The state of the federal government’s finances shifted from large deficit to large surplus over the course of the 1990s, in an extraordinary turnaround that would not have been possible without the defense cuts. …
One important consequence of this substantial decline in government borrowing, a deficit of $290 billion in 1992 transformed into a 2000 surplus of $236 billion, was a fall in long-term interest rates set in the U.S. Treasury bond market – particularly in the later 1990s when investors woke up to the fact that the government was actually retiring some of its outstanding debt. For borrowing by the government crowds out borrowing by the private sector by competing for funds provided by investors. This may sound esoteric, but it had important ramifications because other interest rates depend on long-term government bond yields. For example, it became much cheaper for home buyers with lower mortgages rates or companies planning to borrow money for investment as federal surpluses grew during the ‘90s. While economic textbooks have long pointed out the existence of crowding out, budget deficits had been around for so long by the end of the Cold War that nobody could really remember what it was like when there had last been a lot less competition for funds in the capital markets from the government. …
Defenses’ share of total government spending dropped from 28 percent at the end of the 1980s to 16 percent in 1999. …
Throughout the second half of the decade, interest rates in the United States stayed low, investment in new businesses and technologies boomed, and the economy experienced its longest expansion since records began with a significant increase in the productivity trend. …
The peace dividend, then, has been large and significant. This should come as no surprise. War is not an inherently productive activity, to say the least. This points to a rather pessimistic conclusion about the likely impact of the resumption of war, and one that could, like the Cold War, be long drawn out and spread its tentacles throughout civilian life. After all, uncertainty about the world outlook is likely to keep investment spending lower than it might otherwise have been, as businesses opt for taking fewer risky bets on demand for their products or services. The new concern, not only in America but worldwide, about security, and higher insurance premiums, will raise businesses’ costs. Even a small increase in costs can have a big impact on investment decisions and on international trade. Some specific industries – the airlines and tourism, for example – have been badly affected by the terror attacks. And there may be other ramifications, such as a drop in immigration to the United States, reversing a flow of skills and energy that had enormously benefited the economy during the 1990s.
– Diane Coyle, Sex, Drugs and Economics
