War isn't healthy for living things. In the long run, it also hurts business.
A popular slogan from the Vietnam War era was, "War is not healthy for children and other living things." It's hard to argue with that sentiment, but the notion that war is healthy for the economy is still widely accepted.
Wasn't it World War II that finally pulled us out of the Great Depression? The unemployment rate peaked at 25 percent in 1933, then persisted at just under 20 percent until 1938. The war-driven economic recovery that ensued was the most robust ever. Nothing comes close to the vigor of the expansion that occurred during World War II; not the bull market boom during the Roaring 1920s, nor the railroad-driven prosperity in the early 1890s, nor even the 1870s industrial overexpansion.
During the Vietnam War, the unemployment rate dipped below 4 percent, a level not achieved since World War II. During both World War II and the Vietnam War, women and minorities established a foothold in the labor market. Recent evidence seems to confirm the belief that war can stimulate business activity, especially if the war is fought on foreign soil. Seven years ago, the bombing of Iraq was accompanied by a double-digit percentage gain in the Dow Jones Industrial Average. Wall Street seemingly applauded an escalation of Desert Shield into Desert Storm.
The evidence suggests that wars can stimulate a sluggish economy, clear up unemployment problems, and rev up the stock market. But closer scrutiny indicates that any of these accomplishments could also have been achieved through a variety of national efforts that exclude war. In the 1930s, the British economist John Maynard Keynes suggested deficit spending to cure the Great Depression. At the time, the idea was simply too radical to be adopted. World War II finally forced the deficit spending that Keynes had recommended all along.
The unemployment rate in the United States today is creeping down toward the record lows of World War II and Vietnam. A long and steady expansion is the reason. Desert Storm coincided with the onset of the current recovery, but this has been a peacetime expansion.
The stock market has reached record highs during this expansion. Stock prices actually declined during Operation Desert Shield, for a simple reason--Wall Street doesn't really like war. The rise in stock prices during Desert Storm was more of a relief rally. Stocks rose only after it became apparent that the conflict would be limited. Wall Street mirrors the fortunes of ordinary Americans, most of whom also do not benefit from war. Our Index of Well-Being and the stock market diverged during Operation Desert Storm.
For January 1998, the Index of Well-Being rose almost one-tenth of a percent to a level of 103.71. This indicates that the typical American is 3.71 percent better off than in April 1990, the base month for the index. The income and employment component edged up 0.29 percent as incomes advanced in January over December. Also moving ahead was the leisure component, as a result of higher spending on recreational goods and services. The remaining three components of the Well-Being Index declined marginally. But these declines were not enough to offset the gains made in the first two components.
Comparing January 1998 to January 1997, well-being improved just over 1 percent. Over the year, the largest percentage gains came in the consumer attitudes sector that leapt almost 4.7 percent. The productivity and technology sector tacked on 2.6 percent. The only component to show a decline over the 12-month period was the social and physical environment, which shed just under 3 percent.
Trends In Well-Being (values for American Demographics Index of Well-Being and five major components for selected months, benchmarked to April 1990 level of 100)
[DATA TABLE, see print edition]
Source: Author's analysis of government and Conference Board data
About the author Elia Kacapyr is professor of economics at Ithaca College in Ithaca, New York, and author of Economic Forecasting (M.E. Sharpe, 1996).