Schiff: A New World War Won’t Help The Economy

We considered here back on July 2 some ways that this worsening recession could turn into a major war. If you’re going to read that article for background, be sure to read the many thoughtful comments as well.

One of my readers, Ron, sent along an article by Peter Schiff on the same subject but with a different angle. Schiff looked at the ways that World War II helped end the Great Depression, joked a little about staging a fake paintball war with Russia as a way to stimulate our way out of the current recession without killing anybody, then showed how, actually, the US can no longer afford a conflict on the scale of World War II anymore. Highlights from the article:

There is overwhelming agreement among economists that the Second World War was responsible for decisively ending the Great Depression. When asked why the wars in Iraq and Afghanistan are failing to make the same impact today, they often claim that the current conflicts are simply too small to be economically significant.

Most economists believe that massive federal government spending on tanks, uniforms, bullets, and battleships used in World War II, as well the jobs created to actually wage the War, finally put to an end the paralyzing “deflationary trap” that had existed since the Crash of 1929. Many further argue that war spending succeeded where the much smaller New Deal programs of the 1930s had fallen short.

The numbers were indeed staggering. From 1940 to 1944, federal spending shot up more than six times from just $9.5 billion to $72 billion. This increase led to a corresponding $75 billion expansion of US nominal GDP, from $101 billion in 1940 to $175 billion by 1944. In other words, the war effort caused US GDP to increase close to 75% in just four years!

The War also wiped out the country’s chronic unemployment problems. In 1940, eleven years after the Crash, unemployment was still at a stubbornly high 8.1%. By 1944, the figure had dropped to less than 1%.

But to repeat the impact of World War II today would require a truly massive effort. Replicating the six-fold increase in the federal budget that was seen in the early 1940s would result in a nearly $20 trillion budget today. That equates to $67,000 for every man, woman, and child in the country. Surely, the tremendous GDP growth created by such spending would make short work of the so-called Great Recession.

The big question is how to pay for it. To a degree that will surprise many, the US funded its World War II effort largely by raising taxes and tapping into Americans’ personal savings. Both of those avenues are nowhere near as promising today as they were in 1941.

Current tax burdens are now much higher than they were before the War, so raising taxes today would be much more difficult.

That leaves savings, which was the War’s primary source of funding. During the War, Americans purchased approximately $186 billion worth of war bonds, accounting for nearly three quarters of total federal spending from 1941-1945. Today, we don’t have the savings to pay for our current spending, let alone any significant expansions. Even if we could convince the Chinese to loan us a large chunk of the $20 trillion (on top of the $1 trillion we already owe them), how could we ever pay them back?

If all of this seems absurd, that’s because it is. War is a great way to destroy things, but it’s a terrible way to grow an economy.

The truth is that we cannot spend our way out of our current crisis, no matter how great a spectacle we create. Even if we spent on infrastructure rather than war, we would still have no means to fund it, and there would still be no guarantee that the economy would grow as a result.

What we need is more savings, more free enterprise, more production, and a return of American competitiveness in the global economy. Yes, we need Rosie the Riveter – but this time she has to work in the private sector making things that don’t explode. To do this, we need less government spending, not more.

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One Comment

  1. Brayden
    Posted July 23, 2010 at 6:06 am | Permalink

    I’ve been following Peter Schiff for many years. Those that have know how unbelievably accurate his predictions have been to date. On this topic however, I have to disagree.

    “What we need is more savings, more free enterprise, more production, and a return of American competitiveness in the global economy. Yes, we need Rosie the Riveter – but this time she has to work in the private sector making things that don’t explode. To do this, we need less government spending, not more.”

    Americans in general cannot and will not start saving more. People are trying to survive, and those that are surviving have to support others close to them. This will only get worse as the years progress.

    The American Government is not going to spend less. We all know that. America loves war, occupying countries and become accustom to spending billions on defense. Always has and always will.

    I think war unfortunately will be the inevitable end to this ‘great recession’. I don’t think ‘terror’ is a real threat here either, I think the real threat is the US staging a false flag operation (as they and other countries have in the past) to justify an invasion of a third country in the Middle East.

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