The Economic Effects of the Vietnam War

Between 1960 and 1968, the United States steadily increased its involvement in the Vietnam War, peaking at over 500,000 US troops stationed in South Vietnam. Economically, America’s lengthiest war, which involved eight and half years of wartime footing after several years of prior “advising” of South Vietnam, had significant impacts. Wartime spending kept corporate profits high and unemployment low but also resulted in high inflation rates and allegedly diverted money from social programs vital to low-income and marginalized communities. Supporters of hawkish foreign and defense policy argued that it kept technological innovation high, while critics argued that it helped destroy the social programs created under President Lyndon Johnson’s Great Society and War on Poverty initiatives.

After World War II, the United States experienced unprecedented economic prosperity thanks to high government spending, lack of immediate foreign competition, and the GI Bill putting millions of veterans through college. Following on the heels of the New Deal, America’s World War II spending significantly stimulated the economy and gave most citizens a positive opinion of Keynesian economics. The post-WWII economic boom saw a rapid expansion of the middle class, the growth of suburbs, and a wave of consumerism where families bought televisions, washing machines, dishwashers, and automobiles.

Thanks to the post-war boom, Americans had an economic incentive to support the maintenance of a strong military. For the first time, the US did not rapidly demobilize the majority of its wartime forces. A looming conflict with the communist Soviet Union, a former World War II ally, also influenced strong public support for elevated military spending during the 1950s. The brief-but-intense Korean War (1950-53) underscored the possibility that the Cold War could turn “hot” in an instant, meaning the US had to maintain a large, active-duty military that could respond without having to wait for mobilization.

Setting the Stage: Korean War vs. CIA Ops

American involvement in Vietnam began slowly, following the CIA intervention model far more than the conventional warfare Korean War model. At first, the US focused on providing military aid to the anti-communist government of South Vietnam to help it combat pro-communist forces and North Vietnam. Within a few years, it was sending military advisors to assist South Vietnam’s forces. However, the CIA model of intervention was not successful in turning the tide of war against North Vietnam and its communist Viet Cong allies; both were aided by China and the Soviet Union. To prevent a rapid loss of South Vietnam and the resulting spread of communism in Southeast Asia, the US had to match the Soviet and Chinese support.

Realizing that mere support for South Vietnam would not turn the tide of war, the US intervened directly beginning in the autumn of 1964. Between 1965 and 1968, American military spending in Vietnam soared, peaking at roughly $85 billion in 1969. Economically, this was beneficial for defense contractors, who were already enjoying strong revenues thanks to the overall Cold War. However, the benefits were unevenly distributed, with manufacturers of weapons suitable to the Vietnam War enjoying greater profits. For example, producers of helicopters enjoyed a tremendous increase in government orders.

The soaring profits of defense contractors became a point of contention for anti-war protestors, with many being opposed to government-funded research and development being used for military purposes. Protestors targeted the companies that made especially controversial weapons, such as Dow Chemical Company, for the production of napalm. The company also made Agent Orange, a defoliant that has been accused of causing long-term health problems in those exposed to it. Many large American companies are considered to have benefited economically from Vietnam War spending.

Development of New Weapons

Economically, contractors who made weapons suitable for jungle warfare benefited the most. New weapons developed during the Vietnam War by the United States include different configurations of helicopters, especially the iconic Bell UH-1 “Huey” by Bell Helicopter. Not surprisingly, Bell’s profits soared during the Vietnam War era, when it manufactured some 16,000 units of the Huey. The F-4 Phantom, manufactured by McDonnell Douglas, was another weapon system that gained immense popularity during the Vietnam War.

Like previous wars, Vietnam brought a surge in government demand for weapons development. Weapons like air-to-surface missiles were developed rapidly during the conflict, allowing helicopters to strike powerfully without needing to drop troops. A second weapon that surged in popularity during the war was the M79 grenade launcher, which was considered both simple to use and highly effective. Manufacturers of these munitions saw a tremendous increase in profits during the Vietnam War, especially as the military sought refinements and improvements. For example, the popular M79 grenade launcher, a standalone weapon, was refined into the M203 grenade launcher that could be attached to an assault rifle like the M-16.

After the election of Republican president Richard Nixon in 1968, US military involvement in the Vietnam War began to decrease. In 1969, Nixon introduced the doctrine of Vietnamization, where South Vietnam would be handed increasing responsibility for conducting the war. The economic impact of Vietnamization was debated, as it would involve increasing financial and military aid to South Vietnam even as the number of US troops in the country was reduced. In order to continue fighting the war, the South Vietnamese regime wanted significant aid. An increase in aid to a foreign country while reducing money to US personnel and defense contractors resulted in a net decrease in US aggregate demand (total spending).

Unfortunately for the Nixon administration, Vietnamization was ultimately unsuccessful. Despite the increase in aid, US military efforts did not draw down as swiftly and smoothly as expected. In fact, Nixon expanded the war into Laos and Cambodia in 1970 and 1971 in an attempt to stop the flow of communist fighters and weapons into South Vietnam. After the US withdrawal from Vietnam in 1973, it gave billions of dollars in weapons to South Vietnam to continue the war, with the South Vietnamese Air Force becoming the fourth-largest in the world at its peak. Unfortunately, the North Vietnamese victory in April 1975 resulted in between $2 billion and $5 billion in American military equipment being captured.

