War in Iraq Aims a Bullet at the Heart of the Economy
There's no indication that Bush thought through the potential for far-reaching fiscal damage.
By James K. Galbraith
James K. Galbraith teaches at the LBJ School of Public Affairs at the
University of Texas in Austin and is chair of Economists Allied for
Arms Reduction, www.ecaar.org, a global network of economists
April 26, 2004
However badly the war is going in Iraq, on the home front it is still a good thing for George Bush — so far.
A year ago, the push to Baghdad doubled the economic growth rate and
got a recovery started. Now, the literally untold billions in military
payrolls and equipment purchases that keep the war going also help to
propel our economy along.
This is normal. All wars bring
cheerful economic news at first. They stimulate production. They raise
capacity utilization, which helps business cover costs and improve
earnings. This is good for the stock market. Wars create jobs and also
usually draw young men and women away from the labor force, cutting
unemployment. (So far, this war has been fought by a handful of
overstretched professional soldiers, so the job effects have been
small. That could change, especially if the draft is resurrected, as
some would like.)
But the good news doesn't last.
Soon enough, profiteers see their chances. Bottlenecks happen. Prices
go up. Long before unemployment disappears, wars generate inflation.
Indeed, inflation — and the depreciation of private wealth and public
debt that it brings — is the ages-old way in which governments pay for
war.
Wars upset the trade balance. They gobble imports. And
they tend to pull critical resources — scientific talent and key
materials — away from exports. Our trade deficit is already staggering.
As the economy grows, it will get worse. Under wartime conditions, it
will get worse still.
Wars aggravate the national external
debt. Already we borrow half a trillion dollars yearly from abroad. How
long will Japan and China keep sending us goods and piling up uncashed
IOUs in return? No one knows.
And what do we get for our
blood and treasure? Security is priceless, of course — if, in fact, you
get it. But in material terms, do we get, for instance, cheaper oil
from our Saudi ally? Certainly not at the moment. Bob Woodward does
tell us that Prince Bandar ibn Sultan, the Saudi ambassador to the
U.S., has arranged a few months of relief for his friend, George W.
Bush, this coming fall. But don't expect that largess to outlast the
election.
The U.S. had one good economic experience with war.
World War II conquered the Depression, reindustrialized the country and
built the middle class. But that was special. The U.S. fought WWII with
full mobilization, super-high taxes, super-low interest rates, big
deficits, price controls and rationing. Iraq isn't going to be like
World War II.
Economically, the Iraq war is more like
Vietnam: insidiously underestimated, sold to the public and Congress on
false premises, improperly budgeted and inadequately taxed. During the
Vietnam years, there was also economic growth at first. But then came
creeping inflation, followed by worldwide commodity shocks, the oil
crisis of 1973, international monetary disorder and a decade of
economic troubles.
Could it happen again? Yes, it could.
Did Team Bush think through the economics of a long and costly war?
There is no evidence it did. It counted on the war being quick, cheap
and self-financing. If it thought about the long-range economics, there
seems to have been only one goal: control of oil.
Spain's
Philip II believed that control of the gold of Peru and silver of
Mexico would guarantee his nation's predominance in Europe. Elizabeth I
and Sir Francis Drake disagreed. Louis XIV and Napoleon I trusted in
conquest to enrich France. Their ministers — Turgot and Talleyrand —
knew better. Winston Churchill vowed not to preside over the end of the
British Empire. But his successors gave it up when they couldn't afford
it anymore. Luckily, the U.S. was there to take over, and we had the
support of the free world. But that was then.
By going into
Iraq with few allies, we've assumed the entire economic cost. The
home-front damage is small now, but it will build over time. And it
will take time and effort to repair. The future American economy will
especially need a new energy direction, emphasizing conservation and
renewable energy, and concerted investment in the world's next
generation of technologies — both to reduce our oil dependence and to
help balance our trade deficits.
Let's hope Sen. John F. Kerry makes this point on his manufacturing tour this week.
And let's hope that Americans understand. Real security begins at home.