A Defense-Adjusted National Accounting of the US Economy and its Implications, 1791-2023

This paper revisits the assessment of living standards in the United States from its founding to the present, challenging the conventional portrayal of economic well-being during wartime periods. Reflecting multiple criticisms made of the quality of national accounts which include defense spending during times of both peace and war, we employ the methodological framework established by Higgs (1992) and extended by Geloso and Pender (2023) to correct national accounts by subtracting military expenditures from GDP and GNP data. This rectifies the overstatement of living standards attributed to defense spending. Our analysis uses comprehensive data from the Historical Statistics of the United States and the Measuring Worth database, adjusting for price controls during World Wars I and II, the Korean War, and the Vietnam War using a corrected price deflator based on a regression model of economic indicators. The study finds that traditional measures significantly overstate living standards during the Civil War, World War I, and World War II. Post-World War II analysis reveals a persistent overestimation of living standards, particularly pronounced during the Vietnam War years. More importantly, our results provide nuanced insights into certain stylized facts of trends in American improvements of living standards (notably inequality and the Great Depression).