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Wednesday, June 22, 2005

Math

In another blog, someone wrote about the economics of the war. without getting into the politics of the whole thing, I will just stick to the math and economic theory.

first off, a war CAN boost the economy. It happened twice. After WWI, we had the roaring 20s. Then a massive crash in the 30s, only to be pulled out of it by massive public works projects and a build up for WWII. And during WWII, the USA went into production overtime. So many war materials were cranked out that nothing can be compared to it today. Shipyards were putting out entire Liberty Ships DAILY. Facotries were running 24/7. Steel was being produced as fast as it could be used.

After WWII, all these factories had the capital to re-tool, so when people came home there were plenty of factory jobs. And with all the jobs, people had money. And with money, people bought a lot of stuff made in American facotries. The system was in awesome shape.

But what about Vietnam? From an economic standpoint, it was a stupid thing to do. We were at full employment and full production. The job market did not need a war to create more jobs. Factories were perfectly happy making electric can openers and consumer vehicles. There were not many factories with unused capacity that could be used to make tanks.

So, the government had to compete with consumers for things like steel and aluminum. This caused the price of everything to go up. Fuel costs went up. Car prices went up. Electric can openers cost more. Everything cost more.

And things were more expensive for the military too. They had to compete with consumers for the same resources. So their tanks, guns, and bullets cost more.

So you are a factory manager. Your factory is doing just fine making electric motors for washing machines. Along comes Uncle Sam and he says "retool your plant to make tank parts". What do you say? Chances are you would say "I would rather not, unless you can make it worth my while". The plant would have to shut down to re-tool, re-train the entire workforce, and it would be months before the first tank part came off the line. Time is money, so that first tank part would cost A LOT. The government had to pay for the re-tooling, the re-training, AND the downtime that oculd have been used making washing machine motors. during WWII, there was no downtime to pay for because that factory was empty to begin with.

So now there is another war going on. As far as the economy is concerned, things look more like Vietnam than WWII. Yea, there was an economic downturn in 2000. And yes, Septmber 11 added to that slowdown. But in no way was the slowdown like the 1930s. The unemployment rate was not that high, inflation was rather low, and capital was cheap due to low interest rates. All in all, not a bad economic outlook.

So, according to economcs it was not a good time to start a war. I am ignoring the political implications of the war, I am trying to just stick to economics here.

Oh yea, I almost forgot to add in this little fact. American production has been outsourced. So even if the government starts to order tank parts, there is no gurantee that the parts will not be made in Mexico.

I would really like for Econo-Girl to chime in here. She can probably add to this posting. Hell, I might even be wrong here. I really do not know too much advanced economic theory to consider myself any kind of "expert".

6 Comments:

Blogger GodlessMom said...

Thank you, very informative. I'm an economic know-nothing so this kind of information helps me a great deal.

08:20  
Blogger dddragon said...

yes, thank you. What you've posted makes sense to me. I'll look for Econo-Girl's comment, too.

08:54  
Blogger jevanking™ said...

I took a LOT of Economics classes and many of my professors made the same exact point you did. You may not say that you are an "expert," but seriously, you must play one on TV. Great post.

11:43  
Blogger Econo-Girl said...

Great analysis. You explained it really well. Yes, the ramped-up production lowers unemployment and can compete with private sector production materials and factories.

It's like, you got so many people and so many factories. If some of them are being sopped up making war equipment, and you want to make lawn mowers, you need to make it worthwhile to the factory owner. Which means paying more. Often there is excess capacity, a phrase that you will hear from time to time. That means that some factories are standing empty. Then you are helping everyone by getting them to build tanks.

The FDR projects and WWII spending resulted in a US administration that was willing to debt to get things going again. Because nobody had money, no one was spending any. The thought was to get cash in the hands of the working man so he could spend it. And it worked.

The extra capacity during the Great Depression was huge. I mean, all this labor was dying to work.

The current Bush had a kind of twisted version of that thinking with the tax cut he gave. The difference would be that Bush wasn't facing an American public unable to spend money.

And Bush wasn't facing supermarket and factory prices that were GOING DOWN because everybody was so broke during the Depression. And of course, if you are eat-dirt poor and you see prices going down, you don't spend any money in hopes that prices will be even lower when you do buy.

There were several factors going on during the '70's. One of them was the competition for resources of production. Another was that women were entering the workforce and the price of oil was really much higher than what we experience now. They were all supply shocks to the economy, leading to Econo-Girl's theory that it is supply shocks that lead to inflation, not just too much fast economic growth.

I know this is a bit long, sorry for that.

But - I will continue anyway.

Always keep your eye on capacity, both factory and labor. And inventories. Are inventories rising? Then consumption is not keeping up with how much was produced and ready for sale.

-sigh- I just love economics.

15:52  
Blogger Fred said...

Econo-girl: Nicely done. I don't agree with all of of your comments, but I can see the wisdom of your opinions. We're not that far off.

Since I'm a faithful reader of iguana, I'll stop in to say hi on your blog. Feel free to annoy me anytime on my blog.

22:38  
Blogger The Lazy Iguana said...

Econo-Girl's blog is better than Bloomberg. Thanks for stopping by.

22:51  

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