Guest Post: “War ALWAYS Causes Recession”

By George Washington of Washington’s Blog.

PhD economist Marc Faber predicts that the U.S. will launch a war to distract people from the bad economy.

China’s largest media outlet – – wrote in October 2008 that the Rand corporation, a leading U.S. military advisor, lobbied the Pentagon for a war to be started with a major foreign power in an attempt to stimulate the American economy:

According to French media, well-known U.S. think tank RAND Corporation … has submitted [to the Pentagon] an evaluation report assessing the wage a war to shift the feasibility of the current economic crisis…

Continued deepening of the U.S. sub-prime mortgage crisis and economic downturn, developed to a certain extent, is likely to trigger a war in order to achieve the purpose of the crisis passed.

(Google’s translation services are crude approximations, but Yihan Dai confirmed the translation of the original).

Is Faber right? Is the report accurate?

I don’t know. For example, I won’t take the claim very seriously until someone can point to the French media source, so that I can assess it’s credibility.

However, “military Keynesianism” – using military spending to stimulate the economy – has been U.S. policy for half a century. And the economist who coined that term said that such a policy always and “inexorably” leads to “an actual war” in order to justify all of the military spending.

Therefore, any studies which disprove the efficacy of war as an economic stimulus -see this and this – are important for balance.

In addition, contrary to popular belief, some writers say that the reason that WWII actually stimulated the U.S. economy was not because of America fighting the war. Specifically, they argue that America’s ramped-up production of armaments for the British before the U.S. entered the war was the thing which stimulated our economy.

To try to sort some of this out, I spoke with a PhD professor of economics with a background in international conflict in July 2008 to find out whether war is really good for the economy.

I asked if conventional wisdom that war is good for the economy is true, especially given that all of the spending on the war in Iraq seems to have weakened America’s economy (or at least, greatly increased its debt).

The economist explained the seeming paradox:

“War always causes recession. Well, if it is a very short war, then it may stimulate the economy in the short-run. But if there is not a quick victory and it drags on, then wars always put the nation waging war into a recession and hurt its economy.”

Given that America has been fighting both the Afghanistan and Iraq wars longer than it fought WWII, the exception obviously doesn’t apply.

Can America go beat up some poorly-armed country to get a quick war?

It is more unlikely than many assume. Given that many believe that the U.S. started the Iraq war based on false pretenses, and that the Iraq war was really about oil (see this, this, this, this and this), I am skeptical that many would buy America’s stated justifications for another war.

Indeed, the article – even if wholly untrue – proves my point.

In addition, even a war against a small, poorly-armed and resource-poor country could be considered a proxy war. In other words, other heavily-armed countries might fight the U.S. through local proxies, dragging the war out for years, just as the U.S. did with Russia in Afghanistan. America today is not the empire it was even 10 years ago, and – as Afghanistan and Iraq show – America no longer has the financial resources to project force and impose its will world-wide.

The bottom line is that anyone advocating for war to help our economy is mistaken.

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  1. Moopheus

    Just to pick a little nit, because it is what I am paid to do, why do you always describe someone as a “PhD economist”? Does that make them a better or more reliable economist? Given the performance of economists lately, that isn’t necessarily a justified assumption. In fact, one could make the opposite argument–that having spent all of your time in an ivory tower studying theories with only tangential relation to the real world make you part of the problem, not the solution.

    It does seem that “PhD professor” is somewhat redundant–in most schools you aren’t a professor without a PhD. It can be assumed.

  2. First time commenter

    You quote a Chinese paper which sources “French Media” about something anti-American. Why don’t you just make shit up yourself? I mean, what’s the point of repeating dubious facts when you can create them whole cloth?

    1. Kevin de Bruxelles

      I’ve searched for French sources on Google and I can find nothing that could be the source of this article. What is interesting is that this Chinese article came out in Oct. 2008 and many (leftist) French sources picked it up and repeated the “French media sources” quote but none of them were able to track down the original source either. If there really is a “French media source” behind this (which I doubt) then the most likely suspect would be Le Canard enchaîné.

      1. Dave of Maryland

        Back 30 years ago when I was reading the Canard, they were doing some of the best reporting in France. Stuff Le Monde wouldn’t condescend to. But if it was Canard, know that their stories get picked up four days later by the “legit” Paris media. If that didn’t happen, then I would doubt Le Canard was the source.

