Change in America

Introduction

This paper discusses the topic of America's involvement in wars. These wars have substantially affected the American economy in a negative way.

The basic economic problem in wartime is how to transfer resources from the civilian sector to the military sector. Economists often analyze this transition with a “production possibilities curve” of the type, which shows the amounts of civilian goods (butter) measured on the vertical axis, and military goods (guns) measured on the horizontal axis. The curve shows the maximum amounts a country could produce depending on how it allocated its resources (Edelstein, 85). The proverbial expression “guns or butter,” incidentally, is usually traced to Hermann Goering, who became the major planner of economic mobilization in Germany during the 1930s and is frequently quoted as having said “Guns will make us powerful; butter will only make us fat.”

If a country allocated all of its resources to civilian production, it would produce A of butter and zero of guns. If it allocated all of its resources to military production and none to civilian production it would produce B of guns and zero of butter. (For this extreme to make sense one would need to think of some minimum of civilian production as an input in the production of guns.) The contrast between the Peace point on the curve and the War point illustrates the basic problem of mobilization: increasing war production normally means reducing civilian consumption. One measure of the cost of the war, to put it differently, is the civilian production that is thereby foregone (Edelstein, 21).

Some of America's wars have involved relatively small reallocations of resources; this made the War point on the curve relatively close to the Peace point. The Spanish- American War is an example. From 1895 to 1897, the three years before the war, spending by the Army and Navy averaged about 0.62 percent of GDP. This percentage rose to a peak of 1.40 in 1898, averaging 1.27 percent from 1898 to 1900. On the other hand, some wars required a far more dramatic reallocation of resources. In the period from 1914 to 1916 leading up to U.S. involvement in World War I, spending by the Army and Navy (the newly created Air Force was then part of the Army) averaged about 1 percent of GDP. That figure rose to 6.17 percent in 1917, and reached a peak of 12.37 percent in 1918. That percentage would be even higher if other forms of production—ships built for the government, munitions purchased by U.S. allies, for example—are taken into account (Dewhurst, 45).

If a country is at less than full employment when the war begins, unemployed resources can be allocated to the war effort, so more guns can be produced without reducing consumption of butter. This is illustrated in figure 1 by the economy at C. This economy can move horizontally to the right. It faces no trade-off until the production possibilities curve is hit. World War II, as is frequently observed, got the United States out of ...