Bob Davis and Gref Jaffes article (Feb. 4) on the likely economic consequences of a U.S. war against Iraq errs by giving past wars credit for creating positive economic effects. This hoary fallacy, it seems, just cant be killed.
The strongest case for it has long been World War II, which Davis and Jaffe claim clearly was a boon for the U.S. economy. But a boon in what sense? Unemployment fell during the war entirely because of the buildup of the armed forces. In 1940, some 4.62 million persons were actually unemployed (the official count of 7.45 million included 2.83 million employed on various government work projects). During the war, the government, by conscription for the most part, drew some 16 million persons into the armed forces at some time; the active-duty force in mid-1945 numbered in excess of 12 million. Voila, civilian unemployment nearly disappeared. But herding the equivalent of 22 percent of the prewar labor force into the armed forces (to eliminate 9.5 percent unemployment) scarcely produced what we are properly entitled to call prosperity.
Yes, officially measured GDP soared during the war. Examination of that increased output shows, however, that it consisted entirely of military goods and services. Real civilian consumption and private investment both fell after 1941, and they did not recover fully until 1946. The privately owned capital stock actually shrank during the war. Some prosperity. (My article in the peer-reviewed Journal of Economic History, March 1992, presents many of the relevant details.)
It is high time that we come to appreciate the distinction between the government spending, especially the war spending, that bulks up official GDP figures and the kinds of production that create genuine economic prosperity. As Ludwig von Mises wrote in the aftermath of World War I, war prosperity is like the prosperity that an earthquake or a plague brings.
Also see the following:
National Emergency and the Erosion of Private Property Rights, by Robert Higgs and Charlotte Twight
World War II and the Triumph of Keynesianism, by Robert Higgs
How War Amplified Federal Power in the Twentieth Century, by Robert Higgs