Published on March 9, 2014
“ RECESSION AND WAR “ THE UNDERLYING TRUTH…
Time Line of the Recessions and their succeeding Wars PRE WAR RECESSION SUCCEEDING WAR 1912-1914 WORLD WAR I 1929 TO MID 1940’S WORLD WAR II 1937 TO 1938 RECESSION 1949 TO 1950 RECESSION KOREAN WAR POST KOREAN WAR RECESSION ( 1953 TO 1954) 1957 TO 1961 VIETNAM WAR(1955-75) 1973-75 RECESSION GULF WAR(19891990) POST GULF WAR RECESSION (JULY 1990 TO MARCH 1991) DOT COM CRISIS (1997 TO 2000) 9/11/2001 (WAR AGAINST TERRORISM) POST WAR RECESSION
THE RELATIONSHIP BETWEEN RECESSION AND WAR CANNOT BE DISCUSSED , TOLD , EXPRESSED . BUT IT CAN BE SEEN -- Vivek Kumar WHEN THE WORLD WAR I BEGAN, THE U.S. ECONOMY WAS IN RECESSION AND THE TIME PERIOD FOR RECESSION WAS 1912-14 . 1912 – 28 JULY 1914 PRODUCTIONS AND REAL INCOME DECLINED DURING THIS PERIOD AND WERE NOT OFFSET UNTIL THE START OF WORLD WAR I INCREASED DEMAND.
THE PANIC OF 1910 ENDED IN JANUARY 1912. JUST A YEAR LATER, IN JANUARY 1913, ANOTHER LONG RECESSION STARTED. FEW REASONS FOR PRE-WORLD WAR RECESSION THERE WAS NO CENTRAL BANK JUST YET TO ACT AS A SHOCK ABSORBER TO WILD SWINGS IN MONEY AVAILABILITY IN THE ECONOMY AND SUPPORT BANKS; THE ACT THAT CREATED IT WASN'T SIGNED INTO LAW UNTIL DECEMBER 1913 THE PROGRESSIVE GOVERNMENT WAS STILL TRYING TO BRING OVERREACHING CORPORATIONS INTO LINE AND ESTABLISH PROTECTIONS FOR LABORERS THE REVERBERATIONS OF THE PANICS OF 1907 AND 1910 WERE STILL BOUNCING AROUND. ALL OF THIS LED TO A FRAGILE ECONOMY
BEFORE 1914 UNEMPLOYMENT RATE WAS INCREASING BUT, AS THE WORLD WAR - I STARTED THE UNEMPLOYMENT RATE STARTED TO DECLINE
AFTER THE START OF WORLD WAR – I THE GDP STARTED TO BOOST-UP
According to Paul Krugman, ““The Great Depression in the United States was brought to an end by a massive deficit-financed public works program: World War II.” War production expanded from roughly 2% of GDP to almost 40%, statistically. Unemployment rates fell from 19% in 1939 to below 2% in 1945. In 1940 dollars, GDP shot from $101.4 billion to $120.7 billion in 1941 up to $174.8 billion by 1945
Going beyond the numbers.. • GDP measures only the total monetary value of production while ignoring what is actually produced. • A rise in government spending increases output but crowds out private investments and consumption.
Cause of the War and PreWar Scenario in USA The Korean War broke out because it was just another episode in the on going Cold War between the USA and the USSR. On the surface, the Korean War seemed to be a war between South Korea and North Korea, but really the superpowers were just using it as a front to combat each other without actually going into a ‘hot war’ which – as both had the atomic bomb – would have been MAD (mutually assured destruction). Before the Korean War had started, USA was in a period of recession, when unemployment reached a peak of 7.9% , GDP fell 0.5% for the year. Similar to World War II, the Korean War had potential to boost GDP growth via government spending.
