Macroeconomic Impact on Military Spending during War
Macroeconomic Impact on Military Spending during war
While spending on the war has stimulated the economy through government purchases and consumer patriotism it has had a negative macroeconomic effects through increases in the national deficient and debts used to finance the war. While the initial effect on the GDP (gross domestic product) has been positive it has started to decline. Since 9/11 the increased military spending was largely financed through borrowing which has caused a higher debt to GDP ratio because debt has risen faster than income.
Federal debt as a share of GDP was 32.5% at the end of 2001 and is on the rise and by the end of 2011 it was 69.4%. The Congressional Budget Office (CBO) projects it to rise to more than 75% by the end of 2020 (Edwards, 2011) Operations in Iraq (OIF) and Afghanistan (OEF) since 2001 have cost the United States close to $1.5 trillion and so far that has caused a rise in the ratio of debt to GDP by over 10 percentage points. The CBO expects those numbers to continue to rise and by 2020 to be near 20 percentage points if war spending and the budget continue as forecasted (CBO.gov)
Because the government chose to borrow to finance the war rather than reduce spending in other areas or raising taxes the United States has accrued a lot on interest since the start of the war. So far the United States has already paid out over $200 billion in interest payments and according to the CBO we can expect to pay out close to $1 trillion in interest by 2020. Because of this increase in the debt to GDP ratio it has always caused interest rates to increase. Generally a 1 percentage point raises the long term interest rates by 3.5 points. Based on the current numbers the long term interests rates are over 35 basis points higher than they should be and if the trend continues they can be expected to be above 70 basis points higher by 2020. Since interest rates to borrowers tend to move one for one with interest rates paid on government
While spending on the war has stimulated the economy through government purchases and consumer patriotism it has had a negative macroeconomic effects through increases in the national deficient and debts used to finance the war. While the initial effect on the GDP (gross domestic product) has been positive it has started to decline. Since 9/11 the increased military spending was largely financed through borrowing which has caused a higher debt to GDP ratio because debt has risen faster than income.
Federal debt as a share of GDP was 32.5% at the end of 2001 and is on the rise and by the end of 2011 it was 69.4%. The Congressional Budget Office (CBO) projects it to rise to more than 75% by the end of 2020 (Edwards, 2011) Operations in Iraq (OIF) and Afghanistan (OEF) since 2001 have cost the United States close to $1.5 trillion and so far that has caused a rise in the ratio of debt to GDP by over 10 percentage points. The CBO expects those numbers to continue to rise and by 2020 to be near 20 percentage points if war spending and the budget continue as forecasted (CBO.gov)
Because the government chose to borrow to finance the war rather than reduce spending in other areas or raising taxes the United States has accrued a lot on interest since the start of the war. So far the United States has already paid out over $200 billion in interest payments and according to the CBO we can expect to pay out close to $1 trillion in interest by 2020. Because of this increase in the debt to GDP ratio it has always caused interest rates to increase. Generally a 1 percentage point raises the long term interest rates by 3.5 points. Based on the current numbers the long term interests rates are over 35 basis points higher than they should be and if the trend continues they can be expected to be above 70 basis points higher by 2020. Since interest rates to borrowers tend to move one for one with interest rates paid on government
References: Edwards, Ryan (2011) Post 9/11 War Spending, Debt and the Macroeconomy CBO.gov Cost of War.org www.economy.com/freelunch