Our discussion to this point has been about the role of the federal government in the civilian economy. Defense spending, however, followed a different path from civilian spending. Until the early 1990s, American foreign policy was dominated by the attempt to contain communism. There were outbreaks of hard fighting in Korea and Vietnam. But, even in the years between and after those wars defense spending was elevated far above what had been typical in peacetime before World War II. The “Cold War” began as soon as World War II ended and continued until the collapse of the Soviet Union in 1991. There was considerable optimism in the United States after the fall of the Soviet Union that there would be a “Peace Dividend.” Defense expenditures could be reduced and used to address domestic needs through government programs or to reduce taxes. But after a short interregnum of peace in the 1990s, the effort to increase domestic security in the wake of the terrorist attacks of September 11, 2001, and the wars in Afghanistan and Iraq, produced a new surge in defense spending.
All this is clear in Figure 26.4. The continuous line shows defense and international spending as a share of GDP from 1947 to 2011. Spending on international affairs is included because much “foreign aid” was part of the Cold War against the Soviet Union or the wars in Afghanistan and Iraq. However, international affairs was, in any
FIGURE 26.4
Federal Spending on Defense and International Affairs as a Percentage of GDP, 1947-2011
Source: Economic Report of the President, 2012, table B80.
Case, a secondary source of spending. Over the years 1947-2011, spending on international affairs averaged about 9 percent of defense spending, less in recent years. The taller bars in Figure 26.4 show the war years: Korea, Vietnam, Afghanistan, and Iraq. The shorter bars show the Reagan military buildup.
Evidently, defense spending used a significant share of GDP, although that share declined as diplomatic efforts, including formal treaties to end the nuclear arms race, lowered tensions with the Soviet Union. Surprisingly, in terms of resources used the War against Communism was probably the most costly war of the twentieth century, exceeding even World War II. The total cost for World War II (measured as the sum over the years 1941-1946 of the share of military spending in GDP less the share in 1940) was about 1.4. In other words, fighting World War II required about one - and four-tenth’s years’ worth of GDP. The War against Communism (including both the Cold War and the Hot Wars in Korea and Vietnam), however, used about 2.1 years of GDP. We defined the war period for the War against Communism as 1947-1992 and the years 1997-2001 as the non-war base. To be sure, there are plausible alternative calculations that would produce slightly different results. But all would point to the high cost of the War against Communism. Resource use was more intense during World War II, but the War against Communism lasted far longer.
What was the long-term impact of Wars, Hot and Cold, on the economy? The answer to this difficult question depends on which categories of spending were reduced to maintain a high level of defense spending. Did the decrease come in other kinds of government spending? Private consumption? Private investment? Careful studies by Michael Edelstein (1990) and Robert Higgs (1994) showed that increases in defense spending came mainly at the expense of private consumption rather than private investment or nondefense government spending, suggesting that the long-term effects of defense spending on growth were small. We are entitled, however, to consider what might have
Been: the medical research, conservation efforts, and so on, that might have been undertaken with the resources devoted to the War against Communism. In the end, deciding whether this was money well spent is beyond the capacity of the economic historian to answer, but the amounts were clearly significant.
SELECTED REFERENCES AND SUGGESTED READINGS
-. “A Rational Theory of the Size of Government.”
Edelstein, Michael. “What Price Cold War? Military Spending and Private Investment in the US, 19461979.” Cambridge Journal of Economics 14 (1990): 421-437.
Friedman, Milton, and Rose D. Friedman. Tyranny of the Status Quo. San Diego: Harcourt Brace Jovano-vich, 1983.
Higgs, Robert. Crisis and Leviathan: Critical Episodes in the Growth of American Government. New York: Oxford University Press, 1987.
-. “The Cold War Economy: Opportunity Costs,
Ideology, and the Politics of Crisis.” Explorations in Economic History 31 (July 1994): 283-312.
Lindert, Peter H. Growing Public: Social Spending and Economic Growth since the Eighteenth Century. Cambridge; New York: Cambridge University Press, 2004.
Meltzer, Allan H., and Scott F. Richard. “Why Government Grows (and Grows) in a Democracy.” Public Interest 52 (Summer 1978): 111-118.
Journal of Political Economy 89 (October 1981): 914-927.
Morris, William, and Mary Morris. Morris Dictionary of Word and Phrase Origins. New York: Harper & Row, 1971.
Niskanen, William A. Bureaucracy and Representative Government. Chicago: Aldine-Atherton, 1971.
Peltzman, Sam. “The Growth of Government.” Journal of Law and Economics 23 (October 1980): 220-285.
Schlesinger, Arthur M., Jr. The Cycles of American History. Boston: Houghton, Mifflin, 1986.
Schumpeter, Joseph. Capitalism, Socialism, and Democracy, 3rd edition. New York: Harper & Row, 1950.
Stockman, David A. The Triumph of Politics: How the Reagan Revolution Failed. New York: Harper & Row, 1986.
The Changing Role of the Federal Government: Consumer Safety, Agriculture, the Environment, and Housing
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CHAPTER THEME As we saw in Chapter 26, there was a broad trend toward expanding the role of the federal government until the late 1970s, when the liberal vision of the role of the federal government was effectively challenged by conservatives. In this chapter, we discuss how these trends played out in several important divisions of the economy: consumer safety, agriculture, the environment, and housing. As we will see, broad ideological trends were important, but they were often moderated or reversed by sector-specific developments.
World History
