11/22/96
ATHENS, Ohio -- With the breakup of the Soviet Union and end of the Cold War, the United States is enjoying a "Peace Dividend" that is being used to reduce the deficit rather than cut taxes, according to a new study that examined the impact of war on the nation's economy over the last 200 years.
"Politicians respond to voter sentiments in allocating the dividend, trying to improve chances for electability," said Richard Vedder, a distinguished professor of economics at Ohio University. "Deficit reduction, out of fashion for a time, seems to be at least partly back in fashion, suggesting Americans are at least somewhat concerned by the long-term burden of the national debt," Vedder said.
Vedder and Dwight Lee, professor of economics at the University of Georgia, reviewed the U.S. economy from the 1790s to the present, examining the economic impact of eight major wars over 25 years.
A reduction in military spending impacts the economy by reducing taxes, increasing non-military spending, increasing deficit reduction or a combination of the three, according to the study published recently in the journal Public Choice. Politicians gauge public sentiment concerning the three elements in the economic equation and then make economic decisions.
"The model is based on the assumption that the political process responds to political demands and costs in a way that maximizes net political benefits," Vedder said.
The recent passage of a welfare reform bill -- a reduction in non-military spending -- and budgets over the last four years that have reduced the deficit reflect a conservative fiscal trend in the country, Vedder said.
"People seem to be reverting to a pre-1930 view of the world in which deficits are viewed as sinful," Vedder said. "People are starting to feel that way about the national government. It goes all the way back to the Protestant ethic of thriftiness and Ben Franklin."
Deficit spending was about $117 billion, or 1.6 percent of the 1996 budget, for the federal fiscal year ending Sept. 30, less than half of what it was in the 1980s when deficits approached 4 percent.
"The deficit has come down some, but federal taxes as a percentage of gross national product are at an almost peace-time high," Vedder said.
While many non-military programs have been reduced, spending on entitlement programs such as Medicare and Medicaid is increasing.
"The thing that makes this century different from the 19th is one word -- entitlements," Vedder said. "Six years after the fall of the Berlin Wall and the end of the Cold War, we still have a deficit. In the 19th century we would have cut non-military spending as we did after the War of 1812 and the Civil War. Today, we don't have the fervor we once had. But a bigger part of the equation is entitlements. If you look at non-defense, non-entitlement spending as a part of GNP, it has been reduced."
Contact: Richard Vedder 614-593-0142;
vedder@ouvaxa.cats.ohiou.edu
Written by Dwight Woodward, 614-594-2376;
dwoodward1@ohiou.edu