Consequences of the War • As can be seen in the next figure, as in World War II, there is an increase in the growth of GDP, albeit smaller, for the 1950-53 time period. Investment and consumption flattened while the overall growth rate was driven by government spending. • The economy experienced real GDP growth of over 11% in 1951 with inflation increasing to 5.3% in 1951. • Notably, the year after the conflict ended, 1954, there was a short recession in spite of the fact military outlays still constituted 13% of GDP. National GDP fell to be effectively the same as it had been two years prior, in the middle of the war in 1952. Beginning in July 1953, lasted 10 months, as a result of the end of the Korean War. Unemployment did not reach its peak of 6.1% until September 1954, two months after the recession ended. GDP was down to 6.2% in Q4 of 1953.
During the Korean War, GDP was boosted by government spending financed by taxation which constrained investment and consumption.
After World War II and the Korean War, the key components of GDP, consumption and investment did not return to the pre-war level.
As we can conclude from the above slides, that although there has been no mention of the fact that wars and recession are related but from the previous data we have observed that there is a relationship between recession both pre war and post war. USA financing South Korea during the war was a clear example of government financing, which in turn led USA to get out of its recession period. Thus, proving the fact that there is an underlying truth which clearly states that wars and recession are related.
The Vietnam War was the longest war ever fought by the United States. It lasted more than 15 years, from 1959 to 1975. It was also the first war that the United States lost. WHY DID US ENTER THE WAR: To stop the spread of Communism in Southeast Asia. American leaders feared that Communist forces would gain control of Vietnam. After that, nation after nation might fall to Communism. Communism is a political and economic system that the United States strongly opposed. South Vietnam had a non-Communist government. This government was weak which United States supported it in order to keep the Communists from taking control of all of Vietnam. RECESSION OF 1957–1961 : High levels of unemployment and demand was higher than the supply. Thus idle plants and machinery meant that industrial sector could now grow rapidly to meet the demand. Early 1960s witnessed a boom by change in their govt. policies(tax cut) and by financing the Vietnam war. War did mean that a growing portion of the industrial capacity and labor force of the US economy had to be devoted to meet the needs of the war. From 1965, US could no longer expand its production and thus demand was reduced to meet the supply by increasing the prices thus the boom of 1960s was on.
END OF THE WAR Although Nixon increased the bombing of North Vietnam, he began withdrawing U.S. troops. Without U.S. support, South Vietnam's government collapsed. North Vietnam won the war in 1975. Vietnam was reunited as a Communist nation. 1973–75 RECESSION A quadrupling of oil prices by OPEC coupled with high government spending because of the Vietnam War led to stagflation in the United States. The period was also marked by the 1973 oil crisis and the 1973–1974 stock market crash. The period is remarkable for rising unemployment coinciding with rising inflation.
The Vietnam War had a lasting fiscal legacy due to the increased levels of government expenditure which was financed by increases in taxation from 1968 to 1970. The blowout in budget deficits was driven by both military and non-military outlays in combination with an expansionary monetary policy that led to rapidly rising inflation in the mid-1970s. Figure in the next slide shows the increase in government spending which peaked in 1968. Consumption remained constant and investment remained flat. The slight fall in government spending after 1969 and up to 1973 can be attributed to falling military expenditure that outweighed the increases in non-military expenditure. Consumption was negatively affected by rising unemployment and inflation after the 1973 oil shock, while prior government attempts to rein in inflation with price and wage controls also kept investment almost flat through most of the 1970s. The financing method of the Vietnam War via inflation did not help policymakers who later had to deal with stagflation brought on by the 1973 oil crisis.
During the VIETNAM War, GDP was boosted by government spending financed by taxation and increase in inflation which constrained investment and consumption.
• IN FINANCE, BLACK MONDAY REFERS TO MONDAY, OCTOBER 19, 1987, WHEN STOCK MARKETS AROUND THE WORLD CRASHED, SHEDDING A HUGE VALUE IN A VERY SHORT TIME. • THE CRASH BEGAN IN HONG KONG AND SPREAD WEST TO EUROPE, HITTING THEUNITED STATES AFTER OTHER MARKETS HAD ALREADY DECLINED BY A SIGNIFICANT MARGIN. THE POST-1987 PERIOD IS MARKED BY ECONOMIC STAGNATION. IN THE OECD COUNTRIES, GDP GROWTH HAS FALLEN FROM 3.1% PER ANNUM IN THE 1980S TO A MEAGRE 1.7% IN THE 1990S.
