Where's the economic "bounce" from the Iraq War?

[Steve]

Wartime spending stimulates the economy, right? All sorts of weaponry systems must be made or maintained, ammunition manufactured if only to replenish stockpiles, food, clothing, POL, all of those things, most of them consumables, must be procured in quantity.

Defense contractors have suppliers, who may also have suppliers, and on down the line.

Seems to me that the simple presence of our forces in Iraq, separate from funds allocated for rebuilding, should be enough to have the economy booming along.

So why isn't it?

[eakes]

Government spending on WWII pulled the US economy out of the depression, there was another blip for the Korean conflict and a little impact for Vietnam. The difference, in my opinion, is the amount of government spending relative to the size of the the economy. The economy of the 40s, 50s and 60s was much smaller than the US economy today. The relatively small amounts (compared to the size of the economy) being spent on Iraq is not enough to give any sizeable surge in economic activity. Certainly there are some industries and companies which will benefit from spending on Iraq (the company I retired from just got a several million dollar order for equipment to be deployed in Iraq) but overall there is not enough spending to cause a major bump in the economy.

It takes an awful lot of government spending to make the demand side economic theory work.

[Steve]

eakes, excellent answer! I had WWII exactly in mind when this thought occurred to me and you're right, it's a matter of proportions, of course.

A follow-up question, if you know the answer: Adjusting for inflation, how much has the economy increased in size since WWII?

[misterduck]

GDP was 223 billion in 1945. In 2002 10.4 trillion.

http://www.census.gov/statab/hist/HS-32.pdf

[Steve]

Wow! It grew by almost 47 times in 60 years. That's amazing.

[ethics]

Can we calculate that according to inflation?

[Steve]

That's in current dollars, ethics, which factors out inflation, so that's real growth.

Or are you asking for the inflated figures?

[Swamp Fox]

There are several aspects to this question, Steve.

1) First of all, the US economy is probably far more open now than before - in 1940, the US wasn't trading with Europe (then occupied by the Nazis); now, however, it has substantial trade connections with Europe and Asia. That means that, if the US government spends, a lot of that would be spent on imports, which would not necessarily stimulate the domestic economy. A few decades before, some European countries tried to spend their way out of the slump, but they found out that, being small, their money quickly leaked out, with little effect on their respective economies.

To give an analogy, let's say you spend $1,000.00 at your local car dealer, but your dealer has to give $900 to his suppliers, all foreign, that would leave only $100 in his pocket. That happened with the small countries, and that may be happening in the US.

That said, the US economy is so large that it can pull itself and its foreign suppliers out of a slump. And that has been happening - I understand the US is growing at 2.5-3.5% a year, which is as fast as it can get - it can't grow faster.

2) That leads to the next point - how fast its economy can grow. I haven't kept up with the economic theories since my days as an undergrad student in economics, but economists have agreed that an economy can only grow so fast. If a government tries to grow any faster, there will be countervailing forces that will force the growth rate to slide back to its natural rate. This is like trying to get an undergrad student to be a PhD too fast - it just won't work, because it takes time for a student to learn his subject.

[SixofNine]

The graph shows outlays, receipts, and the resulting surplus/deficit as a percentage of GDP. Check out WWII!

This table shows real GDP (in 2000 dollars) and real GDP per capita (in 2000 dollars) from 1940 through 2003. Looks like our spending has really increased.

edit: Not sure where all of the white space is coming from. First time I pasted a table here (directly pasted the html) if that makes a difference.

<table border=1 cellpadding=2 cellspacing=0>
<tr>
<td valign=top>Year</td>
<td valign=top align=center>Real GDP<br><font class="smallerfont">(billions of 2000 dollars)</font></td>

<td valign=top align=center>Real GDP<br>per Capita<br><font class="smallerfont">(2000 dollars)</font></td>
</tr>
<tr>
<td>1940</td>
<td align=right>$1,034</td>
<td align=right>$7,826</td>
</tr>
<tr>
<td>1941</td>
<td align=right>$1,211</td>

<td align=right>$9,078</td>
</tr>
<tr>
<td>1942</td>
<td align=right>$1,435</td>
<td align=right>$10,643</td>
</tr>
<tr>
<td>1943</td>
<td align=right>$1,670</td>
<td align=right>$12,219</td>

</tr>
<tr>
<td>1944</td>
<td align=right>$1,806</td>
<td align=right>$13,053</td>
</tr>
<tr>
<td>1945</td>
<td align=right>$1,786</td>
<td align=right>$12,765</td>
</tr>

<tr>
<td>1946</td>
<td align=right>$1,589</td>
<td align=right>$11,241</td>
</tr>
<tr>
<td>1947</td>
<td align=right>$1,574</td>
<td align=right>$10,924</td>
</tr>
<tr>

<td>1948</td>
<td align=right>$1,643</td>
<td align=right>$11,206</td>
</tr>
<tr>
<td>1949</td>
<td align=right>$1,634</td>
<td align=right>$10,956</td>
</tr>
<tr>
<td>1950</td>

<td align=right>$1,777</td>
<td align=right>$11,671</td>
</tr>
<tr>
<td>1951</td>
<td align=right>$1,915</td>
<td align=right>$12,364</td>
</tr>
<tr>
<td>1952</td>
<td align=right>$1,988</td>

<td align=right>$12,619</td>
</tr>
<tr>
<td>1953</td>
<td align=right>$2,079</td>
<td align=right>$12,981</td>
</tr>
<tr>
<td>1954</td>
<td align=right>$2,065</td>
<td align=right>$12,669</td>

</tr>
<tr>
<td>1955</td>
<td align=right>$2,212</td>
<td align=right>$13,335</td>
</tr>
<tr>
<td>1956</td>
<td align=right>$2,255</td>
<td align=right>$13,355</td>
</tr>

