The document discusses the relationship between wars and economic recessions/growth throughout history. It notes that World War II ended the Great Depression by boosting government spending and industrial production. Similarly, the Vietnam War initially stimulated the economy in the 1960s but then contributed to stagflation in the 1970s. The Gulf War profited the US as higher oil prices from the conflict exceeded military expenditures. The 9/11 attacks may have accelerated US recovery from recession by enabling fiscal stimulus and patriotic spending increases. However, the Iraq War has been very costly with over $1.7 trillion spent and no WMDs found, negatively impacting the economy through higher debt and oil prices.

1. Wars and Recessions

4. “Economics is not a morality play” -
Paul Krugman
• A situation in which virtue becomes vice and
prudence is folly
• Someone should spend more, even if the spending
isn’t particularly wise
• Spending on something destructive like war is
what is needed to solve the problem especially
when the “political consensus for spending on a
sufficient scale” is not available
• Destruction creates wealth, and war, though not
ideal, is morally acceptable because it produces
economic growth

5. The fallacies of this economics
• To believe that any kind of spending is the cure
for what ails us is to ignore the subjective nature
of wealth and the microeconomic basis of
economic growth
• Wealth increases when people are able to engage
in exchanges they believe will be mutually
beneficial
• The real solution to digging out of a recession is
to remove the barriers to the free exchange and
production that actually comprise wealth creation

6. Event timeline : Food for thought
War between US & Great Britain
Long depression
War between US & Spain
World War 1
Great depression
World War II
Recession
US Iraq War &
Sub-prime crisis
1797
1798 - 1800
1873 - 79
1929 - 39
1939 - 45
1807 - 08
1898
1914 - 18
1812
1990
2008

8. Pre World War-I Recession
• No Central bank to cater to fluctuations in
money availability in economy and support
the banks.
• The Progressive government was still trying
to bring overreaching corporations into line
and establish protections for laborers
• Panics of 1907 and 1910… Fragile economy
• US Economy in recession (1912-14)

9. • For every oppressed Serb, the autocratic
Archduke and his empire were just the
latest cruel colonial powers that were
occupying Serbia, oppressing and taxing
the Slavic people and denying freedom
for those unfortunate indigenous folks
who had been living, toiling and
suffering there for centuries
• On June 28, 1914, the heir to the throne
of the Austro-Hungarian Empire,
Archduke Franz Ferdinand, one of the
wealthiest men in Austria, was murdered
in Sarajevo.

10. Three main economic tools at their disposal:
Taxes
Direct taxes , 2% to 8%
Borrowing
Big international loans, borrowing from the public - war
bonds scheme. Big promotional campaigns were used to
inspire the country to invest in the war effort
Printing money
Risked contributing to inflation - rising prices
What did the government do?

11. AFTER THE START OFAFTER THE START OF
WORLD WAR – I THEWORLD WAR – I THE
GDP STARTED TOGDP STARTED TO
BOOST-UPBOOST-UP

12. GDP three Allies (Britain, Italy, and US)
GDP France and Russia, in neutral Netherlands, and in the three
main Central Powers
•Trade union membership doubled
•Most pigs were slaughtered, horses killed,
•Women were forced into the workforce in unprecedented numbers.
•Gender imbalance, adding to the phenomenon of surplus women
• Demobilisation and economic decline following the war caused high
unemployment

13. Depression of 1920–21
• The upheaval associated with the transition from a wartime to
peacetime economy contributed to a depression in 1920 and
1921.
- Returning troops, a surge in the civilian labour force, wage
stagnation
- Decline in labour union strife
- decline in agricultural commodity prices, Changes in price
expectations
- Changes in fiscal and monetary policy, (4.75 to 7%
• Extreme deflation- 18% , wholesale prices - 36.8%
• GNP declined 6.9%
• Unemployment - 5.2% to 11.7%

