What Happens to the Economy when the Country is at War

What happens to the economy when the country is at war? No two conflicts are the same but I suspect many people equate war with recession — when the bombs start to drop, economic gloom deepens.

This is understandable but wrong. It is true that Iraq’s invasion of Kuwait in the summer of 1990 coincided with the start of Britain’s last recession. The Gulf War (which like all other episodes after the Second World War, including Korea and Vietnam, was never declared as a war by America) appeared to the uninitiated to trigger the downturn. In fact, while that conflict was not helpful, particularly as it pushed up oil prices sharply, it played little part in the recession, which had its roots in 15% interest rates, established a year earlier.

In the two main wars of the 20th century, similarly, recession was not a problem. The war effort entailed a big increase in economic activity and productivity. Unemployment was eliminated. The problem, as Lord Skidelsky points out in Fighting for Peace, the third volume of his biography of John Maynard Keynes, was more typically one Breitling Replica Watches of inflation. Prices doubled in the First World War and rose by a half in the Second World War. The reason was not just pressure on capacity and available labor (industrial disputes were common in both wars) but also, and mainly, deficit financing. Taxation accounted for only a third of government spending in the First World War and only just over a half in the second.

I am not suggesting, of course, that we have embarked on a conflict on that scale, al-though I do confess to finding such information fascinating. It also helps put into perspective some of the current worries about the economy. These are, to take both ends of the range, the fear that the global economy will never recover from the shock of September 11 and its aftermath, or it will do so only after a prolonged slump. And, at the other end of the scale, there is the worry about policy overreaction, that cuts in interest rates and the “rediscovery of Keynesianism” in Washington mean that unwise decisions are being taken, the result of which will be to worsen economic imbalances and generate high inflation.

These are early days, but the slump school is not yet winning the argument. British shoppers, despite being threatened with every manner of attack on their front pages every day, are still spending strongly, even at Marks Spencer. My anecdotal evidence is that, outside London, the hotel trade is enjoying a good autumn. Britain’s manufacturers enjoyed an unexpected output boost in August but remain in trouble. They do not, however, appear to be suffering any more than before September 11.

Even in America the picture is less bleak than the doom mongers expected. Take away the crisis in the airline industry and you would be hard pressed to say that much had changed from the admittedly slow-growth picture beforehand. World Hublot Replica stock markets have recovered strongly and the dollar, against expectations, remains robust. Slump and war do not, then, typically go together. Inflation and war, on the other hand, often do. And inflation at present is an important silver lining among the clouds.