What effect has war spending had on the U.S. economy? What would the U.S. economy have looked like without war spending? War spending has probably stimulated the national economy to a degree. But the extra income attributable to war spending has been partially offset by the negative macroeconomic consequences of increased deficits and debt used to finance the wars. The net effect on GDP has probably been positive but is small and declining. An important impact of war spending has been to raise the nation’s indebtedness.
The increased military spending following 9/11 was financed almost entirely by borrowing. According to standard macroeconomic models and evidence, rising deficits have resulted in higher debt, a higher debt to GDP ratio because debt has risen faster than income, and higher interest rates.
The ratio of federal debt held by the public to national income (gross domestic product, or GDP), a good indicator of the sustainability of government spending, was 32.5% at the end of fiscal year 2001. It rose to 36.2% after 2007 and to 69.4% at the end of 2011, an increase of almost 37 percentage points since 2001. The nonpartisan Congressional Budget Office (CBO) projects that under current law, debt held by the public will rise to more than 75% by 2020, an increase of greater than 40 percentage points since 2001.
How much of the increase in federal indebtedness is due to war spending? By the end of 2011, deficit spending on OEF/OIF will have raised the ratio of debt to GDP by about 10 percentage points, or between a quarter and a third of the total increase. By 2020, the increase will be 20 percentage points if war spending and the rest of the budget continue as forecast.
There are many other reasons the debt has grown since 2001, including tax cuts, increases in other government spending, and the effects of the largest postwar recession and the policy response. But military operations in Iraq and Afghanistan have raised annual deficits by about 1 percent of GDP, a trend that the Congressional Budget Office expects to continue through 2020.
Does the U.S. government have to pay interest on borrowing for the wars? How much? Interest is due because the government chose to finance the wars by borrowing rather than raising taxes or reducing other spending. The U.S. has already paid about $200 billion in interest on war spending over the last decade. If war spending continues as forecast by the CBO, the country can expect to have paid about $1 trillion in interest by 2020. That number grows if the effect of increased debt on interest rates and thus the cost of servicing all other debt are also included.