14. The Great Depression
• The widespread prosperity of the 1920s ended abruptly with the stock market
crash on October 29, 1929, known as Black Tuesday
• over one-quarter of the American workforce was out of work, Unemployment in
the U.S. rose to 25%
• Worldwide GDP fell by 15%, 1929-32
• The New Deal, as the first two terms of Franklin Delano Roosevelt's presidency
were called, became a time of hope and optimisms rose as high as 33%
•When Japan attacked the U.S. Naval base at Pearl
Harbor, Hawaii, on December 7, 1941, the United States
found itself in the war it had sought to avoid for more
than two years
•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

15. • Mobilizing the economy for world war finally cured the depression
• Millions of men and women joined the armed forces, and even larger numbers
went to work in well-paying defense jobs
• World War Two affected the world and the United States profoundly; it
continues to influence us even today

16. Causes and Recovery
• Primary Cause:
– The Banking “Panic of 1930.” Major banks fail including “The Bank of the United States,” a
private bank in New York with a very official sounding name
– Unemployment steadily rises from 14 to 25 percent over these two years as banks fail en masse
– By 1933, around HALF of all banks in the United States had failed
– The Smoot-Hawley Tariff raised duties on imports (protectionism). Trade war resulted in
which other countries responded in kind. This contributed to the world-wide Depression.
• Recovery
– Unemployment fell from its 1933 peak of 25 percent
to around 14% in 1937.
– Unemployment rose back to 20 % during the
“depression within the Depression” of 1937-38
– World War II unemployment finally fall back to single
digits in the 1940s
– Great Depression ended with the advent of World War II
– The US' entry into the war in 1941 finally eliminated the
last effects from the Great Depression and brought the
U.S. unemployment rate down below 10%

17. Post Second World War (History of
military Keynesianism)
• Military Keynesianism – using military spending to stimulate the economy
– has been U.S. policy for half a century.
• During the second world war, soaring military spending had pulled the
world out of the Great Depression
• After the second world war, it was feared that falling military budgets
would reverse this process
• If that were to happen, the expectation was that business would tumble,
unemployment would soar
• Seeking to avert this prospect, in 1950 the U.S. National Security Council
drafted a top-secret document, NSC-68.

20. Cause of the War

21. Consequences of the War

23. The Vietnam War

24. 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.

25. 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.

26. 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.

27. During the VIETNAM War, GDP was boosted by government spending financed by taxation
and increase in inflation which constrained investment and consumption.

28. The Gulf War
• Expenses of the gulf war: $40bn
• Who paid:
• From where the prices were paid:
– Prices of oil before the war 15$ per barrel during war 42$ , extra profit of
$60bn
• Extra profit was distributed as $30bn to oil companies and $30bn to Kuwait
an Saudi Government
• Who owns oil companies:
– In the middle east the extraction and trading of oil is in the hands of the 7
sister(Shell, Tamodets) all of which are American, and 5 are state owned
• From 30bn:
– $21 Bn was approximately given to American state and $9 bn to
American private sector
Who paid the expenses
75%
Arab countries: kuwait and saudi Arabia
25% USA

29. US has made a profit of $20bn
US made total profit of $11bn from oil and $49bn from weapons
Where did $40bn spent on the war go- to war industry which is American
Gulf war in 1991 happened for financial reasons only and not for some humanitarian
reasons or right to freedom
Expenses of war Profits from
increase in the oil
prices
Net profit or loss
Arab nations 30bn 30 0
USA govt 10bn 21.5 11.5
USA private sector 0 9 9

31. - American conspiracy
 Critics of the official account of 9/11 provided evidence that the Bush administration
intentionally allowed the attacks of 9/11:
1. Inside Traders Knew About Attacks Before They Happened
2. Air Defense Was Told To ‘Stand Down’
3. Planes Didn’t Make Twin Towers Collapse, Bombs Did
 President Bush himself declared that the attacks provide “a great opportunity” for
employment and industries
 Donald Rumsfeld stated that 9/11 created “the kind of opportunities that World War II
offered, to refashion the world” . The world can be reconstructed
 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

32. •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 Harbour
•The Bush-Cheney administration endorsed a document indicating
that “a new Pearl Harbour” would be helpful for furthering its aims
and provide opportunities

