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Past as prologue: Postwar recessions

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Snapshot for January 29, 2003.

Past as prologue: Postwar recessions

With the U.S. economy still struggling to find a foothold, a sharp rise in defense spending to prepare for possible war in the Persian Gulf is often cited as a factor that might help end America’s economic woes. But the facts suggest otherwise. If the past is any guide to the future, any short-term economic gains would soon be paid for by recession.

Every major U.S. war since WWII propelled the economy into recession after the fighting ended. This time, a likely postwar recession would be coming on the heels of the current very weak recovery.

The figure below shows the average decline in growth and rise in unemployment that occurred in the postwar recessions following the Korean, Vietnam and Gulf Wars. The blue columns show the average growth and jobless rates in the six quarters just prior to the onset of each postwar recession. The dark red columns show the same measures for the six quarters that followed. Overall growth fell, on average, by 4.5 percentage points. Unemployment rose, on average, by about one percentage point.

wars

In the pre-recession periods, the boost in growth resulting directly from raised defense spending was, on average, an annualized 1.8%. In the subsequent recessionary periods, growth directly due to defense spending fell, on average, to an annualized 0.1%. (These direct effects of defense spending account for a substantial part of the overall decline in growth by 4.5 percentage points; but the direct effects are also augmented by the indirect, multiplier effects of the changes in defense spending, as well as other factors-many of which are also war-related-together accounting for the overall, 4.5-point drop.)

Note: Growth rates before and after recession are statistically different at the 1% level, and unemployment rates are statistically different at the 10%-level, using a Mann-Whitney ranksum test in both cases.

This week’s Snapshot by EPI economist Christian E. Weller.

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