The deadweight cost of war: An illustrative CGE
War is costly both because of the resources used up and because of the inefficiency introduced by the higher taxes necessary to finance them. War has been justified by its ability to help an economy achieve full employment. Robert Barro argues that war increases employment because folks work harder to smooth consumption and take advantage of the higher interest rates caused by the scarcity that accompanies war. In his view, it does not reflect putting previously wasted resources to work. This article describes the simulations of a small-scale intertemporal computable general equilibrium model. It illustrates that the cost of war depends on how it is financed, and that the increase in employment that it generates may be explained by the logic that Barro offers. Our model can be loaded into GAMS, a program which is available free of charge online, so readers can themselves simulate variations of the model.
