Impact of Defense Spending on Business Cycle & Education Priorities

Supporting standards comprise 35% of the U. S. History Test 17 (C)

Supporting Standard (17)The student understands the economic effects of World War II & the Cold War. The Student is expected to: (C) Describe the impact of defense spending on the business cycle & education priorities from 1945 to the 1990s

What is the “Business Cycle”? A business cycle is a sequence of economic activity in a nation’s economy that is typically characterized by four phases—recession, recovery, growth, and decline—that repeat themselves over time. Economists note, however, that complete business cycles vary in length. The duration of business cycles can be anywhere from about two to twelve years, with most cycles averaging about six years in length. In addition, some business analysts have appropriated the business cycle model and terminology to study and explain fluctuations in business inventory and other individual elements of corporate operations. But the term “business cycle” is still primarily associated with larger (regional, national, or industrywide) business trends. A business cycle is a sequence of economic activity in a nation’s economy that is typically characterized by four phases—recession, recovery, growth, and decline—that repeat themselves over time. Economists note, however, that complete business cycles vary in length. The duration of business cycles can be anywhere from about two to twelve years, with most cycles averaging about six years in length. In addition, some business analysts have appropriated the business cycle model and terminology to study and explain fluctuations in business inventory and other individual elements of corporate operations. But the term “business cycle” is still primarily associated with larger (regional, national, or industrywide) business trends. The term business cycle (or economic cycle or boom-bust cycle) refers to economy-wide fluctuations in production, trade and economic activity in general over several months or years in an economy organized on free-enterprise principles. The term business cycle (or economic cycle or boom-bust cycle) refers to economy-wide fluctuations in production, trade and economic activity in general over several months or years in an economy organized on free-enterprise principles.

RECESSION: a recession—also sometimes referred to as a trough—is a period of reduced economic activity in which levels of buying, selling, production, and employment typically diminish. This is the most unwelcome stage of the business cycle for business owners and consumers alike. A particularly severe recession is known as a depression. RECESSION: a recession—also sometimes referred to as a trough—is a period of reduced economic activity in which levels of buying, selling, production, and employment typically diminish. This is the most unwelcome stage of the business cycle for business owners and consumers alike. A particularly severe recession is known as a depression. RECOVERY Also known as an upturn, the recovery stage of the business cycle is the point at which the economy "troughs" out and starts working its way up to better financial footing. RECOVERY Also known as an upturn, the recovery stage of the business cycle is the point at which the economy "troughs" out and starts working its way up to better financial footing.

GROWTH: economic growth is in essence a period of sustained expansion. Hallmarks of this part of the business cycle include increased consumer confidence, which translates into higher levels of business activity. Because the economy tends to operate at or near full capacity during periods of prosperity, growth periods are also generally accompanied by inflationary pressures. GROWTH: economic growth is in essence a period of sustained expansion. Hallmarks of this part of the business cycle include increased consumer confidence, which translates into higher levels of business activity. Because the economy tends to operate at or near full capacity during periods of prosperity, growth periods are also generally accompanied by inflationary pressures. DECLINE: also referred to as a contraction or downturn, a decline basically marks the end of the period of growth in the business cycle. Declines are characterized by decreased levels of consumer purchases (especially of durable goods) and, subsequently, reduced production by businesses. DECLINE: also referred to as a contraction or downturn, a decline basically marks the end of the period of growth in the business cycle. Declines are characterized by decreased levels of consumer purchases (especially of durable goods) and, subsequently, reduced production by businesses.

Kondratiev Wave In economics, Kondratiev waves (also called supercycles, great surges, long waves, K-waves or the long economic cycle) are supposedly cycle-like phenomena in the modern world economy. The Soviet economist Nikolai Kondratiev (also written Kondratieff) was the first to bring these observations to international attention in his book The Major Economic Cycles (1925) alongside other works written in the same decade. The period of the wave averages at fifty, and ranges from approximately forty to sixty years, the cycles consist of alternating intervals between high sectoral growth and intervals of relatively slow growth. Unlike the short-term business cycle, the long wave of this theory is not completely accepted by current mainstream economics, although there is empirical support for it. Recent research employing spectral analysis has confirmed the presence of Kondratiev waves in the world GDP dynamics at an acceptable level of statistical significance. In economics, Kondratiev waves (also called supercycles, great surges, long waves, K-waves or the long economic cycle) are supposedly cycle-like phenomena in the modern world economy. The Soviet economist Nikolai Kondratiev (also written Kondratieff) was the first to bring these observations to international attention in his book The Major Economic Cycles (1925) alongside other works written in the same decade. The period of the wave averages at fifty, and ranges from approximately forty to sixty years, the cycles consist of alternating intervals between high sectoral growth and intervals of relatively slow growth. Unlike the short-term business cycle, the long wave of this theory is not completely accepted by current mainstream economics, although there is empirical support for it. Recent research employing spectral analysis has confirmed the presence of Kondratiev waves in the world GDP dynamics at an acceptable level of statistical significance.

