America’s wartime economy

In April, the White House asked Congress for $1.5 trillion more in defense spending for 2027. This is a 40% increase over the Pentagon's spending in fiscal year 2026. Half the funding will come from cuts to education, housing, and health programs. Welcome to the war economy.

While the stock market celebrates another two-week extension of a cease-fire between the U.S. and Iran, the wars are not over. There will be more, in my opinion, and preparing for them will cost money. The Pentagon needs $4.5 billion to replenish its Tomahawk cruise missile stockpile. The Navy wants more boats, and the $250 million in planes and helicopters we lost rescuing two downed flyers need to be replaced.

As more military resources disappear, the need to replace them grows. That never-ending story fuels a wartime economy. The money earmarked for defense may not be enough. At a private lunch last week, according to the New York Times, the president said we need to prioritize military protection. Otherwise, he said in a since-deleted video, the country could not continue to shoulder the financial burden of services including ‘day care,’ Medicare, and Medicaid.

For those, like my daughter, who vaguely remember the term “wartime economy” from their history books, let me start with a definition. A wartime economy is an economic system that is reorganized by a nation to prioritize military production and resource allocation during periods of armed conflict.

What that means is that all the resources, including production, distribution, and financial systems, are adjusted to support military efforts while maintaining overall economic stability. If you are old enough to remember, it can and did mean rationing, price controls, centralized planning, inflation, and deficit spending here in the U.S.

For Americans, World War II is usually the go-to example of a wartime economy. Defense spending surged from 1.6% of Gross Domestic Product (GDP) in 1940 to over 40% four years later. By the end of the war, that number climbed to 119% of GDP. Non-military auto production was halted. Seel, rubber, and aluminum were rationed. Price controls artificially suppressed inflation, and black markets in everything from food to fuel proliferated.

Historians say this wartime economy pulled the U.S. out of the Great Depression. It sped up GDP growth and built the military-industrial complex. The war and draft created a job boom. By 1944, unemployment fell below 1%, the lowest ever. Women joined the workforce in large numbers. War also sparked major advances: radar, jet engines, computers, medicine, and the nuclear bomb.

All this is true; however, that is not the whole story. Under the hood, both private consumption and investment lagged badly. Civilian living standards were lower during the war than in 1940. That was before rationing and quality deterioration.

Much of wartime economic growth came at the private sector’s expense. Tanks, ammunition, ships, and planes—many lost in combat—could have built schools, hospitals, housing, or consumer goods. Instead, Americans waited in line for basics like gasoline, meat, and shoes. The national debt more than doubled as a share of GDP during the war.

Could we see the same results 80 years later? It seems doubtful. War may not deliver the benefits people expect. War spending gives an output boost, and we may fight for a “good cause,” whatever that means now. Yet do not expect the same job gains as before.

Next week, I will address the inflationary fallout from wartime economies and how countries worldwide are being forced to alter their own economies due to shifting post-war strategic alliances and geopolitics.

Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires.  Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc.  None of his commentary is or should be considered investment advice.  Direct your inquiries to his website at www.schmicksretiredinvestor.com. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.