Financing Issues and Economic Effects of American Wars
"The increased government outlays associated with wars can be financed in four
ways: through higher taxes, reductions in other government spending, government
borrowing from the public, or money creation. The first two methods are unlikely
to have an effect on economic growth (aggregate demand) in the short run: the
expansion in aggregate demand caused by greater military outlays is offset by the
contraction in aggregate demand caused by higher taxes or lower non-military
government spending. The latter two methods increase aggregate demand. Thus, a
by-product of American wars has typically been a wartime economic boom in excess
of the economy’s sustainable rate of growth. Wars may shift resources from nonmilitary spending to military spending, but because military spending is included in GDP, it is unlikely to lead to a recession. Just as wars typically boost aggregate
demand, the reduction in defense expenditures after a war removes some economic
stimulus as the economy adjusts to the return to peacetime activities..."