Business cycles in Organization for Economic Cooperation & Development countries after World War II were generally more restrained than the earlier business cycles. This was particularly true during the “Golden Age of Capitalism” (1945/50–1970s), and the period 1945–2008 did not experience a global downturn until the late-2000s recession. Economic stabilization policy using fiscal policy and monetary policy appeared to have dampened the worst excesses of business cycles, and automatic stabilization due to the aspects of the government’s budget also helped mitigate the cycle even without conscious action by policy-makers. Business cycles in Organization for Economic Cooperation & Development countries after World War II were generally more restrained than the earlier business cycles. This was particularly true during the “Golden Age of Capitalism” (1945/50–1970s), and the period 1945–2008 did not experience a global downturn until the late-2000s recession. Economic stabilization policy using fiscal policy and monetary policy appeared to have dampened the worst excesses of business cycles, and automatic stabilization due to the aspects of the government’s budget also helped mitigate the cycle even without conscious action by policy-makers.

In this period, the economic cycle—at least the problem of depressions—was twice declared dead. The first declaration was in the late 1960s, when the Phillips curve was seen as being able to steer the economy. However, this was followed by stagflation in the 1970s, which discredited the theory. The second declaration was in the early 2000s, following the stability and growth in the 1980s and 1990s in what came to be known as The Great Moderation. In this period, the economic cycle—at least the problem of depressions—was twice declared dead. The first declaration was in the late 1960s, when the Phillips curve was seen as being able to steer the economy. However, this was followed by stagflation in the 1970s, which discredited the theory. The second declaration was in the early 2000s, following the stability and growth in the 1980s and 1990s in what came to be known as The Great Moderation.

FACTORS THAT SHAPE BUSINESS CYCLES VOLATILITY OF INVESTMENT SPENDING Variations in investment spending is one of the important factors in business cycles. Investment spending is considered the most volatile component of the aggregate or total demand (it varies much more from year to year than the largest component of the aggregate demand, the consumption spending), and empirical studies by economists have revealed that the volatility of the investment component is an important factor in explaining business cycles in the United States. VOLATILITY OF INVESTMENT SPENDING Variations in investment spending is one of the important factors in business cycles. Investment spending is considered the most volatile component of the aggregate or total demand (it varies much more from year to year than the largest component of the aggregate demand, the consumption spending), and empirical studies by economists have revealed that the volatility of the investment component is an important factor in explaining business cycles in the United States.

MOMENTUM: Many economists cite a certain “follow-the-leader” mentality in consumer spending. TECHNOLOGICAL INNOVATIONS: Technological innovations can have an acute impact on business cycles. Indeed, technological breakthroughs in communication, transportation, manufacturing, and other operational areas can have a ripple effect throughout an industry or an economy. VARIATIONS IN INVENTORIES: variations in inventories—expansion and contraction in the level of inventories of goods kept by businesses—also contribute to business cycles. MOMENTUM: Many economists cite a certain “follow-the-leader” mentality in consumer spending. TECHNOLOGICAL INNOVATIONS: Technological innovations can have an acute impact on business cycles. Indeed, technological breakthroughs in communication, transportation, manufacturing, and other operational areas can have a ripple effect throughout an industry or an economy. VARIATIONS IN INVENTORIES: variations in inventories—expansion and contraction in the level of inventories of goods kept by businesses—also contribute to business cycles.

