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Macroeconomic Strategy in Wartime

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In 2001-02 the United States has been hit by two quite different shocks, terrorism and recession. As usual in time of war, national defense is the highest priority for use of the country's resources. Although the opportunities for international warfare are limited, the challenges to the homeland are virtually unlimited. The president's fiscal year 2003 budget includes $48 billion additional for the military and $38 billion additional for homeland defense. Given the gravity of the threat, it is hard to understand why new expenditures are not undertaken as soon as and as large as possible. This would also be timely for stimulus to the economy, more effective than tax cuts and other proposals - with the nation in peril, the country is ready to make sacrifices, not to enjoy further tax reductions. Pearl Harbor in December 1941 occurred with the economy not yet recovered from the Great Depression, with unemployment still 10 per cent. Expenditures for war were increased sharply and rapidly, and full employment was restored in 1943.

Suggested Citation

  • James Tobin, 2002. "Macroeconomic Strategy in Wartime," Cowles Foundation Discussion Papers 1357, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:1357
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    File URL: http://cowles.yale.edu/sites/default/files/files/pub/d13/d1357.pdf
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    Keywords

    Fiscal; War; Recession; Stimulus; Tax; Deficit;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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