        I once translated the name of the rag as “The Rumormonger”. Which I think fits.

        1. Kevin de Bruxelles


          I like Canard too and I buy it maybe once a month when I see it in a shop. They did actually report on something that Rand (really did) put out a year ago on Afghanistan which is why I mentioned it. I am convinced now though that the parts about “Rand” and “French media sources” are bullshit concerning the $700 billion war. Doesn’t mean that no one is planning such a war; only that if they are it hasn’t hit the French media yet!

    2. Naive_person

      An article published by China, a police state?!? Yes, why don’t you just make this up yourself.

  3. Bob_in_MA

    “China’s largest media outlets – – wrote in October 2008 that the Rand corporation, a leading U.S. military advisor, lobbied the Pentagon for a war to be started with a major foreign power in an attempt to stimulate the American economy…”

    What nonsense. Yves Smith has really degraded her blog by publishing this stuff here.

  4. Aki_Izayoi

    Well, if the US wants a war, why not encourage China and India to go at it? Just encourage them, and do not participate in the main fighting. War only benefits countries if they are unharmed and if their competition has been removed. Sweden benefited from WWII, and so did the US because the US and Sweden weren’t bombed. Imagine how the US (and Europe) will benefit if many of the Chinese manufacturing cities are destroyed in war, or the Indian call centers.

  5. John Papola

    This is the most important reason why Keynesian broken-window nonsense must be revealed as such at every single opportunity. It’s not just bad policy, but it ultimately leads to large scale violence.

    As for whether the Rand Corporation sent such a dubious memo, call me deeply skeptical. Then again, we did just witness the destruction of thousands of working cars amid the worst unemployment in a generation as part of a Keynesian “stimulus”.

  6. Lars Hvidberg

    How does Exxon paying the Iraqi government 55 billion dollars for the rights to an oilfield equate with “America carving up Iraq’s oil for American comanies”? Somebody has to get the oil out of the ground, and the Iraqi’s can’t do it themselves. Don’t you know that the oil laws have been fiercely debated in the Iraqi parliament for years and there have been strong Anti-American sentiments? It’s not just something “America” can dictate.

    1. Michael

      “Somebody has to get the oil out of the ground, and the Iraqi’s can’t do it themselves. ”

      There are many companies with the expertise and money to extract oil from the ground, not just American ones. There have certainly been many reports (so an internet search informs me) that the process of assigning contracts gave large US energy companies preference.

      If any tendering process was interfered with then the Iraqi people – whose sovereign property it is – almost certainly got a worse deal than if the process was not interfered with.

      You can bet Exxon got a ‘good deal’ on that 55B$, and someone got some kickbacks along the way.

      1. Lars Hvidberg

        Sure, there are Russian companies and French companies, and they pay kick-backs as well, which is why they were opposed to the war. The point is that with the process that has actually been going on, you can in no way say that the American companies have carved up the Iraqi oil for themselves. If they did that, these kinds of deals would have been made i 2003 in stead of now after endless delays and endless debates of the oil laws. Why else would a guy like Khazlizad make a comeback and once again lobby for American interests, if the Americans have just “carved it up” for themselves?

        The process have probably been a lot freer and to a lot greater advantage to the Iraqi people than it was under Saddam. Could probably be even freer, but that’s politics for you. Especially Iraqi politics.

    2. Yves Smith


      I am pressed for time, otherwise I’d track the references down. but some pretty credible source did discuss, at length, the policy assumptions re what would happen to the oilfields versus what actually happened when Big Oil was brought in. The US assumption was that the US would expropriate the oil, and the majors wanted nothing to do with that.

      We’ve never been given an explanation that even remotely makes sense as to why we went into Iraq. The WMD was clearly trumped up, and the many, shifting rationales since then do not add up.

      Wars are also convenient ways to distract the public from domestic issues…provided you can make the “enemy” seem like a credible threat.

      1. Lars Hvidberg

        Again all these “credible sources” and “the internet tells me” this and that. Apart from that I don’t even understand your answer, I’m afraid. The policy assumptions of who, and what did actually happen? Did the US expropriate the oil, as the poster tells us, or not?

        The idea of the war was to bring democracy to Iraq and thereby create an US ally in the region. Also to settle some scores. And open up the country to US companies. And to show the world that the US is a powerful nation, not to be crossed. All things turned out to be a lot more difficult than imagined. They should probably have done what everybody else did: Accept the dictatorship and make the deals anyway. It would also have been much better for the oil companies.

