THE MACROECONOMIC EFFECTS OF WAR FINANCE IN THE UNITED-STATES - WORLD-WAR-II AND THE KOREAN-WAR

During World War II, government expenditures were financed primarily b y issuing debt. During the Korean War, expenditures were financed almo st exclusively by higher taxes, reflecting President Truman's preferen ce for balanced budgets. This paper evaluates quantitatively the econo mic effects of the different policies used to finance these two wars. Counterfactual experiments are used to explore the implications of fin ancing World War II like the Korean War, and financing the Korean War like World War II. I find that using a Korean War policy during World War II would have resulted in much lower output and welfare relative t o the actual policy.