Yamarik, Johnson and Compton on War

As my students know, I question the common conclusion that the United States government’s economic response to World War II lifted the country out of the Great Depression.  I don’t believe that the United States has benefited economically from any war beginning with the Spanish American War and our wars were or are being fought off our shores.  My conclusion is more one-sided than the economic literature.

Yamarik, Johnson and Compton in “War! What Is It Good For? A Deep Determinants Analysis of the Cost of Interstate Conflict” (Peace Economics, Peace Science and Public Policy, Vol 16, No 1, 2010) write that

…there is no clear consensus on the economic consequences of interstate wars.One line of reasoning argues that war is harmful to the economy. Simply put, war kills people, destroys property, restricts trade, and retards capital formation. Marwah and Klein (2005) find that military expenditures reduced private investment and thus lowered the growth rate for the Southern Cone of Latin America. Blomberg, Hess, and Thacker (2006) estimate that major external conflict in the previous two years has a negative contemporaneous impact on growth. Sevastianova (2009) finds that international war has a negative impact on the one- and two-year growth rate, but an insignificant impact on the longer five-year growth rate. Glick and Taylor (2010) also find a negative short-run relationship between war and growth. They estimate that the indirect cost of World Wars I and II stemming from lost trade was even greater than the direct costs associated with the loss of life.

An alternative line of reasoning argues that the macroeconomic effect of war is ambiguous, or even positive. In the short-run, wartime expenditures increase aggregate demand and the level of real GDP.4 Military research and production can increase innovation and technological progress in the long-run (Alchian, 1963; Kuznets, 1964; and Ruttan, 2006). Similarly, war can eliminate distributional coalitions, thereby reducing rent seeking, especially for the “losers” of the conflict (Olson, 1982). For the U.S., conventional wisdom is that the Second World War saved the U.S. economy from an even longer depression and planted the seeds for future prosperity.

Their empirical research adds to the literature that concludes that war is bad for an economy.  They conclude

We find that a one standard deviation increase in fatality-weighted conflict results in an average reduction in real GDP per capita of between 0.09 and 0.14 of a standard deviation. Our estimate is consistent with common sense and is fairly stable across different specifications of our cross-country regression. Most surprisingly, these results suggest that the costs of war stay with a country much longer than is implied by previous studies. Even if an economy grows quickly after a war is over, our results imply that this will not be enough to return standards of living to where they would have been in the absence of conflict. War is more than a transitory supply shock, it permanently alters the economic potential of the country.