The National Pulse

War Is Hell — Even for the US Economy

Yesterday, President Trump announced the United States will significantly increase its military presence in Afghanistan, with some estimating an additional 4,000 troops could be joining the 8,400 already on the ground.

Without even a conversational understanding of the current status of the war or our policy objectives, I do not wish to criticize the consensus opinion of America’s brightest military minds that a troop surge is needed. There is no question that those who arrived at this decision are deeply aware of the enormous sacrifice that comes with sending more of America’s promising youth to fight overseas, and did not make the decision lightly.

But although the foreign policy side of the coin is murky to me, the economic side is much clearer. War is terrible for American prosperity.

The last century provides countless examples of war resulting in less economic freedom for American citizens. Below is a brief history of how war decisively altered the U.S. tax structure, which is provided not to impugn the decision to enter these wars, but rather, to show just how economy-sapping war is.

World War I

From History Channel:

[P]reparation for and entry into World War I had greatly increased the government’s need for revenue. Congress responded to this need by passing an initial Revenue Act in 1916, raising the lowest tax rate from 1 percent to 2 percent; those with incomes above $1.5 million were taxed at 15 percent. The act also imposed new taxes on estates and excess business profits.

By 1917, largely due to the new income tax rate, the annual federal budget was almost equal to the total budget for all the years between 1791 and 1916. Still more was required, however, and in October 1917 Congress passed the War Revenue Act, lowering the number of exemptions and greatly increasing tax rates. Under the 1917 act, a taxpayer with an income of only $40,000 was subject to a 16 percent tax rate, while one who earned $1.5 million faced a rate of 67 percent. While only five percent of the U.S. population was required to pay taxes, U.S. tax revenue increased from $809 million in 1917 to a whopping $3.6 billion the following year.

World War II

From Time:

To pay for the war, Congress passed a new Revenue Act that nearly doubled the number of Americans who would have to pay income taxes. TIME called it “the biggest piece of machinery ever designed to separate dollars from citizens.”

Though the amount raised was important in the short run, it was the expansion in the number of people paying that fundamentally altered U.S. tax structure. The middle class had pitched in before—paying a tax on a purchase was seen as totally normal—but most people had never written a check to Uncle Sam. Now that link would be set in stone…. we are still living under the structure created to serve the needs of World War II.

From Foundation for Economic Education:

Before World War II … relatively few people paid income taxes. As late as 1939 fewer than four million individual returns were filed, and the filers’ total tax bill came to less than $1 billion, or less than 4 percent of their net taxable income. When so few people paid income tax and the amounts due in most cases were so small, the system of deferred payment imposed no great burden and gave rise to few taxpayer complaints.

Beginning in 1940, however, the tax burden increased enormously. As the government began to mobilize for participation in a gigantic global war, its revenue demands grew apace. Federal spending burgeoned from $9 billion in fiscal year 1940 to more than $98 billion in fiscal year 1945. Although the greater part of this spending upsurge was financed by borrowing, huge increases in tax collections also took place. In 1945, 50 million individual income-tax returns were filed, and the filers owed more than $19 billion, or almost 20 times the amount that Americans had coughed up for this tax just five years earlier.

Vietnam War & War on Terror

Apart from transforming our tax structure, war also changed American monetary policy. The enormous cost of the Vietnam War was one of the prominent factors that resulted in the “Nixon Shock” that would sever the U.S. dollar’s final link to gold, throwing us into the era of free-floating currencies that exists today (at great detriment to our economy). The War on Terror has come with a large price tag as well, as Neta Crawford, a co-director of the Cost of Wars Project at Brown University, has estimated that total war spending in Iraq, Afghanistan and Pakistan since 2001 is approaching $5 trillion.

Most importantly, beyond the obvious costs of war (i.e. paying for troops, planes, boats, bombs), in a highly memorable Forbes column, John Tamny articulated the human cost of war as well:

To believe that war is stimulative is to turn the genius of Adam Smith on its head, and naively assert that the human capital which drives all advancement doesn’t matter; that greater prosperity can be achieved by sending the young and energetic off to foreign lands so that they can be maimed, and too often killed. Supposedly this is more stimulative than is keeping them at home so that they can produce for their fellow man.

To believe that war is stimulative is to presume that free trade and the intense specialization that it brings us is irrelevant to growth; that we’re instead made better off when conflict to varying degrees erects barriers to the global division of labor. Rather than producing in concert with fellow economic actors around the world, all of us doing what we’re comparatively best at, during war Smith’s proverbial pin factories are often shrunk in favor of autarkic production; much of it meant to destroy rather than create wealth.

To believe that war redounds to economic growth is to presume that during times of economic hardship we should dynamite cities around the U.S. so that politicians can pay people with money taxed and borrowed away from the productive to rebuild all the wealth that was destroyed. It also presumes that we should actively court conflict with an eye on putting soldiers in harm’s way globally and defense contractors to work domestically.

Lastly, to think that World War II ended the Great Depression is to blindly assume that once the war ended, and government spending plummeted, that the U.S. economy sank into the mother of all recessions. In fact, the U.S. economy soared after the war as the government spending burden shrank, and an energetic generation returned to endeavors amounting to real wealth creation over destruction of same.

Without challenging our military leaders’ decisions to go to war, it is important to understand the economic consequences of such decisions. The past century has given us countless examples of how war can deter American prosperity.

Jonathan Decker

Jonathan Decker is the Chief Economic Correspondent for TheNationalPulse.com.