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Economics of War

Economics Honors 1 November 2013 Economics of Military Spending during Iraq/Afghanistan war People are under the impression that wars are beneficial to an economy. They seem to create Jobs and give a variety of businesses work. But do they really turn a profit or is there more spending being done than profit being turned in. The Iraq and Afghanistan war has been very controversial. Part of that controversy comes from the economic perspective of the war. One of the many sub-topics to the war is Job creation or Job loss. For every one million dollars spent towards the war since 001-2011, has created 8. Jobs. On the other hand, with one million dollars spent else where, it could have created many more Jobs. 15. 5 Jobs could have been created in public Jobs, 14. 3 Jobs in health care, and 12 Jobs in home weatherization. With all the money spent on the war over that decade, 900,000 educational Jobs could have Ben created and 300,000 construction Jobs could have been created as well. With an average of $130 Billion dollars spent a year over 10 years, you are looking at almost 2 million more Jobs created if that money is

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spent in alternate sectors.

The war in Iraq did create a lot of Jobs but the issue there is that, the money that is made by the employees are generally spent abroad and spent on materials made outside of the US. So the Jobs that would have been generated state side, also would’ve generated a lot of capital for the US economy. So overall, the war generated a lot of Jobs but the money spent on the war could’ve generated more Jobs domestically. Military spending isn’t Just spending the money but it is also keeping money from being spent in other areas. As you saw with Jobs, more money spent domestically would’ve en a more efficient use of the money.

The same goes for public investments such as US infrastructure. In 2001, military assets were valued at roughly $904 Billion. The total increase $341 Billion over the next 10 years. That puts the value at $1. 2 Trillion at 2011. Now, with that $341 Billion dollars, the US could’ve increased the key value of public assets 7. 8 percent, adding $1 50 Billion to the private sector. These additions to the private sector could’ve been essential to economic growth. War spending has probably stimulated the national economy to a degree.

But the extra income attributable to war spending has been partially offset by the negative macroeconomic consequences of increased deficits and debt used to finance the wars. The net effect on GAP has probably been positive but is small and declining. An important impact of war spending has been to raise the nation’s indebtedness. Borrowing financed the increased military spending following 9/1 1 almost entirely. According to standard macroeconomic models and evidence, rising deficits have resulted in higher debt, a higher debt to GAP ratio because debt has risen faster than income, and higher interest rates.

The ratio of federal debt held by the public to national income (gross domestic product, or GAP), a good indicator of the sustainability of government spending was 32. 5% at the end of fiscal year 2001. It rose to 36. 2% after 2007 and to 69. 4% at the end of 2011, an increase of almost 37 percentage points since 2001. The Economics of War By Shaffer held by the public will rise to more than 75% by 2020, an increase of greater than 40 percentage points since 2001. All of this spending is completely borrowed money as well, forcing the government to have to pay interest on the borrowed money.

Some estimate that by 2020, the government will have paid $1 Trillion dollars in interest. These spiking interest rates have an effect on non-direct areas as well. For a 30-year fixed rate mortgage on a home priced at the median of $250,000 with 90% borrowed funds, an increase of 35 basis points would cost new homeowners roughly an extra $50 per month or about $600 per year given the current rate of 5%. Not only has the war cost us money as a nation, it is causing the individuals to have to pay more for necessities in life.

Now not only is the war financially draining, but it is also mentally and physically draining. There were 650,000 members of the military that were treated at Veteran hospitals around the country. To date, that equates to $32. 6 Billion in funds for medical services. But the real expenses of VA benefits don’t kick in until 30 to 40 years after a war. Estimates show that the amount of money paid medically to veterans is any where from $800 billion to $1 trillion. In addition to veterans being paid, you now have to account for Homeland Security. The cost spent on Homeland has reached $649 billion.

Now if the wars and 9/1 1 wouldn’t have appended, and homeland security growth would’ve stayed at 3% annually, only $23 billion would have been spent in 2011. That means that $369 billion wouldn’t have been spent in that area. Not only are we spending money now on a new domestic branch of military, we are aiding the recovery of Iraq as well. $61 billion has been budgeted to be spent on helping Iraq recover as a nation for this war that we still haven’t left. Now, some of this money is returned back to the states in form of contracts and private firms, but it still doesn’t equate to the entire $61 billion spent.

Lastly, the war may seem like an immediate issue and not have any future effects. This is a false statement because this is where a large portion of money is going to be spent. Future obligations and payments are estimated to be valued at $884 billion. Those cost include veteran disabilities and interest on borrowed money. Now looking at the current cost of the war at roughly $3 trillion dollars, and adding the future cost at nearly $900 billion, you are looking at a $4 trillion dollar war. So with the math of $1 million creating 8. 3 Jobs, that is 24 million Jobs created.

Now that is wonderful to an economy that isn’t spending $3 trillion on a war, but to one that is, it doesn’t amount to much. Considering that with 3 trillion dollars the government could’ve created 46 million Jobs in those public areas alone. So from an economic standpoint, the war hasn’t been completely beneficial. If there wasn’t a war, that money could’ve been spent to have the economy thrive and flourish. With an end thought, where would we be without the war? What kind of world would we live in? From an economic view, a much better one.

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