Rescuing the Recession: How the U.S. Economy Found Some Financial Independence After Modern Wars

Photo: Enduring America

It’s July 4th, and time to celebrate America’s 236th birthday, complete with barbecues, fireworks and an all-around sense of pride in the good ol’ U.S.A., even if the state of the economy isn’t in the greatest shape. And it could all be the result of how we gained our Independence in the first place — war.

Is the U.S. in a recession? Yes and no. According to the National Bureau of Economic Research, the U.S. recession that began with the subprime mortgage crisis of 2008 effectively ended three years ago; a 16-month downturn, it was the longest period of recession in U.S. economic history since the Great Depression over 75 years ago. But Peter Ferrara of the Washington Times says otherwise — we’re still in the thick of recessionary times.

History, Ferrara says, tells us that the deeper a recession, the stronger the recovery, which implies that the U.S. should be in year three of a major fiscal turnaround. Instead, dire unemployment figures are the strongest indicator that America is still stuck in the recessionary mud. The labor force, Ferrara notes, is 365,000 workers smaller than in 2009; counting population growth since that time, the U.S. economy is missing 7.7 million workers that would be in the labor force. Investor’s Business Daily said in May that the roughly 8 percent unemployment rate could be closer to 11 percent, according to those numbers.

At War With the Economy

state of the economy

The publication said that the U.S.’s current numbers are so poor that they stand “in stark contrast” to any economic expansions following World War II, where labor forces climbed into the millions. The country’s collective memory tells us that periods of wartime in the U.S. are periods of great solidarity, victory and growth (the Baby Boom following World War II is one example).

But war has never been kind economically to the U.S. It’s always following the end of a major conflict or skirmish that the country falters into poor financial shape. Just as we came off the Iraq War at the end of last year, Americans are once again feeling the sting of tight economic times, just like we did in the aftermath of every major war.

Earlier this year, the Institute for Economics and Peace released a report detailing some of the economic effects resulting from the U.S. government’s spending on wars and military efforts. According to Michael Shank of the Institute, in each war the U.S. has participated in — from World War II, Korea, Vietnam, up to Afghanistan/Iraq — the same economic trends emerged:

  • Public debt and taxation levels increased;
  • Investments and consumption as a percentage of the U.S.’s Gross Domestic Product (the country’s total value) decreased;
  • Inflation increased during and after each conflict was over.

Making Economic Peace With War

economic history of the United States

The Institute’s study described how the economic history of the United States was impacted by major wars.

World War II

Following the Great Depression in the 1930s, the U.S.A. under President Franklin Roosevelt took great strides in patching together the economy. In 1941, the U.S. entered World War II, and by the war’s end in 1945, the debt-dependent government had spent $296 billion to fight in the conflict — that’s $4.1 billion in today’s dollars.

Government debt and raised taxes grew to 6 times their original amount to fund the war. And though unemployment levels fell to 1.9 percent (with 20 percent of the population working for the armed forces), consumption — the purchase of goods and services — fell, leading to a stagnant economy. According to the Institute, Americans were encouraged to conserve food, and produce as much of their own food as possible, since groceries and food items were scarce during the war. It wasn’t until Americans conserved their resources — and women joined men on the assembly lines — that the economy stabilized back to pre-war levels, resulting in the Baby Boom and an economic expansion that lasted until the early 1970s.

Korean Conflict

While not as large as World War II, the 3-year Korean War cost the U.S. government $30 billion in 1953 money. The hit to America’s economy was also minor. To finance the war, President Truman raised taxes by 1.3 percent, and there was a 5.3-percent increase in inflation.

The study said that by the war’s end in 1954, material well-being suffered among residents, consumer spending was subdued, investments were stagnant and there was a short recession, too, but the economy quickly recovered.

Vietnam

The Vietnam War did not cost the U.S. government as much as previous conflicts, but the loss of American morale, and 58,000 U.S. troops killed, were the real costs.

Vietnam had a “lasting fiscal legacy,” according to the study. An increase in taxation from 1968-1970, and rising inflation through the mid-1970s to fund the war effort, hurt consumers. Unemployment remained high, and the 1973 oil crisis didn’t help, either; though Presidents Nixon and Ford tried to stop inflation with price and wage controls, nobody was investing, and the economy remained flat.

By 1975, the stock market had fallen to 1963 levels. Similar to today’s economic climate, Americans could do little but wait until the economy improved — it wasn’t until 1980, five full years after the war ended, when inflation finally stabilized and the country saw some economic recovery.

Afghanistan/Iraq

After a short blip on the economic radar, a brief recessionary period early in President Clinton’s turn in the White House picked back up only to falter again following the September 11, 2001 terrorist attacks, from which the country has arguably not recovered economically.

With President George W. Bush declaring a $297 billion war on Afghanistan, and later, Iraq, the Institute study notes that the conflict shot oil prices up from $23 to $140 per barrel — and that had a direct effect on oil demand and inflation. Between September 11, the early 2000s dot-com burst, and the 2008 subprime mortgage collapse, all contributed to an anemic economy that continues to this day. The last American troops finally withdrew from Iraq last December on orders of President Obama.

Will the U.S. Economy Recover?

U.S. economy recoverIt’s as if we’d wish that our Fourth of July fireworks would just explode our bad economy good again, to celebrate the financial stability our country was originally founded upon. Maybe the cold, hard truth is that we’re responsible for the recent financial crisis; a lack of financial literacy combined with years of spending and loaning beyond our means simply took their toll.

Economist Heidi Shierholz wrote earlier this year in her U.S. News & World Report blog that today’s effects of the recession are due in part to a reduced demand for goods and services, which translates, she says, into reduced demand for workers who create those goods. If let the economy recover on its own, it could take seven more years — until 2019 — to get the unemployment rate back to normal, she said.

Will the U.S. economy recover? Shierholz says yes — but we need to be responsible not just with our financial habits, but the pressure we apply to policymakers. “Aggressive policies to create jobs — namely substantial fiscal support to bolster demand — need to become a top national priority,” Shierholz said.

With that approach, turning around the U.S. economy could be the biggest victory we’ve won just yet.