If you ask most people in the U.S. what the economic effects of war are, the standard answer is “It’s good for the economy.” And to some extent, this is true. But there are some very important caveats to that.
The belief that war is good for the economy stems from the remarkable boost that World War II gave to U.S. industrial production, both during and after the war.
Not surprisingly, unemployment plunged as the government pushed production of war goods.
And the nation flipped from a deflationary economy to an inflationary one.
But the notion that war is good for the economy has several important corollaries. The first is, of course, that you should win the war. German reparations after World War I destroyed its economy and resulted in hyperinflation. The post-war South suffered for years afterward Appomattox because its railroads and factories were destroyed, and there was little credit available to rebuild.
The second is that even if you win the war, you shouldn’t fight it on your own territory. “If we look at the stronger performing countries over the past 115 years, the secret to success seems to have been “stay away from Europe,” writes Ben Inker of GMO. “And before declaring that this is an argument for European patheticness even if not American exceptionalism, it is worth remembering that Europe was devastated by two major wars in the period, and the countries in Europe that did the best were generally those that had the good fortune not to be invaded at some point along the way.”
The third is that even if you fight and win the war outside your borders that you can afford to fight it. War typically means higher taxes and higher inflation, as raw materials get diverted from normal use to the military. It also means that certain goods get more difficult and more expensive to obtain through trade. “Where the army is, prices are high; when prices rise the wealth of the people is exhausted,” according to Sun Tzu.
The U.S. paid for World War II — and much of the recovery in Europe — through high taxes and relatively small government. Neither one of those seems particularly easy today.