FLUCTUATIONS IN GOVERNMENT SPENDING Variations in government spending are yet another source of business fluctuations. This may appear to be an unlikely source, as the government is widely considered to be a stabilizing force in the economy rather than a source of economic fluctuations or instability. Nevertheless, government spending has been a major destabilizing force on several occasions, especially during and after wars. Government spending increased by an enormous amount during World War II, leading to an economic expansion that continued for several years after the war. Government spending also increased, though to a smaller extent compared to World War II, during the Korean and Vietnam wars. These also led to economic expansions. However, government spending not only contributes to economic expansions, but economic contractions as well. In fact, the recession of 1953-54 was caused by the reduction in government spending after the Korean War ended. More recently, the end of the Cold War resulted in a reduction in defense spending by the United States that had a pronounced impact on certain defense-dependent industries and geographic regions. Variations in government spending are yet another source of business fluctuations. This may appear to be an unlikely source, as the government is widely considered to be a stabilizing force in the economy rather than a source of economic fluctuations or instability. Nevertheless, government spending has been a major destabilizing force on several occasions, especially during and after wars. Government spending increased by an enormous amount during World War II, leading to an economic expansion that continued for several years after the war. Government spending also increased, though to a smaller extent compared to World War II, during the Korean and Vietnam wars. These also led to economic expansions. However, government spending not only contributes to economic expansions, but economic contractions as well. In fact, the recession of 1953-54 was caused by the reduction in government spending after the Korean War ended. More recently, the end of the Cold War resulted in a reduction in defense spending by the United States that had a pronounced impact on certain defense-dependent industries and geographic regions.

The Post War Economy: 1945-1960 Many Americans feared that the end of World War II and the subsequent drop in military spending might bring back the hard times of the Great Depression. But instead, pent-up consumer demand fueled exceptionally strong economic growth in the post war period. The automobile industry successfully converted back to producing cars, and new industries such as aviation and electronics grew by leaps and bounds. A housing boom, stimulated in part by easily affordable mortgages for returning members of the military, added to the expansion. The nation’s gross national product rose from about $200,000 million in 1940 to $300,000 million in 1950 and to more than $500,000 million in 1960. At the same time, the jump in postwar births, known as the “baby boom,” increased the number of consumers. More and more Americans joined the middle class. Many Americans feared that the end of World War II and the subsequent drop in military spending might bring back the hard times of the Great Depression. But instead, pent-up consumer demand fueled exceptionally strong economic growth in the post war period. The automobile industry successfully converted back to producing cars, and new industries such as aviation and electronics grew by leaps and bounds. A housing boom, stimulated in part by easily affordable mortgages for returning members of the military, added to the expansion. The nation’s gross national product rose from about $200,000 million in 1940 to $300,000 million in 1950 and to more than $500,000 million in 1960. At the same time, the jump in postwar births, known as the “baby boom,” increased the number of consumers. More and more Americans joined the middle class.

The Military Industrial Complex The military–industrial complex, or military–industrial–congressional complex, comprises the policy and monetary relationships which exist between legislators, national armed forces, and the military industrial base that supports them. These relationships include political contributions, political approval for military spending, lobbying to support bureaucracies, and oversight of the industry. The need to produce war supplies had given rise to a huge military-industrial complex (a term coined by Dwight D. Eisenhower, who served as the U.S. president from 1953 through 1961). It did not disappear with the war’s end. As the Iron Curtain descended across Europe and the U. S. found itself embroiled in a cold war with the Soviet Union, the government maintained substantial fighting capacity and invested in sophisticated weapons such as the hydrogen bomb. Economic aid flowed to war-ravaged European countries under the Marshall Plan, which also helped maintain markets for numerous U.S. goods. And the government itself recognized its central role in economic affairs. The Employment Act of 1946 stated as government policy “to promote maximum employment, production, and purchasing power.” The need to produce war supplies had given rise to a huge military-industrial complex (a term coined by Dwight D. Eisenhower, who served as the U.S. president from 1953 through 1961). It did not disappear with the war’s end. As the Iron Curtain descended across Europe and the U. S. found itself embroiled in a cold war with the Soviet Union, the government maintained substantial fighting capacity and invested in sophisticated weapons such as the hydrogen bomb. Economic aid flowed to war-ravaged European countries under the Marshall Plan, which also helped maintain markets for numerous U.S. goods. And the government itself recognized its central role in economic affairs. The Employment Act of 1946 stated as government policy “to promote maximum employment, production, and purchasing power.”

