The economic consequences of the (Iraq) war

Posted in economics, global, security, trends, warfare by thenextwavefutures on 29 February, 2008

There’s an interesting discussion going on in the economics world about the impact of the cost of the Iraq war and on the US, following the publication of The Three Trillion Dollar War, by Joseph Stiglitz and Linda Bilmes. Economic theory says it should have stimulated the US economy, but it doesn’t seem to have. The impact of the war on oil prices is also disputed. Finally, Stoglitz and Bilmes suggest that the financing of the war has accelerated the transition of global power away from the US.

The first thing to say is that three trillion dollars is a lot of money – three thousand, thousand, million dollars, or $3,000,000,000,000. If you piled it up $1,000 bills, it would be almost 240 miles high. It’s also a bit more than 20% of the total output of the US economy every year. And this is just the cost to America; the cost to the rest of the world is as much again.

Before I get to the economics, I should say that I haven’t read the book yet – this is based on news reports, extracts, interviews, and online coverage.

Now, the economist Paul Krugman points out that war is generally expansionary, and from an economics perspective, a government borrowing all that money and then spending it should stimulate the economy (at the expense of the future generations who get to pay off the loan).

World War II, remember, ended the Great Depression. The $10 billion or so we’re spending each month in Iraq mainly goes to US-produced goods and services, which means that the war is actually supporting demand… at a time when a shortfall of demand is the problem, the Iraq war nonetheless acts as a sort of WPA, supporting employment directly and indirectly.

Stiglitz and Bilmes regard this as a bit of a myth – if you’re going to spend to stimulate the economy, you don’t spend it on a war.

“Money spent on armaments is money poured down the drain”; far better to invest in education, infrastructure, research, health, and reap the rewards in the long term.

Picking up the WWII analogy, the economy was in depression, so there was a lot of spare capacity which war put back to work. And generally, expenditure on military and defence is almost the least effective way to gain economic benefits (one of the reasons why the UK government’s near-obsession with supporting arms production and exports, which has got it into some trouble over British Aerospace, is so hard to understand. The other thing that’s worth noting is that war used to be far more labour intensive than it is now. Spending on multi-million pound armaments is not an effective way of reflating an economy.

The second part of the argument is about the overall impact of the war on world oil prices. Most of the recent increase has been caused by demand outstripping supply, so the question is really about the extent to which – without the war – there would have been a little more supply around, and prices wouldn’t have been quite as high. Since Iraq has some of the most substantial researves in the world, there’s likely to be some effect.

Krugman’s view:

[T]he war has some — but probably not too much — responsibility for pricey oil. … Iraq would be exporting more oil now if we hadn’t invaded — a million barrels a day? — and that would have kept prices down somewhat.

Stiglitz tries to put a price on it, according to an article in The Guardian:

The rising price of oil has also meant, according to Stiglitz and Bilmes, that the cost to oil-importing industrial countries in Europe and the Far East is now about $1.1 trillion.

The question is, how much of that extra cost is caused by Iraq’s missing million barrels? Stiglitz and Bilmes reckon $5-$10 per barrel. There are beneficiaries to this – mostly the oil producers – but again their spending is not that productive, economically.
An editorial in the Los Angeles Times rehearsed these arguments quite carefully and came to the conclusion that it might mean that the US economy was even weaker than it seemed right now:

“The interesting question is why the U.S. economy, beneficiary since 9/11 of the largest military spending binge in history, now requires $150 billion more in the form of a short-term stimulus package. Why hasn’t the $1 trillion in defense spending, in addition to the 2001 and 2003 tax cuts, been sufficient to keep the economic boom going? … [M]ountains of taxpayer dollars have been paid to U.S. citizens or businesses in salaries, contracts, supplies, weapons systems, healthcare and services. Does that mean the fundamentals of our economy are weaker than we thought, and a deeper slump might have occurred without all that spending?”

Two final thoughts. Stiglitz and Bilmes argue that the war should have been paid for by a tax rise, effectively to make government more accountable. In practice, as with Vietnam, it’s been paid for by borrowing abroad. In this case. much of the money has come from China.

“Whether we become dependent on Middle East oil money, or Chinese reserves – it’s that dependency that people ought to worry about. That is a big change. The amount of borrowing in the last eight years, on top of the borrowing that began with Reagan – that has all changed the US’s economic position in the world.”

There’s quite a lot in the Guardian interview on how the Republicans’ ‘free market’ principles are frequently found to be wanting when it comes to managing the war, with contracts being awarded without competition (as they also were in the wake of Hurricane Katrina). That’s not a sign of a free market ideology being ignored. It’s a sign of a corporatist state hiding behind a more acceptable ideological facade.


5 Responses

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  1. pithypryor said, on 1 March, 2008 at 12:47 am

    This is a great article and I was thinking this exact thought the other day. If we are spending so much on the “Global War” why is our economy so deflated rigtht now?

  2. pithypryor said, on 1 March, 2008 at 12:49 am

    Another question I have right now: is Bush’s economic stimulus package rellay going to work? If everyone thinks that we can spend our way out of a recession that would be ridiculous. The ones who made it during the Depression were teh ones who had saved money and could buy goods when everyone was selling.

  3. OlivierPrevot said, on 12 March, 2008 at 6:23 am

    related to the fact that US kids will have to pay back China.
    The US Census data shows that, just in terms of trade, the US debt went from 6million dollars in 1985, to 103billion in 2002, to 256billion in 2007. Today, it is estimated that this debt is growing at a reasonable 25million a month. of course, these figures exclude any financial debt.

  4. America’s 2025 « thenextwave said, on 29 November, 2008 at 1:11 am

    […] for a New American Century which animated so many of Bush’s advisers, and which met an expensive and bloody end in Iraq. PNAC believed that it was essential to build up US military strength so as […]

  5. Dawood Mamedoff said, on 23 July, 2009 at 7:21 pm

    This war is the second most expensive for U.S. after the World War II. Here I’ve tried to summarize all costs of the Iraq war for Americans:

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