JUST BEFORE 1990 THERE WAS A RECESSION BUT AFTER THE WAR THERE WAS A SMALL IMPROVEMENT YHTHIS REGION IS DUE TO THE 1987 FINANCIAL CRISIS
Some critics of the official account of 9/11, provide evidence that the Bush administration intentionally allowed the attacks of 9/11. One way to approach this question would be to ask whether these attacks brought benefits to this administration. President Bush himself declared that the attacks provide “a great opportunity.” Donald Rumsfeld stated that 9/11 created “the kind of opportunities that World War II offered, to refashion the world.” Condoleeza Rice had said the same thing in mind, telling senior members of the National Security Council to “think about „how do you capitalize on these opportunities‟ to fundamentally change…the shape of the world. A pre-9/11 document that speaks of benefits that could accrue from catastrophic attacks.
•In the fall of 2000, a year before 9/11, a document entitled Rebuilding America’s Defenses was published by an organization calling itself the Project for the New American Century (PNAC). •PNAC argues that it is necessary for defense spending to be greatly increased if the “American peace is to be maintained, and expanded. •This transformation of US military forces will, however, probably be a long, slow process, partly because it will be very expensive. However, the document suggests, the process could occur more quickly if America suffered “some catastrophic and catalyzing event like a new Pearl Harbor. •The Bush-Cheney administration endorsed a document indicating that “a new Pearl Harbor” would be helpful for furthering its aims and provide opportunities.
One of the important dimensions of PNAC is the militarization of space, the US space command. Govt describes spending for the US Space Command as spending for “missile defense” making its mission sound purely defensive, augmenting a feeling of “homeland security”. Its primary purpose was not to protect the American homeland but to protect American investments abroad. Another possible motive on the part of the Bush administration was its desire to attack Afghanistan so as to replace the Taliban with a US-friendly government to further US economic and geopolitical aims.
Economists go further. Many are now quietly suggesting that if 11 September hadn't happened America would not have recovered so quickly from its recession. 'On the one hand 11 September was the last thing the economy needed, but with hindsight it may well have accelerated the healing process, awful as it was. Talking about it from a purely economic standpoint, not from the moral or the political, it did bring forward much of the creative destruction that recessions wreak,' said Danny Gabay, economist with JP Morgan. Bush administration was able to use the tragic events to get through Congress a $1.35 trillion tax cut, something that looked inconceivable before 11 September. The relaxation of fiscal policy - coupled with aggressive interest rate cuts by the Federal Reserve - provided a strong, immediate stimulus to the economy. The rebate made consumers feel wealthier - in the third quarter of 2001 some $40bn found its way back to them - and they kept shopping, spurred on by patriotic appeals to spend, spend, spend from the likes of Mayor Rudolph Giuliani and General Motors.
His was the first war in history paid for entirely on credit. As America went into battle, with deficits already soaring from his 2001 tax cut, Bush decided to plunge ahead with yet another round of tax “relief” for the wealthy. Since the wars are being financed primarily though borrowing, the added $2.4 trillion would worsen an already staggeringly $13.5 trillion national debt. This massive national debt increases interest rates on loans. Americans may not necessarily feel this tax burden now, but eventually the government will need to raise taxes to pay off the increasing interest on national debt. “The Joint Economic Committee, which estimated a $3.5-trillion cost through 2017, indicated that the wars would cost the average American family $46,400 [in increased taxes]” causing AD and thereby output to fall. Evidently, the Iraq war is indeed forcing oil prices upward, decreasing the ability and willingness of consumers to spend money on other items.
Presented by: Debarati Bir Vivek Kumar Saurav Das Saurav Roy Tuhina Kumari Devika Kannan Sanya Goyal Saptarshi Maiti
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