        1. DownSouth


          If you think an occupied country has sovereignty, I’ve got some great oceanfront property in Arizona that would be perfect for you.

          Also, you say: “The idea of the war was to bring democracy to Iraq and thereby create an US ally in the region. Also to settle some scores. And open up the country to US companies. And to show the world that the US is a powerful nation, not to be crossed.”

          It’s funny how you fail to mention the frequent invocation of “mushroom clouds” by the Bush administration during the selling of the war. It wasn’t until after the failure to find WMD that the administration cooked up the “bring democracy to Iraq” charade.

      2. jake chase

        We went to War in Iraq to keep the Iraqi oil in the ground and drive up the price. If you don’t understand this you should stop writing about economics and politics.

  7. gordon

    On dangerous ground here! But what the hell:-)

    I remember before the attack on the World Trade Centre how people made fun of George Bush. He was called “Shrub”. There was a TV show called “That’s My Bush!” which made him look silly. And there was a lot of dissatisfaction about his Presidency, especially economic performance. He wasn’t terribly popular. Then after the World Trade Centre attack in 2001, everything changed and he became a popular war leader.

    Of course, this doesn’t prove that President Bush either organised the WTC attack or embraced the Iraq war from motives of personal political expediency. It does show that some people can do well out of wars; not everybody is immiserated.

  8. Paul Tioxon

    Well, here we go again, the social order is larger than the graphs and charts of economics. The relevant work to start with here is Paul Kennedy’s, “The Rise and Fall of the Great Powers”, 1987. Perhaps the concept of Imperial Overreach should be explored as the war causes recession thesis. I think the critical part of this argument for our country in the global imperial enterprise of our military is the fact that of the $680b military budget, just approved by Congress, most of the money is spent overseas. Hence, whatever Keynesian effect there is, it in not on American soil, but elsewhere. And unless those USD are repatriated into investments on our soil, what is the benefit to employment, payroll taxes etc for me and for you, the taxpayers? Look up the number of military bases in Europe, Italy, Germany, Spain? Do we really need that many golf courses in Germany? Do we defend the Alps from Euro-trash. Fleet maintenance is not done at all of the closed Navy Yards from Boston to Philadelphia, but Korea and elsewhere. Subic Bay in the Philippines was closed off when they kicked us out, allowing more private Pacific yards to get our work. There is a permanent state of war and war spending, but its nature has changed, it is more capital intensive. Look at pilotless drones. Finally, look at the cost for war in Afghanistan, $1mil per solder per year. 40,000 more troops, 40,000,000,000.00/yr. This is in addition to 130,000 in Iraq for 2-3 more years and the current force deployed in Af-Pak now, around 50,000.

    1. alpwalker

      I agree. Faber is not advocating for war; he’s making a prediction. Faber is a contrarian economist, is anti-Fed and anti-big government in general and certainly anti-Keynesian. War is the biggest big government Keynesian project out there. Here’s his quote from Bloomberg: “If the global economy doesn’t recover, usually people go to war.” He’s made other statements that governments usually start wars as a way out of economic meltdowns like the Great Depression.

      We don’t necessarily need a new war. We may be in store for a higher intensity second phase of the Afghan campaign. That might appear to some as more justifiable, especially if we are seen to be driven by “liberal” causes like women’s rights instead of oil pipeline rights. It will still end in disaster, both economic and political. Not to mention moral and human.

  9. bob goodwin

    The path from crisis to war is much more nuanced than the post implies. Countries around the world want to distract attention from internal problems to external enemies. The stronger this force is, the less effort each side puts into de-escalation. A war is not spontaneously called. It is the sum of grievances and political frustrations. And of course the stronger the underlying problems that the polititians want to deny, the greater the displaced grievances become.

    The better title is “Crisis economies ALWAYS cause war”

  10. Swedish Lex

    You write that “Given that many believe that the U.S. started the Iraq war based on false pretenses”.

    I thought it had been established that so was the fact.

    I do not have no opinion on the topic you raise at this point in time. In early/mid 2002 I concluded that it was more likely than not that there would be a war in Iraq pretty soon and that an excuse to go in was in the process of being invented. I do however currently not see any similar signs in the tea leaves, excluding Iraq (on-going) and Afghanistan (a disaster in progress).