Vietnam War Influences High Inflation

Elevated government spending during the Vietnam War, primarily on military expenditures, resulted in rising inflation between 1965 and the early 1970s. President Lyndon Johnson was blamed for increasing this spending without a related tax increase, allowing aggregate demand to soar and triggering widespread increases in prices. Allegedly, Johnson intentionally underreported the costs of the war to protect his Great Society social programs. The combined increase in both defense and social welfare spending in the mid-to-late-1960s is credited with beginning an era known as The Great Inflation, which continued until 1981.

The 1973 OPEC oil embargo, which began after the US ended its involvement in the Vietnam War, created a “new” type of inflation: cost-push inflation, also known as stagflation. Thus, the Vietnam War era became defined as an era of high demand-pull inflation, where prices rise due to high demand for goods and services. Beginning in 1973, rising oil prices due to the embargo created cost-push inflation, where prices rise due to a decrease in the availability of goods and services. Combined, the sudden shift from wartime demand-pull inflation to unexpected cost-push inflation from the oil embargo resulted in almost 16 years of higher prices.

Many Americans were fed up with inflation and the tumult of the Vietnam War by 1968. As a result, moderates were successfully courted by Republican candidate Richard Nixon. However, Nixon struggled with how to combat inflation and “fix” the economy. In August 1971, Nixon imposed a price and wage freeze, violating traditional conservative principles against artificial price controls. However, Nixon’s swift action against inflation was politically popular, at least in the short run. Nixon handily won re-election in 1972 by a tremendous margin, aided by his announcement that the US would be leaving the Vietnam War.

Although Nixon campaigned on conservatism, he governed as a moderate. The true “conservative resurgence” is often considered to have begun not with Nixon but with the next elected Republican president: Ronald Reagan. High inflation in 1981, when Reagan took office, made the country receptive to a new economic policy: supply-side economics. After the Federal Reserve raised interest rates to painful heights to suppress inflation, Reagan simultaneously cut taxes while increasing military spending. This was controversial, but it did trigger an improvement in the economy…at the cost of drastically increasing the national debt. As part of Reaganomics, Reagan attempted to cut many of Lyndon Johnson’s Great Society programs in 1983 but was blocked by a Democratic-controlled Congress.

Post-Draft Spending Trade-Off: Freedom vs. Spending

In January 1973, the United States formally ended its involvement in the Vietnam War. It also ended the draft, which was highly controversial. Economically, the end of the draft was controversial in that it increased the cost of recruiting young men and women for America’s all-volunteer force. The all-volunteer force is affected by the overall economy, with the US military struggling more to recruit when the economy is strong but enjoying more applications during recessions. To improve both recruitment and retention, the military has increased per-unit pay and benefits.

Some have blamed the end of conscription for the rise of lengthy “forever wars” like Iraq and Afghanistan. The argument is that today’s service members volunteer, and thus the government has less incentive to restrict its foreign interventions. When young men are drafted and do not necessarily want to serve, the government faces the risk of greater public scrutiny. Presidents and their administrations must be better able to justify their military engagements to a skeptical public. Today, as compared to the Vietnam War era, only a small percent of the American public has experience with military service, which some observers blame for many public misconceptions about wartime service.

The failure of Vietnamization has also influenced the rise of “forever wars” by making withdrawals from conflicts lengthier and more complicated. This has resulted in a focus on smaller, more targeted conflicts that can be won primarily by US forces and close allies, such as fellow NATO members. Successful interventions in Grenada, Panama, and the Gulf War followed these lessons – combat was primarily undertaken directly by US forces and similarly-equipped Western allies. They were also focused on geographically small areas, with the Gulf War focused on the liberation of Kuwait as opposed to the occupation of all of Iraq.

In concentrated areas, the US can overwhelm opponents with modernized weapons and special forces groups. However, over larger areas, the US faces similar challenges to the Vietnam War: insurgencies and potentially unreliable local allies. Thus, the US has increased its spending on special forces groups and “smart” weapons. At the same time, spending on conventional weapons has declined, which may be influencing American decisions on arming Ukraine in the ongoing Russo-Ukrainian War. The US may be hesitant to provide Ukraine ample weaponry both out of fear of draining its own stockpiles and concerns that a sudden Russian advance might lead to the capture of those weapons, similar to the end of both the Vietnam War and the unexpected advance of the Taliban in Afghanistan.

Post-Vietnam & Veteran Affairs (VA) Spending

The length and increased survival of wounded troops in the Vietnam War substantially increased spending on veterans’ programs, especially medical care. Although increased soldier survivability between World War II and Vietnam was highly desirable, it had economic consequences due to the long-term medical care needed. In previous wars, fewer soldiers survived debilitating injuries on the battlefield. In Vietnam and later wars, the ability of medics to rapidly evacuate wounded soldiers, such as by helicopter, resulted in decades of rehabilitative care.

The Department of Veterans Affairs (VA) budget, adjusted for inflation, reached a peak in 1976 – shortly after the Vietnam War – not reached again until 2004, after the start of the Iraq War. After 1976, VA spending never fell below pre-Vietnam War levels, resulting in permanently elevated government spending on veteran care. The rapid increase in VA spending over the last two decades, including long-term care for aged Vietnam War veterans, has resulted in both praise for the dedication to our nation’s veterans and criticism of the long-term costs of military engagements.