Impact of the war on U.S. economy

Press, Volume CXI, Issue 32589, 24 April 1971, Page 17

Impact of the war on U.S. economy

(By LEONARD SILK, of the New York Times News Service. through N.Z.P.A.)

NEW YORK, April 23.

What will be the economic impact in the United States of the end of its involvement in the Vietnam war? The question has acquired urgency with the announcement by President Nixon that he will reduce American troop strength J in Vietnam from the present 284,000 to 184,000 by December 1, 1971. :i Beyond that date he has 1 announced no time-table—al-though some senators contend he told them he had a : definite date in mind. -I But he has pledged to end American involvement in -IVietnam and he said that he s expects to be held iccount--1 able—presumably on Election ifDay in 1972—if he fails. His goal, he says, is total nt American withdrawal. at. Assuming that Mr Nixon l^ fileves that will there I be an increasingly difficult

problem—of effecting the transition from a war-time to a peace-time economy? The Joint Economic Committee of Congress is exceedingly dubious that there will be any such transition —at least in terms of total military expenditure. Noting that the President had asked for more than SUSBO,OOOm in Budget authority for national defence in the 1972 financial year—a SUS6OOOm increase on 1971 both Democrat and Republican members of the Joint Economic Committee have said "this indicates that the Administration plans to resume the upward trend in defence-spending in the near future.”

The committee insisted that “it is difficult to see anything peace-time about an SUSBO,OOOm national defence budget

“If it is the policy of the 1 Administration to relieve the i unemployment pfoblem by l increasing defence spending,” ' the committee declared, it was “in strong disagreement; with that policy.” Instead it asks for a reduction in de-1

fence spending—“in the interests of national security” —through reform of weaponsprocurement to. eliminate cost overruns and other programmes which it considers wasteful. The committee wants an economic conversion programme, focused on social objectives, rather than simply converting war-time expenditures into garrison-state defence expenditures for military “hardware,” as a means of achieving full employment. There can be no doubt that the rapid military build-ups which pour money into an under-employed economy can produce high employment. But the Vietnam war was superimposed on an economy that was already at full employment. Its impact was brutally inflationary, for two reasons: It increased money incomes and demand beyond the capacity of the economy; and it reduced the human and material resources available to produce goods and services for the private economy. It also helped to undermine the United States balance of payments.

War has high “opportunity costs”—that is, the resources devoted to waging the war in South-East Asia could not be employed to produce socially useful goods. But the impact of Vietnam on the American economy doubtless goes beyond its physical effect of resources. The Joint Economic Committee contends that the wat and the high level of defencespending have contributed to an inflationary psychology. The sluggish behaviour of consumers during the last year demonstrates that worry about inflation can have a choking effect on consumer i spending that outweighs the allegedly "rational” decisions to buy ahead of pricei increases.

Further, as inflation brings about higher interest rates, it increases the rewards for saving—that is, not spending. And fear of unemployment—a potential result of efforts to fight the inflation—can also impair consumers’ confidence.

In the judgment of the Joint Economic Committee,

"the consumer’s confidence will not fully return as long as the debilitating and demoralising effects of the war in South-East Asia persist.”

Investors react to war-gen-erated inflationary threats in the Same way; the sickening plunge of the stock market in the spring of 1970 was a direct reaction to the Cambodian invasion. Likewise they react to fears of a wider war; more Government spending; bigger deficits and rising interest-rates.

But will an end to American involvement in the war in Vietnam necessarily produce a great wave of national confidence and euphoria? Mr Nixon has suggested that, depending on how the war ended, it might instead give way to bitter national recrimination and dissension. Such a national mood would not only aggravate social and economic tensions at home but hurt the United States relations with other countries. It might, at the same time, intensify existing symptoms of neo-isolationism.