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IEP: Economic Consequences of War on the U.S. Economy

February 22, 2012

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This report by the Institute for Economics and Peace provides an overview of the macroeconomic effects of government spending on war and the military since World War II

Heightened military spending during conflict does create employment, additional economic activity and contributes to the development of new technologies which can then filter through into other industries. These are some of the often discussed positive benefits of heightened government spending on military outlays. However, it can be argued that programs specifically targeted at accelerating R&D or creating employment would potentially have the same effect but at a lower cost.

One of the most commonly cited benefits for the economy is higher GDP growth. This has occurred throughout all of the conflict periods, other than in the Afghanistan and Iraq war period. Another benefit commonly mentioned is that WWII established the appropriate conditions for future growth and ended the great depression. This was associated with a sharp decline in income inequality. The trend in declining inequality started with the onset of WWII and lasted through to the end of the Cold War when it rose again.2 It can be argued that the leveling of income inequality created the ideal conditions to build the large consumer oriented economy that the U.S. is today.

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