34. • 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 defence”
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 grow US economic and
geopolitical aims

35. • 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 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 inconvincable 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 around $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.
How 9/11 helped America overcome the recession

36. War on
Terrorism
 This 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

37. IRAQ WAR
“All the economic growth
that the U.S. has had, has
been based on the different
wars it had waged.”-
George W Bush
REASONS:
Weapons of Mass Destruction. Really is it so?
• The greed of a man who called himself the “Decider”
-George W Bush
• OIL gave enough bargaining power to Iraq’s rulers and would spike oil prices
• US strategy of financing a coup proving futile
OUTCOMES:
Took a toll of 189000 deaths
$1.7 trillion: Amount in war expenses spent by the U.S. Treasury Department as
through Fiscal Year 2013
$350,000: Cost to deploy one American military member
2.8 million: Persons who remain either internally displaced or have fled the
country
$5,000: Amount spent per second
$75 billion: Approximate amount expected to go to American subcontracting
companies, largest of all Halliburton.

38. The ECONOMY bleeds in the IRAQ war
Peak year for military spending during the Iraq war
was 2008 at 4.3% of GDP
The estimated cost of the war is one trillion dollars directly
and upto 3 trillion directly and indirectly
Government cut taxes as it went to war and the war expenses
were financed by debts!
“Inflation was muted in the U.S. due to existing weak economic conditions, policymakers were limited by the
large budget deficit and did not use fiscal policy as a lever to boost effective demand until the Global
Financial Crisis in 2008. This ensured the Federal Reserve carried the burden of keeping the economy
growing, which it did via low interest rates, a flood of liquidity and tax banking regulations which in turn
helped fuel the housing bubble. Iraq war pushed USA into recession”
-JOSEPH STIGLITZ (American economist and professor at Columbia University)

39. Higher military spending eventually causes the trade
deficit to rise – almost $90 billion over a ten year
horizon
The construction and manufacturing sectors were
the hardest hit. After ten years they lost 140,000 and
90,000 jobs
EFFECTS ON ECONOMY
Share market rallied from the start of the Iraq war in
2003 and continued its rally increasing in value by over
75%. This Bull Run ended with the Global Financial
Crisis
Iraq War spending, while initially providing a boost to the economy, soon became a drain that lead to job loss
The government borrowed the money to
fund the war . As a result of the drain
imposed by the war, interest rates rose
Negative effects of war are more
gradual and build-up over time
War costs were around 1% of GDP

40. Sub-Prime Crisis and the Iraq war

41. Iraq blows away America’s fuse

42. In defense of Mr. Greenspan

43. Iraq flattens America

44. A way towards World War III
• On February 27, 2014, roughly 6,000 Russian troops are moving across the Crimean peninsula
and forcibly taking operational control of military bases, communications centers, and
government buildings
• The country has seen its Russia-sympathizing president, Viktor Yanukovych, become a
fugitive
• A Russian citizen become the Crimean city of Sevastopol’s mayor
• An emergency meeting of Crimea’s parliament elect Sergey Aksyonov as the new Prime
Minister of Crimea—at gunpoint
• Aksyonov has declared that he will follow orders from the ousted Yanukovych, who is
currently seeking refuge in Russia.
• Riots are flaring up all across the country as the two dominant political forces come to a
head
• The problem isn’t that America and the UN will start tossing bombs into Russia; the problem
is that Putin knows they won’t
• And Putin’s already on round two. In 2008, Russia and Georgia entered a five-day conflict
that culminated in Russian bombs falling on the Georgian capital
• Russia calmly strolled back home and declared that Georgia had been “sufficiently punished”
• Each time this happens, Russia becomes more assured that the warnings of the rest of the
world are just that—words, empty and hollow
• The situation in Ukraine may not be a match that’s going to ignite the fires of World War III,
but it’s a nod to a superpower that they have a free license to do what they want.

