The first two methods are unlikely to have an effect on economic growth (aggregate demand) in the short run. The expansion in aggregate demand caused by greater military outlays is largely offset by the contraction in aggregate demand caused by higher taxes or lower non-military government spending. The latter two financing methods increase aggregate demand. Thus, a by-product of wars has typically been a short-term economic boom and an increase in employment in excess of the economy's sustainable rate of growth. Just as a military buildup in wartime typically boosts aggregate demand, the reduction in defense expenditures after a war typically causes a brief economic contraction as the economy adjusts to the return to peacetime activities. Although some price inflation may be associated with borrowing from the public, money creation is typically a more inflationary method of finance. Use of Price Controls

Under normal circumstances, money creation as a means of government finance would be expected to lead to price inflation. The Vietnam Conflict, the Reagan Military Buildup, and the Desert Storm Operation were not large enough events that they could be thought to dominate cause and effect in the economy at the time. And to equal the military outlays (as a percentage of GDP) undertaken at the peak of the Reagan military buildup, military outlays today would need to more than double from their level in 2001. The Revenue Act of 1942 included provisions that made the individual income tax a "mass tax" for the first time, increased the corporate tax, increased excise taxes, increased the excess profits tax to 90%, and created a 5% Victory tax that was to be repaid through a post-war tax credit. Korean Conflict

In contrast to World War II, President Truman relied largely on taxation and a reduction of non-military outlays, rather than borrowing from the public or money creation, to finance the Korean Conflict. Unlike World War II and the Korean Conflict, non-military expenditures were increased throughout the Vietnam era, beginning with the Great Society programs. As a result, increased military outlays and tax cuts led to budget deficits and a reduction in non-military outlays as a percentage of GDP. Since the United States operated a floating exchange rate in the 1980s, as it does at present, economists believe that one result of the large budget deficits were the large trade deficits of the mid-1980s, which were the result of foreign capital being attracted to the United States by the high interest rates that budget deficits had caused. First, it was the only military operation considered that did not require any increase in military expenditures as a percentage of GDP. The budget deficit rose during the conflict, but it would be difficult to claim that military spending contributed to the rise in the deficit when overall military spending was declining during this time. Ongoing War in Iraq and Afghanistan

This section discusses spending and economic trends through 2008 surrounding the war in Iraq that began in 2003. The increased government outlays associated with wars can be financed in four ways: through higher taxes, reductions in other government spending, government borrowing from the public (the issuance and sale of U.S. Treasury securities to the public), or money creation.
The increased government outlays associated with wars can be financed in four ways: through higher taxes, reductions in other government spending, government borrowing from the public, or money creation. The first two methods are unlikely to have an effect on economic growth (aggregate demand) in the short run: the expansion in aggregate demand caused by greater military outlays is offset by the contraction in aggregate demand caused by higher taxes or lower non-military government spending. The latter two methods increase aggregate demand. Thus, a by-product of American wars has typically been a wartime economic boom in excess of the economy's sustainable rate of growth. Wars may shift resources from non-military spending to military spending, but because military spending is included in GDP, it is unlikely to lead to a recession. Just as wars typically boost aggregate demand, the reduction in defense expenditures after a war removes some economic stimulus as the economy adjusts to the return to peacetime activities.
The economic effect of World War II stands in a class of its own. More than one-third of GDP was dedicated to military outlays. Budget deficits were almost as large; these large deficits were made possible through policies that forced individuals to maintain a very high personal saving rate. Money creation was a significant form of financing, but the inflation that would typically accompany it was suppressed through widespread rationing and price controls. Private credit was directed toward companies producing war materials. There was a significant decrease in non-military outlays and a significant increase in taxes, including the extension of the income tax system into a mass tax system and an excess profits tax. President Truman attempted to avoid financing the Korean Conflict through borrowing from the public or money creation—budget deficits were much lower than during any other period considered—but the economy boomed anyway. Tax increases and a reduction in non-military spending largely offset the increases in military outlays. President Truman relied on price controls to prevent the money creation that did occur from being inflationary.
Vietnam, the Reagan military buildup, and the two wars in Iraq were not large enough to dominate economic events of their time. The beginning of the Vietnam Conflict coincided with a large tax cut. Non-military government spending rose throughout the Vietnam era. Most of the conflict was deficit financed, although tax increases occurred at the peak of the conflict. Inflation rose throughout the period, and President Nixon turned to price controls to suppress it. The beginning of the Reagan military buildup also coincided with a large tax cut, as well as an effort by the Federal Reserve to disinflate the U.S. economy. Thus, borrowing from the public, and later a reduction in non-military outlays, offset most of the rise in military spending. Unlike earlier conflicts, liberalized international capital markets allowed the United States to borrow significantly abroad for the first time, which many economists believe caused the large trade deficits of the mid-1980s. Desert Storm took place among rising budget deficits and rising taxes. It was the only military operation considered to largely occur in a recession. The ongoing wars in Iraq and Afghanistan took place at a time of sluggish economic recovery, tax cuts, and rising budget deficits. This report will be updated as needed.