<tr>
<td>1957</td>
<td align=right>$2,301</td>
<td align=right>$13,379</td>
</tr>
<tr>
<td>1958</td>
<td align=right>$2,279</td>
<td align=right>$13,032</td>
</tr>
<tr>

<td>1959</td>
<td align=right>$2,441</td>
<td align=right>$13,728</td>
</tr>
<tr>
<td>1960</td>
<td align=right>$2,501</td>
<td align=right>$13,847</td>
</tr>
<tr>
<td>1961</td>

<td align=right>$2,560</td>
<td align=right>$13,936</td>
</tr>
<tr>
<td>1962</td>
<td align=right>$2,715</td>
<td align=right>$14,555</td>
</tr>
<tr>
<td>1963</td>
<td align=right>$2,834</td>

<td align=right>$14,975</td>
</tr>
<tr>
<td>1964</td>
<td align=right>$2,998</td>
<td align=right>$15,626</td>
</tr>
<tr>
<td>1965</td>
<td align=right>$3,191</td>
<td align=right>$16,423</td>

</tr>
<tr>
<td>1966</td>
<td align=right>$3,399</td>
<td align=right>$17,292</td>
</tr>
<tr>
<td>1967</td>
<td align=right>$3,484</td>
<td align=right>$17,535</td>
</tr>

<tr>
<td>1968</td>
<td align=right>$3,652</td>
<td align=right>$18,199</td>
</tr>
<tr>
<td>1969</td>
<td align=right>$3,765</td>
<td align=right>$18,578</td>
</tr>
<tr>

<td>1970</td>
<td align=right>$3,771</td>
<td align=right>$18,394</td>
</tr>
<tr>
<td>1971</td>
<td align=right>$3,898</td>
<td align=right>$18,773</td>
</tr>
<tr>
<td>1972</td>

<td align=right>$4,105</td>
<td align=right>$19,557</td>
</tr>
<tr>
<td>1973</td>
<td align=right>$4,341</td>
<td align=right>$20,487</td>
</tr>
<tr>
<td>1974</td>
<td align=right>$4,319</td>

<td align=right>$20,198</td>
</tr>
<tr>
<td>1975</td>
<td align=right>$4,311</td>
<td align=right>$19,961</td>
</tr>
<tr>
<td>1976</td>
<td align=right>$4,540</td>
<td align=right>$20,826</td>

</tr>
<tr>
<td>1977</td>
<td align=right>$4,750</td>
<td align=right>$21,569</td>
</tr>
<tr>
<td>1978</td>
<td align=right>$5,015</td>
<td align=right>$22,530</td>
</tr>

<tr>
<td>1979</td>
<td align=right>$5,173</td>
<td align=right>$22,987</td>
</tr>
<tr>
<td>1980</td>
<td align=right>$5,161</td>
<td align=right>$22,666</td>
</tr>
<tr>

<td>1981</td>
<td align=right>$5,291</td>
<td align=right>$23,010</td>
</tr>
<tr>
<td>1982</td>
<td align=right>$5,189</td>
<td align=right>$22,349</td>
</tr>
<tr>
<td>1983</td>

<td align=right>$5,423</td>
<td align=right>$23,148</td>
</tr>
<tr>
<td>1984</td>
<td align=right>$5,813</td>
<td align=right>$24,597</td>
</tr>
<tr>
<td>1985</td>
<td align=right>$6,053</td>

<td align=right>$25,386</td>
</tr>
<tr>
<td>1986</td>
<td align=right>$6,263</td>
<td align=right>$26,027</td>
</tr>
<tr>
<td>1987</td>
<td align=right>$6,475</td>
<td align=right>$26,668</td>

</tr>
<tr>
<td>1988</td>
<td align=right>$6,742</td>
<td align=right>$27,518</td>
</tr>
<tr>
<td>1989</td>
<td align=right>$6,981</td>
<td align=right>$28,225</td>
</tr>

<tr>
<td>1990</td>
<td align=right>$7,112</td>
<td align=right>$28,434</td>
</tr>
<tr>
<td>1991</td>
<td align=right>$7,100</td>
<td align=right>$28,010</td>
</tr>
<tr>

<td>1992</td>
<td align=right>$7,336</td>
<td align=right>$28,558</td>
</tr>
<tr>
<td>1993</td>
<td align=right>$7,532</td>
<td align=right>$28,943</td>
</tr>
<tr>
<td>1994</td>

<td align=right>$7,835</td>
<td align=right>$29,743</td>
</tr>
<tr>
<td>1995</td>
<td align=right>$8,031</td>
<td align=right>$30,131</td>
</tr>
<tr>
<td>1996</td>
<td align=right>$8,328</td>

<td align=right>$30,885</td>
</tr>
<tr>
<td>1997</td>
<td align=right>$8,703</td>
<td align=right>$31,891</td>
</tr>
<tr>
<td>1998</td>
<td align=right>$9,066</td>
<td align=right>$32,837</td>

</tr>
<tr>
<td>1999</td>
<td align=right>$9,470</td>
<td align=right>$33,907</td>
</tr>
<tr>
<td>2000</td>
<td align=right>$9,817</td>
<td align=right>$34,758</td>
</tr>

<tr>
<td>2001</td>
<td align=right>$9,866</td>
<td align=right>$34,553</td>
</tr>
<tr>
<td>2002</td>
<td align=right>$10,080</td>
<td align=right>$34,937</td>
</tr>
<tr>

<td>2003</td>
<td align=right>$10,390</td>
<td align=right>$35,790</td>
</tr>
</table>

You can ask a variety of interesting questions yourself here:

http://www.eh.net/hmit/gdp/

Brian