It’s long been thought that war and military spending can confer a Keynesian stimulus to the economy. Maybe not, according to the detailed analysis of economists at the Bank of International Settlements (via New Economist), who find that the effects of wars and other shocks on national economies can significantly reduce long run economic growth. When “output drops,” they find, “it tends to remain well below its previous trend.”
Using panel data for a large number of countries, we find that economic
contractions are not followed by offsetting fast recoveries. Trend
output lost is not regained, on average. Wars, crises, and other
negative shocks lead to absolute divergence and lower long-run growth,
whereas we find absolute convergence in expansions. The output costs of
political and financial crises are permanent on average, and long-term
growth is negatively linked to volatility. These results also imply
that panel data studies can help identify the sources of growth and
that economic models should be capable of explaining growth and
fluctuations within the same framework.
May 1st, 2007 at 5:11 pm
I hate to sound like my 13 y/o son, but, “Duh”.