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No Free Lunch

A war-driven economy?

/ 04:05 AM January 07, 2020

Why has US President Donald Trump raised the likelihood of another major war? Is it to divert attention from his impeachment, as already being guessed by many? Is it to help boost the US economy, now threatened by the unfolding consequences of his trade war with China? It need not be an either-or matter, as both could well have been in mind, among other motivations, as they assessed the wider implications of the assassination of Iran’s top general that Trump readily owned up to.

That the American economy has the attributes of a “war economy,” or one that performs best when engaged in war, is something I had seen in economics textbooks since my earliest economics studies decades ago. It’s a view propounded by so-called Keynesian economists, or those who subscribe to the analysis of John Maynard Keynes, who looked to government spending as the key driver of the economy, especially in times of economic depression. Keynes achieved prominence with his prescription that pumping up public spending was the key to get out of the Great Depression of the 1930s. I recall an old American visiting professor of mine telling the story that the US government hired workers during that era to dig ditches, then hired others to fill them up again, just to create jobs and stimulate the economy. War spending was one sure way to pump up government spending, and not a few economists believe that it was actually World War II (and not President Franklin Delano Roosevelt’s New Deal policies) that got the US economy out of the Great Depression.

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In a 2013 article, Steven Horwitz and Michael McPhillips wrote: “Even though the war ultimately involved the destruction of much of what was produced, the standard argument — still made today by Paul Krugman — was that a large enough increase in the demand for labor and capital for any purpose whatever was sufficient to generate overall recovery.” War is argued to stimulate the economy primarily because of its employment impact. The authors observed: “…the war effort wiped out unemployment almost completely. In 1939, more than 17 percent of Americans in the labor force remained without a job. By 1943, nearly every able-bodied man was at work.” (Even as they cited these observations, the authors actually disputed the argument that it was the war that got America out of the Depression.)Other observers have also noted how the American economy has tended to thrive as it engaged in subsequent wars in Korea, Vietnam, Cambodia, Iraq, Syria and others. A recent editorial noted the irony in how the United States has actually been at war for more than half a century, even as that period has been called “the postwar era.” But according to some analysts, the bigger beneficiaries of such a war-driven economy have not been the ordinary workers, but big businesses. Historian Stuart D. Brandes noted that in 1942-1945, the net profits of America’s top 2,000 firms were more than 40 percent higher than in the period 1936-1939. This “profit boom,” he argued, came about because the state ordered billions of dollars of military equipment, but failed to tax profits enough.

Have American presidents been waging wars not so much to pursue political objectives as more for economic reasons? Is Trump trying to offset the negative effects of his trade war with China by inducing another war of a more familiar kind? The rest of us can only pray that an escalation will not ensue, as the effects on most of the rest of the world will surely be on the downside.

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From our own point of view in the Philippines, our experience with surging inflation induced by the significant oil price rise in 2017-2018 (and worsened by the rice fiasco) is still too fresh in our memories for us to face yet another oil price surge. International crude oil prices jumped 4 percent in the immediate aftermath of the Soleimani assassination, and are reportedly still rising. The depreciation of our peso would not be far behind, with oil imports making up a large portion of our foreign exchange outflows. From these would flow on more economic difficulties.

We must brace ourselves for what could come next.

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TAGS: Donald Trump, No Free Lunch, US economy, US war economy, US-Iran relations
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