The Student is expected to: (D) 5 Explain the significance of 1957 (Sputnik launch ignites U.S.-Soviet space race) The successful Oct. 4, 1957 launching of a Soviet artificial satellite sent shock waves across America. The event revolutionized American education, shifting focus decisively to math & science, and accelerated the pace of the U. S. space program.

National Defense Education The National Defense Education Act (NDEA) was signed into law on September 2, 1958, providing funding to United States education institutions at all levels. It was one of a suite of science initiatives inaugurated by President Eisenhower in 1958, motivated to increase the technological sophistication and power of the US alongside, for instance DARPA and NASA. It followed a growing national sense that U.S. scientists were falling behind scientists in the Soviet Union, catalyzed, arguably, by early Soviet success in the Space Race, notably the launch of the first-ever satellite, Sputnik, the year before on Oct. 4, 1957. U.S. citizens feared that schools in the USSR were superior to American schools, and Congress reacted by adding the act to take US schools up to speed. The act authorized funding for four years, increasing funding per year: for example, funding increased on eight program titles from $183 million in 1959 to $222 million . The National Defense Education Act (NDEA) was signed into law on September 2, 1958, providing funding to United States education institutions at all levels. It was one of a suite of science initiatives inaugurated by President Eisenhower in 1958, motivated to increase the technological sophistication and power of the US alongside, for instance DARPA and NASA. It followed a growing national sense that U.S. scientists were falling behind scientists in the Soviet Union, catalyzed, arguably, by early Soviet success in the Space Race, notably the launch of the first-ever satellite, Sputnik, the year before on Oct. 4, 1957. U.S. citizens feared that schools in the USSR were superior to American schools, and Congress reacted by adding the act to take US schools up to speed. The act authorized funding for four years, increasing funding per year: for example, funding increased on eight program titles from $183 million in 1959 to $222 million .

Years of Change: The 1960s and 1970s The 1950s in America are often described as a time of complacency. By contrast, the 1960s and 1970s were a time of great change. New nations emerged around the world, insurgent movements sought to overthrow existing governments, established countries grew to become economic powerhouses that rivaled the United States, and economic relationships came to predominate in a world that increasingly recognized military might could not be the only means of growth and expansion.

President John F. Kennedy (1961-1963) ushered in a more activist approach to governing. During his 1960 presidential campaign, Kennedy said he would ask Americans to meet the challenges of the “New Frontier.” As president, he sought to accelerate economic growth by increasing government spending and cutting taxes, and he pressed for medical help for the elderly, aid for inner cities, and increased funds for education. Many of these proposals were not enacted, although Kennedy’s vision of sending Americans abroad to help developing nations did materialize with the creation of the Peace Corps. Kennedy also stepped up American space exploration. After his death, the American space program surpassed Soviet achievements and culminated in the landing of American astronauts on the moon in July 1969. President John F. Kennedy (1961-1963) ushered in a more activist approach to governing. During his 1960 presidential campaign, Kennedy said he would ask Americans to meet the challenges of the “New Frontier.” As president, he sought to accelerate economic growth by increasing government spending and cutting taxes, and he pressed for medical help for the elderly, aid for inner cities, and increased funds for education. Many of these proposals were not enacted, although Kennedy’s vision of sending Americans abroad to help developing nations did materialize with the creation of the Peace Corps. Kennedy also stepped up American space exploration. After his death, the American space program surpassed Soviet achievements and culminated in the landing of American astronauts on the moon in July 1969.

Military spending also increased as American’s presence in Vietnam grew. What had started as a small military action under Kennedy mushroomed into a major military initiative during Johnson's presidency. Ironically, spending on both wars—the war on poverty and the fighting war in Vietnam—contributed to prosperity in the short term. But by the end of the 1960s, the government's failure to raise taxes to pay for these efforts led to accelerating inflation, which eroded this prosperity. The 1973-1974 oil embargo by members of the Organization of Petroleum Exporting Countries (OPEC) pushed energy prices rapidly higher and created shortages. Even after the embargo ended, energy prices stayed high, adding to inflation and eventually causing rising rates of unemployment. Federal budget deficits grew, foreign competition intensified, and the stock market sagged. Military spending also increased as American’s presence in Vietnam grew. What had started as a small military action under Kennedy mushroomed into a major military initiative during Johnson's presidency. Ironically, spending on both wars—the war on poverty and the fighting war in Vietnam—contributed to prosperity in the short term. But by the end of the 1960s, the government's failure to raise taxes to pay for these efforts led to accelerating inflation, which eroded this prosperity. The 1973-1974 oil embargo by members of the Organization of Petroleum Exporting Countries (OPEC) pushed energy prices rapidly higher and created shortages. Even after the embargo ended, energy prices stayed high, adding to inflation and eventually causing rising rates of unemployment. Federal budget deficits grew, foreign competition intensified, and the stock market sagged.

