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War Time and the Economy
How does war time affect the US economy? Due to multiple factors it affects the economy in both the US and foreign countries in a large way. The role of government spending in the economy is very important and the military spending that accompanies war time has a large impact on the economy during war time. In addition, the unique mental state of our population during war time creates a different spending pattern. From World War II to our current presence in Iraq today, war time has made a distinct impression on our economy. Wartime has been both positive and negative for our economy. World War II, in a sense, dug us out of the Great Depression, while the Vietnam War increased our deficit.
The first aspect of War time and economy to review is our approach to the guns and butter model. The guns and butter model is defined as the economical approach that the government takes when deciding on the percentage of funds to spend on our military versus the percentage of funds to spend on civilian goods. The guns and butter model specifically challenges the opportunity cost of military spending in the US economy. The division of spending between military and civilian costs must balance to equal the best proposed outcome for our country in both our economic state as well as the conservation of our country. Most literature on the guns and butter opinion states that guns today will transform into more butter tomorrow, however that is dependent on making the best choices possibly with balancing of our spending budget, as well as picking our specifics battles and wars. Our current involvement in war time is a good example of the division of opinions in where and when we should be pursuing military strength in our economy versus butter expenses within our civilian needs. The United States tends to devote a higher amount of financial budgeting to guns then butter. During wartime budgeting to fund the military does become priority over many other social service type budgeting. The balance between guns and butter has been a tough one through the Vietnam War, 9/11, and our current presence in Iraq. I believe the issues within these 3 wars come down to our governments decision in entering wartime. Wartime is not a place to be reckless. Battles must be fought only when absolutely necessary.
In examining our governments economic strengths, Economists review our labor force and gross domestic product equation and apply the same to what our country is actually producing versus what our country should be producing. At times of war, this equation is affected not only by the number of dollars being contributed to military defense, but also by the men and women that are serving during war time. The population of citizens that are present in the military force are of a specific makeup. Men and women serving in the military are recruited from the younger generation of the labor force, and also need to possess specific physical and mental capacity. These two characteristics of people in this population take an important group of workers away from our labor force. However, the opposite can be stated in the realm of creating jobs in the military field of the US economy. Military positions are paid in the same way that a corporate position is paid. Income of military workers will be then injected into our government the same way that a corporate workers income is. Again, we must review the opportunity cost lost when looking at specific individuals in the military force and what else they may have been doing, if not in the military service.
When reviewing the actual military spending and what it is used for, it is important to note that production of military resources is very specialized. Production of missiles, tanks, helicopters, destroyers, submarines, and Humvees come from different manufacturing companies then automobile makers and other types of general civilian merchandise. Therefore, economists also note that the presence of military spending and needs create opportunity within our economy for increased gross domestic product. This is one of the main reasons that war time has stabilized and even increased our economical state in the past.
Throughout history there have been many economists that have been both supportive and un-supportive of military expense within our economy. Its not surprising that many recognize the economical benefits of war based on the production needs that war time creates. The modern type of war; a more technological based war has even more positive affect on our production rates then in the past during World War I and World War II. In the 20th century 90% of war expense was for basic needs of food, clothing, and transportation. Transportation then was simply horses and such. Only 10% of the wartime expense was devoted to weapons and ammunition. The man power was more influential in early times. As we move into the time of the early 21st century the types of resources used in wars developed and the expenses at war time for weapons, military equipment, fuel and other specialized merchandise grew to 50% of the war time budget in the World War II. The percentage of costs on technological resources for warns have only grown throughout the years as our technological advances have changed the way wars are fought greatly.
Another way in which the US has changed in history in regards to war and our economy is through the percentage of the Gross Domestic Product that has been devoted to military spending at the time of war. Thankfully, the percentage has decreased dramatically since World War II. During World War II our government was spending 35% of the GDP on military expense. The Korean War spent 15%, Vietnam 10%, the Gulf War 6% and today we are spending 4.4%. Even though we are down to only 4.4% of our GDP being spent on military expense, in 2000 we were at only 3.8% of the GDP being spent on military. Of course, after 9/11 it is not surprising that our government is dedicated a higher amount of money to defense.
JM Keynes
John Maynard Keynes was against war because it created difficulty in maintaining a macroeconomic balance. Keynes believed that if forced savings could absorb a surplus of income, our markets would then produce at optimal levels. War time created a problem in his theories because it forced our government to allocate funds to military spending that could have been allocated for savings and income, and it also forced our government to put defense planning as a priority, rather than our economical growth. Keynes believed that wars should be funded with higher taxes. He believed that using money collected through higher taxes would eliminate the threat of inflation during