An addition to the latest edition of Mankiw / Belzile, chapter 14 (Principles of Macroeconomics)
One of the myths most rooted in the population for the economic benefit of wars. After all, full employment of the mid-1940s following the Great Depression of the 1930s. What should we think?
argument is that economic benefits and it is generally misleading. Any government spending generates benefits: indeed, if the government gives me $ 100, I spent a part. Someone else will therefore receive the money and spend more, etc. .. This is also the principle of the multiplier, which is examined in the next chapter. The Government should then spend as much as possible to increase the collective wealth? Most economists would say probably no, because there is an opportunity cost to each government spending: eventually, someone will pay for such expenses as taxes and taxes. Indeed, tax revenues come from our pockets. They reduce the disposable income of households and private spending. If government expenditures are a percentage of GDP, private spending will be even lower.
Wars are they good for the economy? If the Canadian real GDP increased sharply between 1914 and 1918 and between 1940 and 1945, because the government increased its spending without raising taxes. It has cut its savings (T - G) and budget balance. In other words, it has increased spending and tax increases returned to later. Such a policy stimulates the economy in the short term, but someone has to pay one day for this increased spending. For example, the ratio (federal debt / GDP) was approximately 125% in 1946, following the Second World War: the generation after 1945 was heavily taxed because of the government debt.
The conclusion is clear: whenever the government is considering new spending, one should ask whether the resources used is less than or greater than the value of what he produces. A program by which the government hires half of the unemployed to dig a huge hole, and the other half to fill it, without raising taxes immediately, increases aggregate demand and GDP. Same thing for a war. But these expenditures do not produce anything useful. On the other hand, public expenditure in infrastructure, education, research and development would have the same impact on GDP, while increasing productivity and standard of living over the long term. Same thing for a tax reduction. And these choices increase the well-being, which is not the case for war.
