NCPA - National Center for Policy Analysis

War and The Economy

October 1, 2001

In the 1930s, the United States suffered its worst economic crisis. Eventually, most economists came around to the idea that the economy needed large budget deficits and fast money growth from the Federal Reserve to turn the situation around.

But although deficits and money growth did rise gradually during the Depression, they did not increase enough to turn around the deflation at the root of the economy's problems.

The Second World War ended the Great Depression. Sadly, many people concluded from this that there is something simulative about war per se. In fact, of course, war represents nothing but economic waste.

Nevertheless, wars do change economic policies, usually for the worse, but sometimes for the better.

  • On the negative side, they almost always lead to sharp increases in taxes, often to levels undreamed of in peacetime.
  • Wars also lead to regimentation of the economy through wage and price controls, and distort investment.
  • But, if the economy is suffering from a severe deflation, as the U.S. economy was in the 1930s, war can bring blessed relief in the form of monetary and fiscal ease.

The U.S. economy has suffered from a severe deflationary slowdown over the last 20 months. But the so-called Social Security lock box kept fiscal policy unusually tight, while the Federal Reserve's obsession with nonexistent inflation kept monetary policy too tight as well.

  • Now tax cuts, such as a cut in the capital gains tax, appear have a good chance of passage in Congress.
  • And the Federal Reserve, as well as foreign central banks, are finally adding the liquidity necessary to end the deflation.

No doubt, some bad economic policies will also result. Many pork barrel spending projects seem to have gotten a new and undeserved lease on life, according to Citizens Against Government Waste.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, October 1, 2001.

 

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