What Happened to the Economy in the ’80s? The Size of the Government—the central theme of Reagan’s national agenda, however, was his belief that the federal government had become too big and intrusive. In the early 1980s, while he was cutting taxes, Reagan was also slashing social programs. Reagan also undertook a campaign throughout his tenure to reduce or eliminate government regulations affecting the consumer, the workplace, and the environment. At the same time, however, he feared that the U. S. had neglected its military in the wake of the Vietnam War, so he successfully pushed for big increases in defense spending. The Size of the Government—the central theme of Reagan’s national agenda, however, was his belief that the federal government had become too big and intrusive. In the early 1980s, while he was cutting taxes, Reagan was also slashing social programs. Reagan also undertook a campaign throughout his tenure to reduce or eliminate government regulations affecting the consumer, the workplace, and the environment. At the same time, however, he feared that the U. S. had neglected its military in the wake of the Vietnam War, so he successfully pushed for big increases in defense spending.

The combination of tax cuts and higher military spending overwhelmed more modest reductions in spending on domestic programs. As a result, the federal budget deficit swelled even beyond the levels it had reached during the recession of the early 1980s. From $74,000 million in 1980, the federal budget deficit rose to $221,000 million in 1986. It fell back to $150,000 million in 1987, but then started growing again. Some economists worried that heavy spending and borrowing by the federal government would re-ignite inflation, but the Federal Reserve remained vigilant about controlling price increases, moving quickly to raise interest rates any time it seemed a threat. Under Fed Chairman Paul Volcker and his successor, Alan Greenspan, the Federal Reserve retained the central role of economic traffic cop, eclipsing Congress and the president in guiding the nation’s economy. The combination of tax cuts and higher military spending overwhelmed more modest reductions in spending on domestic programs. As a result, the federal budget deficit swelled even beyond the levels it had reached during the recession of the early 1980s. From $74,000 million in 1980, the federal budget deficit rose to $221,000 million in 1986. It fell back to $150,000 million in 1987, but then started growing again. Some economists worried that heavy spending and borrowing by the federal government would re-ignite inflation, but the Federal Reserve remained vigilant about controlling price increases, moving quickly to raise interest rates any time it seemed a threat. Under Fed Chairman Paul Volcker and his successor, Alan Greenspan, the Federal Reserve retained the central role of economic traffic cop, eclipsing Congress and the president in guiding the nation’s economy.

The Cold War defined the political role of the United States in the post–World War II world: by 1989 the US held military alliances with 50 countries, and had 526,000 troops stationed abroad in dozens of countries, with 326,000 in Europe (two-thirds of which in west Germany) and about 130,000 in Asia (mainly Japan and South Korea). The Cold War also marked the zenith of peacetime military-industrial complexes, especially in the US, and large-scale military funding of science. These complexes, though their origins may be found as early as the 19th century, grew considerably during the Cold War. The military-industrial complexes continue to have great impact on their countries and help shape their society, policy and foreign relations. The Cold War defined the political role of the United States in the post–World War II world: by 1989 the US held military alliances with 50 countries, and had 526,000 troops stationed abroad in dozens of countries, with 326,000 in Europe (two-thirds of which in west Germany) and about 130,000 in Asia (mainly Japan and South Korea). The Cold War also marked the zenith of peacetime military-industrial complexes, especially in the US, and large-scale military funding of science. These complexes, though their origins may be found as early as the 19th century, grew considerably during the Cold War. The military-industrial complexes continue to have great impact on their countries and help shape their society, policy and foreign relations.

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Impact of Defense Spending on Business Cycle & Education Priorities