ECON : Essentials of Economics. Macroeconomic Term Paper. War, what is it good for ₁

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1 ECON : Essentials of Economics Macroeconomic Term Paper War, what is it good for ₁ The Impact of War on the Macroeconomy Author: Steven Gregerson 7/31/2011 ₁ Starr, E. (1970). War. New York, NY: Motown.

2 Introduction: War & Profits This is an examination of World War II and the economic periods that surrounded it. Research will try to show changes in Macroeconomy as a direct result of the War. This will include employment, inflation control, growth (including stock market reactions), benefits from the productions for war, benefits of testing war mechanisms (developed in prior to the outbreak of war) and even the benefits of wars destructive aftermath. World War II World Economy before the War: The Depression ruled the day Prior to WWII, the world was in the grips of the Great Depression and America was starting to see some recovery, even in the stock market, but elsewhere, recovery was tepid at best. In the late 30 s Hitler had risen to power and would begin breaking treaties and building a German War Machine. This would in turn employ millions and build confidence in the downtrodden German s and there economy hit particularly hard since the end of World War 1. In 1937 a short term recession begins in the US, here are some theories about the causes of this recession: ₂Christina Romer, Barack Obama's current chair of economic advisors, sums up the official history:

3 The recovery... was incredibly rapid. Annual real GDP growth averaged over 9%. Unemployment fell from 25% to 14%...However, that growth was halted by a second severe downturn in , when unemployment surged again to 19%... [Spending cuts and tax hikes] reduced the deficit by roughly 2.5% of GDP, exerting significant contractionary pressure. ₃Jonathan M. Feingold Catalán A writer at Ludwig von Mises Institute postulates the following theory: 1) An inflow of gold from Europe and an artificial increase in the dollar-gold exchange ratio caused inflation. 2) Meanwhile, government's union and wage policies maintained high real wages in the face of stagnating productivity. 3) Finally, heavy government regulation made the stock market extremely volatile and susceptible to otherwise minor changes. I propose a third theory that s actions compounded those theories outlined above. It is that savvy investors closely watch macroeconomics. We know that fluctuations in the stock market (see Figure 1, last page) often precede or predict future economic trends. The market knows as they say and Smart Money started to exit as they began to see the above indicators. The investors (with fresh memories of WWI) seeing the rise of Hitler s Germany, the breaking of treaties and the amassing of militaries and border skirmishes around the globe (e.g. Japan vs. China, Italy vs. Ethiopia and pacts between countries Germany, Italy & Japan etc.) were anticipating the problems to come. They know these uncertainties are hard to factor and can perpetuate longer term negative trends. This would cause contraction in lending, reduce investment in factories and perpetuate hoarding of commodities. This in turn exacerbates inflation in some areas,

4 deflation in others. Finally that reduces consumer spending, which then reduces corporate production and around it goes, a downward spiral feeding in on itself. In summary, the decimated economies of world were just starting to recover, but the ills of bad government policies and global uncertainties pressure on macroeconomics reignited the trend downward until another catalyst caused a paradigm shift in sentiment. World Economy during the War: The Winds of Change The building of the Third Reich and the German War Machine turned the economy around for the average German, but possibly made things worse for other economies by causing fear of uncertainty. Because of this uncertainty, many countries (including the US and Germany) anticipating an outbreak of war, might be eager to put into action the advancements in military weapons and strategies developed as a result of WWI, including the splitting of the atom that occurs just before Hitler invades Czechoslovakia. Despite promises by politicians to keep America out of the War, there would be certain advantages of putting dormant factories and 19% unemployed workforce back into production and finally put an end to the Great Depression years. In summary, after trending down since 1936, the bottom was finally realized in 1942 after America s entry into the War and some positive news from offensives in the Pacific built American confidence that would trickle back to investors. At the same time with the realization that American factories and workforce are ramping up to full utilization,

5 the winds of change start to be felt. War has its positive side effects, including rebuilding from the aftermath. World Economy after the War: Old Enemies Die, New Enemies Born With the ending of WWII and America established as the preeminent world power, it had a residual wind in its sales. The economy may not be perfect, but it wasn t going back to past. America and countries around the globe had plenty to do re-purposing their factories back to the private sector and assisting in the rebuilding of devastated cities and towns. This side effect of war keeps the economy going by keeping people employed for the rebuilding effort, both in reconstruction and manufacturing. Plus many old factories, homes, buildings in Europe could be rebuilt from the ground up, benefiting from more modern standards of engineering and improved materials. In addition years of data and rapid technological improvements (amassed in effort to win the War) would benefit research in new industries for decades. Finally, pent up demand from almost twenty years of the Great Depression would bring about another catalyst, the new dawn of consumerism and the squeaky clean ideal All American households of the 50 s. In Summary, influence from five years of war on macroeconomics was losing steam, but our newfound confidence in peace would be short lived. When one chapter ends, another begins. Our old enemy was replaced with a new enemy that would influence macroeconomics with its Cold War tactics for decades to come the Red Menace and the new war for the arms race was born.

6 Conclusion: The Future of War on Macroeconomics Corporations are now more brazen than ever to make money from War. ₆In Fire Fight an article by Nathan Vardi in Forbes, August 2009 is an example: Battlefield contractors have been around for years. But their importance has grown Roughly 240,000 contractor employees support U.S. missions in Iraq and Afghanistan, outnumbering the troops they serve. They provide security, military and police training, logistics feed, clothe and clean fighting forces collecting some $100 billion U.S. taxpayers are on the hook for With technology playing an ever greater importance on how wars will be fought, the stakes of war on macroeconomics have never been greater. The next wars make be a direct assault on the economy via Cyber Wars. Unlike the wars of the past that pulled us out of economic malaise, this future war may actually be the catalyst for economic Armageddon. Increased coordinated attacks on banks and large corporate e- commerce and database frameworks are be waged with no trace of who or why, therefore no tangible enemy to retaliate against. That being said, and until that final day, there will continue to be microeconomic players that will take advantage of the preparation for war, the production during a war and the efforts to rebuild after a war. From a purely economic perspective they fully understand The Impact of War on the Macroeconomy and War, what it is good for...

7 Bibliography: ₁ Starr, E. (1970). War. New York, NY: Motown ₂ As quoted in Murphy, Robert, "Christina Romer s Faulty Depression History, Daily: 6 July 2009 ₃ Catalán, J.F.M, "Dangerous Lessons of 1937", Mises Daily: 2 February 2010 ₄Yahoo Finance Chart ₅World War II Historical Timeline Data extracted from ₆Vardi, N. (2009) Fire Fight: Wall Street Goes to War Forbes, August 3, 76-81

8 Figure 1 World War II Timeline and the visible effects on macroeconomics ₄Yahoo Finance Chart ₅World War II Historical Timeline Data extracted from