A very Merry Christmas, and a Happy New Year. Let’s hope it’s a good one, without any fear. And so this is Christmas, for weak and for strong, for rich and the poor ones, the world is so wrong. Lamented John Lennon and the Plastic Ono Band in the 1971 song Happy Christmas (The War is Over). As December 2011 comes to a close, another war – this time in Iraq – seems to be coming to an end in the same way as the Vietnam War did in 1973 when President Nixon announced the suspension of offensive action against North Vietnam, officially ending direct U.S. involvement in Indochina. The vast majority of US combat troops were withdrawn from the theater over the next couple of months, ending what had been a 10-year long action. Once again, American GIs, having never lost a single battle, depart a far off land and an unpopular conflict in Iraq. So this holiday season, let us all thank our soldiers, sailors, airmen and marines for another job well done.
The end of a war brings an expected decrease in military spending. The most recent budget request from the President projects defense spending to fall from 5.1 to 3.4 percent of GDP between 2011 and 2016. This is a good thing, as generally, high levels of defense spending lead to lower growth and recession. In fact, defense spending during recession years has been more than one percent higher (as a percentage of GDP) than in non-recession years. If the World War II period is excluded, this difference still holds fairly constant. But how can this be? Did not World War II pull the country out of recession? Does not all of this military spending stimulate the economy?The idea that high military spending benefits the economy is an example of the “broken windows fallacy.” This idea was first published by Frédéric Bastiat in 1850. Bastait asked the question “What would become of the glaziers if panes of glass were never broken?” He went on to say that a broken window demonstrates a lot about how much of what happens in an economy is unseen. Of course if a window is broken such an accident brings [6 francs] to the glazier’s trade and in fact grows that sector in the amount of [6 francs]. As Bastait said, “The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen. But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”
In fact, the money that was spent on the new window can no longer be spent on another item. What is not seen is that if the window did not have to be replaced at all those same six francs could have been spent on shoes, books, or economic consulting services. This spending is what economists today call the “opportunity cost” of broken windows. The same argument can be made about war and military spending. The increased production and employment associated with war often leads some to claim that “war is good for the economy.” However, as Bastait pointed out, the money spend on war represents resources that cannot be spent on health care, roads, airports, telecommunications and other important government services.
In addition, war destroys property and lives. The economic stimulus to the defense sector is offset not only by immediate opportunity costs, but also by the costs of the damage and devastation of war. Simply put, war is destructive rather than productive and can only have a negative impact both on people and on the nation’s economy.
While this does not mean that countries should not spend the resources necessary to defend themselves from others who may want to pillage them. There can be a large economic benefit to this. The cost of World War II in terms of both lives and treasure was great, but it was much less than the cost would have been had the country been overrun by the Axis powers. That said, outside of the clearly defensive purposes of military spending, wars, military operations, and foreign bases are generally an economic drain on the country, and the wrapping up of actions – be they in Vietnam or Iraq – will generally have positive benefits.