
  • Investment as a percentage of GDP decreased during most conflicts.
  • Inflation increased during or as a direct consequence of these conflicts.

Other findings? Excessive military spending can displace more productive non-military outlays in other areas such as investments in high-tech industries, education, or infrastructure.

The crowding-out effects of disproportionate government spending on military functions can affect service delivery or infrastructure development, ultimately affecting long-term growth rates.

When comparing the direct multiplier effects of military spending to other forms of government spending, it is not as productive in economic terms as spending in infrastructure, education, or even as tax cuts to increase household consumption.

In sum, the higher levels of government spending associated with war tends to generate some positive economic benefits in the short-term, specifically through increases in economic growth occurring during conflict spending booms. However, negative unintended consequences occur either concurrently with the war or develop as residual effects afterwards thereby impeding the economy over the longer term.

Check out more of the report's key findings here.

Michael Shank is the US Vice President at the Institute for Economics and Peace. Follow Michael on Twitter. Follow the Institute for Economics and Peace on Facebook and Twitter.