Wars are Not Good for the Economy

One of the more enduring myths in Western society is that wars are somehow good for the economy. Many people see a great deal of evidence to support this myth, after all World War II came directly after the Great Depression. This faulty belief stems from a misunderstanding of the economic way of thinking.

The standard "a war gives the economy a boost" argument goes as follows: Let's suppose that the economy is in the low end of the business cycle, so we're in a recession or just a period of low economic growth. The unemployment rate is high, people may be making less purchases than they were a year or two ago, and overall output is flat. But then the country decides to prepare for war! The government needs to equip its soldiers with the extra gear and munitions needed in order to win the war.

Corporations win contracts to supply boots, and bombs and vehicles to the army. Many of these companies will have to hire extra workers in order to meet this increased production. If the preparations for war are large enough, large numbers of workers will be hired reducing the unemployment rate. Other workers may need to be hired to cover reservists in private sector jobs who get sent overseas. With the unemployment rate down we have more people spending again and people who had jobs before will be less worried about losing their job in the future so they'll spend more than they did. This extra spending will help the retail sector, who will need to hire extra employees causing unemployment to drop even further. A spiral of positive economic activity is created by the government preparing for war, if you believe the story. The flawed logic of the story is an example of something economists call The Broken Window Fallacy.

The Broken ...

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... a factor of production which will certainly help economic growth.

2. Stability and Economic Growth in the Middle East If peace can somehow be established in the Middle East, the U.S. government might not have to spend as much money on the military as they do now. If the economies of the countries in the middle east become more stable and experience growth, this will give them more opportunities to trade with the United States, improving both the economies of those countries and the U.S.

Personally I do not see those factors outweighing the short term costs of the war in Iraq, but you can make a case for them. In the short term, however, the economy will decline due to the war as shown by the Broken Window Fallacy. Next time you hear someone discuss the economic benefits of the war, please tell them a little story about a window breaker and a shopkeeper.