What does war mean for the USA economy?

The war means for the USA economy


The Second World War was a global conflict that ushered in significant changes in global politics. Prior to 1939, Europe was the most influential and dictating force in global affairs. After 1945, the Second World War aided in bringing about profound changes in world politics. For several reasons, both the Soviet Union and the United States remained preoccupied with national growth at the cost of any substantial global involvement.

The conflict propelled the Soviet Union and the United States militarily and politically deep into Europe, transforming their relationship. This change was quickly replicated in their relationship outside of Europe, where different clashes arose. The Cold War, like the Second World War, began in Europe but swiftly expanded over the world, with significant effects on countries and people everywhere.

Several hostilities/wars between "client nations" of the USSR and the USA occurred during the Cold War, which began in 1945 and ended with the collapse of the Soviet Union in December 1991.

When Iraq invaded Kuwait on August 2, 1990, well before the Soviet Union collapsed, a new age of hostility began. The idea of “The Clash of Civilization” by Samuel P. Huntington provided a foundation to invent a post-Cold War useful enemy.

And we have seen that the new enemy (Islamic World in general and Arab World in particular) provided justification for its continued hegemony in a post-Soviet world. The global political agenda of the USA is rooted in its domestic economic conditions.

War as a means of protecting the system

Capitalism, as an economic system has a horrifying past due to its inherent phenomenon of business cycles. However, fears of a recurrence of “Black October of 1929,” which triggered the great depression of the 1930s, have not been completely wiped out. Arthur Okun, one of the leading analysts of business cycles, viewed business cycles as follows:

Recessions are now generally considered to be fundamentally preventable like airplane crashes and unlike hurricanes. But we have not banished air crashes from the land, and it is not clear that we have the wisdom or the ability to eliminate recession. The danger has not disappeared. The forces that produce recurrent recession are still in the wings, merely waiting for their cue.”

After World War II, reflecting both the increasing influence of Keynesian views and the fear of another depression, Congress formally proclaimed federal responsibility for macroeconomic performance. It enacted the landmark Employment Act of 1946, which stated:

“The Congress hereby declares that it is the continuing policy and responsibility of the federal government to use all practicable means consistent with its needs and obligations....to promote maximum employment, production, and purchasing power.”

In the following paragraph, we will read how wisely the US managed to prevent its economy from recessions. Impact of defense spending on the US economy

The government expenditure multiplier at work is seen in the economic impact of the US defense budget. In early 1980 the United States undertook a tremendous expansion of defense spending under President Regan. The defense budget (in constant dollars) soured from $ 271 billion in 1979 to $ 409 billion in 1987, when it reached 7.5 percent of the GDP. After that peak, defense spending as a share of GDP started drifting down.

Reductions in military spending and the 1990s recession

The cuts in defense spending accelerated beginning in 1990 when it became clear that the cold war was finally over, and Soviet communism was no longer a military danger. President Bush and President Clinton both proposed budgets calling for further reductions in military spending, and by the mid-1990s defense spending had declined to under 5 percent of the GDP.

According to the multiplier theory, the defense build-up of the early 1980s should have exerted a strong stimulative impact on the economy, and that is exactly what happened. As defense spending rose, it helped pull the country out of the recession of 1981-82 and helped propel the boom of the mid-1980s. To some regions like Southern California, where many aerospace companies were based, the influx of defense dollars brought tremendous prosperity. A newspaper article noted that one well-paid defense job would spin-off other jobs, such as “the metal shop supplying some specialized parts, the cleaners to keep the jumpsuits white, and the paper company making the pasteboard boxes for the doughnuts that someone picks up on the way to the office.

The multiplier was reversed at the conclusion of the Cold War. As defense spending fell, it became a drag on the economy as a whole. Cuts to defense spending led to the slow rise of output in the early 1990s. For example, between 1990 and 1993, the aircraft manufacturing business lost 170,000 jobs, primarily due to defense budget cuts. Southern California, which had profited from defense spending a decade before, ended up being in recession for far longer than the rest of the country, as Pentagon layoffs showed an increase in that region.

The Vietnam War began in 1965 and continued until 1975. From 1965 to 1973, the American economy grew by an average of 4.2 percent; even after accounting for the negative growth in 1974-75 (-0.6 percent and -0.4 percent, respectively), the US economy grew by 3.7 percent on average and without a major recessionary tendency.

Before the first invasion of Iraq, the state of the US economy

The American economy entered a recession in the third quarter of 1990, with GDP growing at a negative 0.7%. On the other hand, Iraq invaded Kuwait on August 2, 1990, and operations Desert Shield began on August 7, 1990. The United States economy emerges from recession in the first quarter of 1991, and a cease-fire is declared on April 11th, 1991.

The American economy entered a recession in 2001, with negative GDP growth of -0.6 percent, -1.6 percent, and -0.3 percent in the first, second, and third quarters, respectively. However, in the final month of the third quarter, 9/11 occurred, resulting in enormous military attacks on both Afghanistan and Iraq. As a result, the American economy rose from 2.7 percent growth in the fourth quarter of 2001 to 7.1 percent growth in the third quarter of 2003.

Another oddity of the American economy is that the trade deficit actually helped its economic and financial markets. As the deficit grew, so did the country's prosperity. A growing deficit meant an ever-increasing hoard of cash in foreign hands; individuals in other countries didn't know what to do with all that money. The dollar was immediately re-invested in American assets by foreign governments or central banks, US interest rates plummeted, and a virtuous circle initiated by the Japanese stock market disaster in 1990 became a gusher. In 1997, Asian currencies plummeted, causing a significant increase in America's already enormous trade deficit. However, this benefited the US because a larger inflow of foreign capital meant further lower interest rates.

A housing bubble is fueled by falling borrowing rates, and when a person buys a house, he also wants to buy appliances, furniture, paintings, and rugs, among other things. As a result, a housing boom is the best thing that can happen to the economy.

The statistics show that Current Account Deficit (CAD) and Net Capital Inflow (NCI) have a substantial negative link (correlation coefficient -79 percent), as CAD further widens the NCI increases. Countries with a surplus in their trade balance invest funds back into American assets. The infusion of foreign investment into American assets, on the other hand, is lowering interest rates. The negative correlation coefficient between mortgage rates and Net Capital Inflow is -68 percent. It means that as Net Capital Inflow rises, interest rates fall. Current account balance, net, capital inflow, and mortgage rates


It is in the United States' best interests to have a pretext to intervene militarily in order to protect its war machine business. The economy is like a wheel within a wheel; as the larger wheel begins to move, the other wheels follow suit. As a result, bloodshed committed in the name of the Cold War or terrorism greases the wheels of the American economy.

On the other hand, as we've seen, removing trade barriers is in the US's best interests. Regardless of the size of its current account deficit.

However, war is frequently employed as a last resort to prevent worsening economic conditions or currency crises, notably by boosting military services and employment while depopulating sectors of the population to free up resources and restore economic and social order. A transitory war economy might also be viewed as a way to avert more permanent militarization. President Franklin D. Roosevelt of the United States declared during World War II that if the Axis powers triumphed, "we would have to turn ourselves permanently into a militaristic power on the basis of war economics."

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