45. The Senkaku Island Dispute
• The territory in question is a group of rocks known as the Senkaku islands, which are located
in the East China Sea
• The problem, of course, is that both China and Japan feel that the islands belong to them,
• whoever controls the islands also controls shipping lanes, fishing waters, and a potential
oil field
• In November 2013, China startled the world by announcing a newly configured air defense
zone in the East China Sea—a zone that they and they alone would control, to the point
of shooting down aircraft that wandered into it
• Whether or not China was planning an invasion at that point, the Senkaku islands fall inside
their “newly acquired” airspace, and now they’re threatening to forcefully move Japan out of
the area
• America Is Legally Bound To Protect South Pacific Countries
• A war only becomes a World War when the US gets involved
• With about 50 percent of its Naval force stationed in the Pacific, the US will also be in a
position to help the Philippines if China continues pressing to the south.
• They’re yet another country that has been affected by the airspace changes, and the US is
legally bound to protect the Philippines based on the 1951 Mutual Defense Treaty
• The Philippines owns disputed islands within China’s new airspace in the South China Sea
• If China makes a move on any of those, the US Navy has to retaliate on their behalf, or they’ll
break the conditions of the treaty

46. How will it lead to World War III
• Striking similarity between prior to both World War I and World War II,
economic recessions hit several of the countries involved.
• World War II famously brought most of the world’s economies back from
the Great Depression, and World War I helped the US recover from a two-
year recession that had already slowed trade by 20 percent
• And then there’s China: The US government is close to $17 trillion in debt,
and China owns seven percent of that, or about $1.19 trillion
• China recently flew past Japan to become the world’s second largest
economy, and if it keeps growing at this rate, its GDP is going to match
America’s in about eight years. The risk is if China decides to dump the
US debt
• China would take a financial loss, but it could be a crippling blow to the
US economy—and much of the world, since the US dollar is held in
reserve by most foreign governments.
• If China and the US do come to blows over the South China Sea, the US
could eradicate the debt and pump the extra revenue into military spending
—the exact same monetary flow that happened in World War II, only this
time the guns are bigger.

47. WAR and Growth
• History shows that war always follows slowdown or recession -- there are very few
occasions when world faced slowdown or recession after the wars
• Economists have argued that human beings are inherently violent. While this
violence is repressed in normal society, it needs the occasional outlet provided by
war.
• In Krugman’s version of Orwell’s Newspeak, destruction creates wealth, and war,
though not ideal, is morally acceptable because it produces economic growth.
• As a counter argument , to believe that spending trillions of dollars fighting a war is
the cure which results into absolute reification of economic aggregates such as
GDP and unemployment will certainly bring idle capital and labour into
employment. But this does not mean we are any wealthier than before.
• Wealth increases when people are able to engage in exchanges they believe will be
mutually beneficial. Instead we borrow from future generations not to the desires of
consumers, but rather to the desire of the politically powerful.
• Sending soldiers off to war is a waste of human and material resources, and is
almost by definition wealth-destroying, no matter what it does to GDP or
unemployment rates.

48. WAR and Growth (cont…)
• The only way one can view economics amorally is if one is only concerned with
total GDP and not its composition. However, it is the composition of GDP, in the
sense of how well what we’ve produced matches consumer wants, that ultimately
matters for human well-being. It’s easy to create jobs and generate spending, but
those do not constitute economic growth, and they are not necessarily indicators of
human betterment.
• War isn’t peace and destruction isn’t creation. The real solution to digging out of a
recession is to remove the barriers to the free exchange and production that actually
comprise wealth creation
• Given the geo-political situation across the globe, some economists and analysts
feels that the world may well be headed in to War.
• However, a paradigm shift in global political scenario could be a barrier to war-like
situation. Although war as a solution to economic revival is an interesting
hypothesis under the present context, but there is no likelihood of war. Armed
struggle is no solution of economic crisis in the current time
• War always causes recession. Well, if it is a very short war, then it may stimulate
the economy in the short-run. But if there is not a quick victory and it drags on,
then wars always put the nation waging war into a recession and hurt its economy."

49. THANK YOUTHANK YOU