Effects of the Vietnam Debt on America - Essay Example

Macro & Micro economics 14 November Effects of the Vietnam Debt on America Introduction Vietnam is a nation located in Southeast Asia on the eastern section of the Indochinese peninsula. Since its early history, Vietnam has faced constant invasion by outsiders. The Vietnam War is usually regarded as one of the most significant battles of the twentieth century. The conflict was significant gauging it by not only the numbers of casualties and geographical spread, but by the impact it had on the rest of the world and especially the United States. 2. Background of the U.S. Involvement in the Vietnam War Initially, the United States did not take sides on the war in Vietnam. However, a series of global events provoked the United States into backing up France. This was after President Harry S. Truman promised to assist the French in sustaining their control in Indochina. Consequently, the United Sates got involved in Vietnam. Before the war, in one way or the other, the United States believed that it was in charge of maintaining order in the world. Among Harry Truman’s foreign policies was the policy to control communism and this was very evident in Southeast Asia. During Eisenhower’s administration, the United States continued to directly support the French in form of equipment, weapons and technical assistance. According to a report by Charles E. Wilson, who was the defense secretary during Eisenhower’s first term as president, millions of dollars were allocated to the French Union Forces, in addition to a program for regular Indochinese military assistance for equipment and weapons. Campagna states that “In September 1953, $385 million were allocated to the direct support of the French Union Forces and added to the $400 million previously appropriated for this purpose in the budget for fiscal year 1954” (3). In May 1954, there was an emergency and the United States took the responsibility of rushing troop support from France to Indochina. Furthermore, military aid was supplied under the Military Assistance Program, under the Agricultural Trade and Development Act, and the Mutual Security Appropriations Act of 1955. However, while considering the budget for the 1966 fiscal year, Congress became more concerned over the huge amounts of money that were being spent in Vietnam. This led to the transfer of these funds from assistance programs to other accounts of allotment. At the same time, a complete account of the amounts spent in Vietnam was demanded revealing the total dollars spent by the United States from 1953 to 1965. The cost of military personnel in Vietnam was not included in the accounts, as it was not clear how many dollars had been spent on this, despite the fact that between 1954 and 1961, the number of troops assigned to Vietnam had gradually increased (Campagna 5). The amounts in millions of dollars are shown in the following table: Fiscal Year Agency for International Development and other Agencies Public Law 480 (all titles) Total 1953-1957 783.9 39.4 823.3 1958 179.1 9.7 188.8 1959 200.6 6.5 207.1 1960 169.0 11.5 180.5 1961 132.6 12.0 144.6 1962 110.7 32.5 143.2 1963 133.2 64.3 197.5 1964 159.3 71.0 230.3 1965 216.1 52.8 268.9 Total 2084.5 299.7 2384.2 Source: Campagna, Anthony S., The Economic Consequences of the Vietnam War, New York: Praeger Publishers, 1991, Print, table 1.1. At this time, it was difficult to determine whether the total amounts spent in Vietnam, with or without the personnel costs, would have an impact on the economy of the United States. In the 1950s, the economy of the United States underwent a period of stagnation with three recessions during Eisenhower’s administration reducing the economic growth rate of the nation to 2.4 percent (Campagna 5). During this era, the economic and technological growth of the Soviet Union was higher than that of the United States. This brought about charges as a result of the technology gap. The United States however closed this gap by establishing the National Aeronautics and Space Administration agency for space exploration. According to Campagna, “Interestingly the first recession of 1953-54 was in large part caused by a reduction in defense spending on the order of $11 billion, a fact downplayed by the administration” (6). Following a boom in investment in 1955 to 1956, there was a turnaround in investment spending on capital goods; consequently, another recession was experienced in 1957 to 1958. The United States did recover, but the recovery was not strong resulting to another stagnation of the economy in the early1960s. By the end of 1961, the economy had stabilized. From all this, it is clear that the aid given to the French by the United States did not have a significant effect on the economy of the nation. President John F. Kennedy was elected after the drop in the economy in the 1960s. His administration concentrated on filling the gaps that had been created by economic stagnation. Spending on Minuteman and Polaris missiles was increased to reduce an alleged missile gap that did not exist. Over five years, $17 billion had been spent. “This exercise in military Keynesianism did not perturb the New Economists who were enticed into public service with their Keynesian views and growth-oriented prescriptions for the economy” (Campagna 7). This is however the case for most United States national defense budgets and it is difficult to measure the timing of its effects. Allocations for increased defense spending have no immediate effect on the economy. The economy