  11. DJC

    The United States wastes trillions on fighting stupid wars in the Middle East and pretending to be the world’s supercop. Is it really necessary to station hundreds of thousands of troops in Japan and Germany, sixty years after World War II? The US fiscal deficit and financial system are out-of-control. In October alone, the US Deficit was $173 billion. Wall Street firms are still issuing AAA subprime junk securities but now with US Treasury insurance (ie. taxpayer backing for any losses). Maybe the US should get its own house in order before lecturing other sovereign nations on running their own internal monetary affairs.

  12. Dave of Maryland

    The post would be stronger if the experiences of other countries was considered. Such as, did the Falklands War contribute to British & Argentine economic miseries? France & Algeria is another one that comes to mind (France & Indo-China too), as well as Egypt after 1973, Russia after Afghanistan. We’re not the only drunken sailor in the Warfare Bar, but we are the worst abusers of the sauce they serve there.

  13. Mickey in Akron

    Who, what, where, when, and how?

    As has been suggested above, war is increasingly capital-intensive business with more bang for the buck. A conventional [Irag 1991] war versus an asymmetric war [Afghanistan] points up the differences. The former employs overwhelming force with already existing material to “defeat” the enemy in short order in ideal conditions whereas the latter is more protracted and labor-intensive. Either way, right now the US would have to reinstitute the draft and raise taxes.

    Any politicians you can think of with the testicular fortitude to suggest either? Unless a state of permanently high structural employment provided the “volunteers of America” required. But paying for it? Rescinding the Bush tax cuts would be unpatriotic… and just to pay for a war that might interfere with my son/daughter’s career plans. That’s a bit much to ask of me and my family. After all, sacrifice is for the little people.

    But when the Cold War ended the Pentagon had to invent a new enemy and planned accordingly with China as the most likely candidate. Does this seem likely now after billions of capitalist investment? Perhaps if China decided to invade Taiwan … But even then would the US go to war? More importantly, could it with an already stretched volunteer force, without raising taxes, or without eventually resorting to nuclear weapons? And when the goods imported from China stopped then what? Why would China “provoke” the US when it has time on its side? I’m reminded of Sun Tzu’s The Art of War… required reading for US military strategists! Not that they understand it!

    Look elsewhere to what defense analyst, Thomas Barnett, terms the “non-integrated gap” – a swath of the globe not yet fully “integrated” into the new world order – there is simply no other country capable of waging conventional war against the United States. Venezuela? There may be several “failed states” – Sudan, Yemen, Pakistan – on the horizon in which terrorist groups would find “safe haven” to attack the US, but the failed regimes in each know the consequences. But do we?

    The US would not even have to invent a pretext to deploy additional material/forces. But finding both the human resources and monies to wage a permanent asymmetric war now are.

    This is pure speculation on my part just like the article and should be treated as such.

  14. Demented Chimp

    War is fun. I get to steal other peoples bananas and women, and beat my chest. Dopamine is fantastic shit. Couldnt live life without it, luckily its built in.

    You are looking for logic where none exists

    1. Vinny G.

      Yo Chimp,

      Why not try some crack? Or meth, or coke or something? It’s cheaper than going through all the trouble of a war just to pump up your own dopamine? Think of all the crack you can get by not having to buy F-16’s.


  15. Demented Chimp


    Agreed, but imagine if you can do both drugs and war at the same time. Oh wait a minute the Army already tried that and the Vikings and the…

    There all sorts of ways you can get your fix. Problem with these dopamine drug shortcuts is they make you very very antisocial during dopamine deficit -and plain weird/unproductive when you are floating in a vat of dopamine. The other dopamine highs are more subtle and less obviously negative at least in the short term sex, power, shopping, religion.

    Drug addiction problems of vets may in part be due to not being able to get the same dopamine high back home, either that or the army gave them the drugs in the first place.

    1. Skippy

      I blame uber high school sports especially football, win the game, taunt other team, get laid by cheerleader/s, get blind drunk, fight with friends or innocent bystander, drive home and run over every living thing in-between, wake up a god to friends and family!

      Skippy…how the hell can anything compete with that!

  16. alan walsh

    Is not Iran in the crosshairs of current US policy, with wars raging on it’s borders, our navy at it’s doorstep, how much deliberate or accidental provocation is it going to take before we slip into World War 111 with the moslem world?

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