The deadweight cost of war: An illustrative CGE
DOI:
https://doi.org/10.15355/epsj.6.2.34Keywords:
CGE mode, GAMS, Robert Barro, deadweight cost, warAbstract
War is costly both because of the resources used up and because of the inefficiency introduced by the higher taxes necessary to finance them. War has been justified by its ability to help an economy achieve full employment. Robert Barro argues that war increases employment because folks work harder to smooth consumption and take advantage of the higher interest rates caused by the scarcity that accompanies war. In his view, it does not reflect putting previously wasted resources to work. This article describes the simulations of a small-scale intertemporal computable general equilibrium model. It illustrates that the cost of war depends on how it is financed, and that the increase in employment that it generates may be explained by the logic that Barro offers. Our model can be loaded into GAMS, a program which is available free of charge online, so readers can themselves simulate variations of the model.References
Ballard, C., J.B. Shoven, and J. Whalley. 1982. “The Welfare Costs of Distortions in the U.S. Tax System: A General Equilibrium Approach.” Cambridge, MA: National Bureau of Economic Research Working Paper no. 1043 (December).
Barro, R. 2008. Macroeconomics: A Modern Approach. Mason, OH: Thompson South-Western.
Blinder, A. 2011. “The GOP Myth of Job-Killing Spending.” The Wall Street Journal. 21 June 2011. http://online.wsj.com/article/SB10001424052702303635604576392023187860688.html
Buchanan, J.M. 1976. “Perceived Wealth in Bonds and Social Security: A Comment.” Journal of Political Economy. Vol. 84, No. 2, pp.337-342.
Judd, K.L. 1987. “The Welfare Cost of Factor Taxation in a Perfect-Foresight Model.” Journal of Political Economy. Vol. 95, No.4, pp. 675-709.
Leontief, W.W., A. Morgan, D. Simpson, K. Polenske, and E. Tower. 1965. “The Economic Impact—Industrial and Regional—of an Arms Cut.” Review of Economics and Statistics. Vol. 47, No 3, pp. 217-241.
Shoven, J.B. and J. Whalley. 1984. “Applied General-Equilibrium Models of Taxation and International Trade: An Introduction and Survey.” Journal of Economic Literature. Vol. 22, No. 3, pp. 1007-1051.
Stuart, C. 1984. “Welfare Costs of Additional Tax Revenue in the United States.” American Economic Review. Vol. 74, No. 2, pp. 352-362.
Warlters, M. and E. Auriol. 2007. “The Marginal Cost of Public Funds in Developing Countries: An Application to 38 African Countries.” The World Bank. 3 October 2007. http://idei.fr/doc/wp/2007/marginal_cost.pdf.