is only affected when pay outs for interests and profits begin. Campagna points out that in 1963, defense expenditures and government purchases in the national income increased to $52 billion (7). In 1961, General Maxwell Taylor urged President Kennedy to add the number of American Troops in Vietnam. The troop buildup therefore continued “and by the end of 1963, U.S. military personnel in Vietnam totaled 16,575. At a cost of approximately $25,000 per soldier, this meant an annual cost of $414 million” (Campagna 8). Records of official Vietnam War costs do not reflect these costs. An agreement between France and the Democratic Republic of Vietnam had been made in Geneva imposing a limit on the number of troops permitted in Vietnam. Due to this, the American public and Congress were not informed about the addition in the number of troops in Vietnam. Campagna asserts that “the defense buildup in the Kennedy years began to affect the national economy” (8). The nation had also suffered an economic recession in the early 1960s. In a bid to save the economic situation of the United States, President Lyndon Baines Johnson signed the Revenue Act of 1964 into law. This was the largest tax cut in the history of the United States. However, it is difficult to determine whether the tax cuts were responsible for the improvement of the economy. Over the years that the war in Vietnam took place: Officials in Washington , including the presidents, were supplied false reports, erroneous accounts of conditions on and off the battlefield, conflicting forecasts of military and political successes, contrasting views on how to proceed, and misconceptions of all kinds about the people of Southeast Asia (Campagna 17). 3. Forms of Assistance Provided to Vietnam by the United States The United States provided three forms of assistance to the Vietnam government. These were direct aid, cash grants, and commercial import procedures. Tuan asserts that, “Through cash grants, the United States provided assistance…………and to help the new regime cope with the crisis. Cash grants were the quickest way to provide assistance” (184). Cash grants entailed providing support in form of United States dollars to the government of South Vietnam. The South Vietnamese government in turn borrowed an equivalent amount of Vietnamese piaster’s from the National Bank to use in meeting urgent needs. The government of the United States directly assisted agencies in Vietnam by supplying machines, equipment and materials through direct aid or project aid. American experts and competent foreign contractors were also provided to work in South Vietnamese government agencies, and undertake projects requiring advanced techniques. Public officials and technicians from South Vietnam were also sent to the United States, and other countries for in-service training, and a chance to advance their knowledge. “Project assistance was concerned with a wide variety of activities, from economic development and social welfare to public administration support and political reforms” (Tuan 184). Through commercial import procedures, the United States could not provide South Vietnam with direct aid in dollars. “Instead, the United States reserved for South Vietnam an amount of foreign exchange for importers to import consumption goods, agricultural products, materials, and equipment” (Tuan 184). The United States economic aid was therefore significant in easing consumption and raising the South Vietnamese people’s standards of living. 4. Reasons why the Effects of the Vietnam War have been Severe on the United States The economic effects of the Vietnam War on the United States have been severe as a result of three major factors. First is the fact that the conflict in Vietnam was largely financed through deficit spending. Secondly, the Vietnam reinforcement and boost occurred at a time when the economy of the United States was operating close to maximum capacity. Thirdly, contrary to the period during the Korean War, there were no price and wage regulations during the Vietnam reinforcement and boost. During Reagan’s administration, the United States stood a chance of making one of the most disastrous mistakes, worse than that during the Vietnam War, if the arms boost and economic policy went on as planned (DeGrasse 112). This is because President Johnson had earlier increased social spending without adequately increasing taxes and establishing regulations on wage and price, to avoid large budget deficits. Budget policies resulting from Reagan’s administration were estimated to exceed beyond maximum. DeGrasse points out that, “In the late 1960s, federal deficits stimulated inflation because they were financed by allowing the money supply to grow” (112). During the Korean War, between the financial years of 1950 and 1952 respectively, corporate and individual income tax revenues increased, the bulk of federal receipts were made up of these revenues. On the other hand, tax receipts during the Vietnam War increased more slowly. Civilian spending during the Korean War fell while during the Vietnam War, civilian spending as a share of the Gross National Product increased. Deficits during the Korean War did not present a major problem while during the Vietnam War, deficit spending only flared up the problem. Expansion of money supply during the Vietnam War allowed accumulation of deficits. Meanwhile, “the economy was running at close to peak capacity and growing rapidly” (DeGrasse 113). Increase in military spending during the Vietnam War occurred as the economy was reaching maximum capacity. This is the primary reason why more inflation was created by the Vietnam War in comparison to the Korean War. Lack of price and wage controls intensified competition for labor and manufactured goods driving up prices. 5. Economic effects of the Vietnam War on the United States The Vietnam War was quite unsuitable for America. Due to this, Presidents Johnson and Nixon faced difficulties getting Congress to impose higher taxes in order to support the war. To support the war, both presidents had to borrow heavily, consequently increasing the national debt. According to Stobbs, “Government spending on the war effort placed billions of additional dollars into circulation, and this caused inflation” (132). Huge borrowing and spending pushed the United States economy into a state where it could no longer change dollars for gold in the World Market. An estimated $167 billion was spent on the war. This money had been borrowed and was to be paid by the government of the United States. The decision by President Lyndon B. Johnson to finance the Vietnam War and the Great Society at the same time without a considerable increase in taxation doubled the rate of inflation, and increased federal debt that destroyed the United States economy, and lowered living standards from the late 1960s into the 1990s (Sitikoff, “The Postwar Impact of Vietnam”). According to the Institute for Economics and Peace, most government policies related to funding experiences negative effects during or after the funding (5). In most cases public debts and levels of taxation increase, investment as a percentage of the Gross Domestic Product decreases, consumption as a percentage of the Gross Domestic Product decreases, and inflation increases either during war or as a direct effect of war. Positive economic benefits of war are usually short-term, while negative residual effects on the economy are long-term. The Vietnam War had an endless fiscal legacy due to expanded levels of government spending, which was funded by increases in taxation from 1968 to 1970 (Institute for Economics and Peace 12). Government’s increase in expenditure inevitably increases during wars. This can be done in a number of ways namely; reduction in non-military spending to finance for military outlays, borrowing from the public by the government through issuance of treasury securities or war bonds, money creation, and increase in taxation. The Vietnam War was mainly financed by inflation. Coming out of South Vietnam, the United States experienced financial loss. The Vietnam War was very harmful economically, socially, and politically. There was no increased productivity or education to help expand the economy of the United States. The United States went into recession, and was additionally impacted by the Middle East oil crisis, which greatly increased oil prices. Today, the effects of national debt accumulated from the years during the Vietnam War on the United States still exist. According to Masters, many analysts assert that the United States national debt will become unbearable, increasing at a faster rate than the Gross Domestic Product, and demanding an increasing percentage of government revenues, to repay the amounts and interests (“US Deficits and the National Debt” cfr.org). There is urgent need to reduce the huge debt through short-term fiscal reinforcement involving lower spending and higher taxes. 6. Conclusion The Vietnam War was an unapproved United States war, both fiscally and economically. The war had an indirect economic impact on the economy of the United States. Despite the fact that only small effects were felt during and immediately after the war, its economic effects have been long-term, affecting virtually everyone in the United States. This is because over the years, the United States national debt has gradually increased. Today, under the current tax and entitlement regime, the United States faces breakdown. Reforms in the United States economic sector have been postponed for too long, given that national debts began accumulating way before the Vietnam War began. The United States consequently risks damaging its reputation in the view of global investors. Although military and defense spending are significant in providing national security and helping protect and support allies, its efficiency and fulfillment of primary goals needs to be evaluated just like other forms of government expenditure. It is a fact that investment in defense budgets creates jobs, increases economic growth, and brings about new technologies. However, the primary objective of providing and improving national security should be achieved first before secondary objectives are considered. Works Cited Campagna, Anthony S. The Economic Consequences of the Vietnam War. New York: Praeger Publishers, 1991. Print. DeGrasse, Robert. Military Expansion, Economic Decline: The Impact of Military Spending on U.S. Economic Performance. New York: The Council on Economic Priorities, 1983. Print. Institute for Economics & Peace. “Economic Consequences of War on the U.S. Economy.” thereformedbroker.com. 2011. Web. 14 November 2012. Masters, Jonathan. “US Deficits and the National Debt.” cfr.org. 2 March 2012. Web. 14 November 2012. Sitikoff, Harvard. “The Postwar Impact of Vietnam.” Illinois.edu. 1999. Web. 14 November 2012. Stobbs, Gregory A. Business Method Patents. New York: Aspen Law & Business, 2002. Print. Tuan, Nguyen Anh. America Coming to Terms: The Vietnam Legacy, Volumes 1-2. Philadelphia: Xlibris Corporation, 2009. Print. Read More