The Economic Costs of the Iraq War
There have been several occasions where President Bush rejected suggestions that the United States adhere to the Kyoto agreement’s targets to prevent global warming because this would hurt economic growth. This argument was the end of the conversation. President Bush is right to be concerned about economic growth. It provides a basis for rising living standards. But his concern that reducing greenhouse gas emissions may slow growth is inconsistent with his apparent lack of concern about the economic damage done by the war in Iraq.
While it may be news to the general public, in standard economic models, wars and military spending almost always slow growth and lead to job loss. The reason that wars lead to slower growth in these models is essentially the same as the reason that standard models project slower growth due to restricting greenhouse gas emissions: The government is diverting resources from its most efficient uses. This makes the economy less efficient, therefore it grows less rapidly and creates fewer jobs.
People often think that military spending creates jobs because people get hired to build weapons and supply the military. But we can think of programs to combat global warming in exactly the same way. Instead of taxing people to discourage them from using gas or electricity, we can simply pay them to buy more fuel efficient cars or make their homes more fuel efficient.
If the government pays people either to build weapons or to be more energy efficient, it needs the money to cover the costs. It can either raise taxes to get the money or it can borrow. If it raises taxes, then it’s easy to see how higher taxes can pull money out of people’s pockets and slow the economy. However, if it borrows (as it is doing now to pay for the war), then it leads to higher interest rates. Higher interest rates typically reduce house and car buying and lead to a higher dollar, and therefore, a higher trade deficit. Reduced house and car purchases and a larger trade deficit slow economic growth and job creation.
The basic story for both the war and curtailing greenhouse gas emissions is the same: Standard economic models predict slower growth and fewer jobs. The only difference is that the politicians and the media have chosen to talk about the economic impact of policies designed to reduce greenhouse gas emissions, while completely ignoring the economic impact of the Iraq war and higher military spending more generally.
In order to better inform the debate, the Center for Economic and Policy Research commissioned the econometric forecasting firm Global Insight to simulate the impact of a sustained increase in military spending equal to one percentage point of GDP, or $140 billion annually at present (approximately the same increase that has taken place since 2001). Global Insight was selected because it has a highly respected econometric model and is one of the oldest econometric forecasting firms in the country (it was formed from the merger of WEFA and DRI).
The model showed that after an initial stimulus, the impact of higher military spending turns negative around the sixth year. By the tenth year, the economy is projected to have 464,000 fewer payroll jobs in the high-spending scenario. If the higher spending persists for 20 years, the simulation shows job loss reaching 670,000. The job loss is concentrated in construction and manufacturing, with the construction sector projected to lose 144,000 in the tenth year and the manufacturing sector 95,000. By the twentieth year, the number of construction jobs is projected to be 211,000 lower in the high military spending scenario.
The projections also show a considerably larger trade deficit, which would add roughly $1.8 trillion (in 2007 dollars) to the foreign debt in 20 years (approximately nine percent of GDP). In the twentieth year, car sales are projected to be 730,000 lower in the high military spending scenario, while housing starts and sales are projected to be down by 39,000 and 287,000, respectively.
While projections based on the Global Insight model should not be treated as the holy writ, most econometric models would show a comparable impact from higher military spending. Whether the war is worth these costs depends on what we think of the war.
What does not make sense, however, is to push a discussion of curtailing greenhouse gas emissions off the table because the necessary policies could slow growth, while the negative economic effects of the Iraq war or higher military spending never even gets mentioned. It is totally reasonable to be concerned about the impact of important policies on the economy and jobs, however this concern should apply to all policies, not just the policies that our political leaders don’t like.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The
The difference is partly economical: war spending moves wealth upward in the society. The other half is political: war hysteria produces an obedient public.
Isn’t there a simpler argument that will work here? Normally, in an economy, X produces widgets that will be useful to consumers as the widgets meet the consumers’ needs, at least in part by increasing the consumers efficiency (think of widgets as books or computers) in producing. Then the consumer produces more widgets that are used by other consumers and those consumers become more efficient and they produce more widgets and so on. The positive effects are multiplied as they traverse through the system.
Military weaponry does not produce anything to increase efficiency unless it is used to intimidate or control others and take what they have (as is being attempted in the so far thwarted effort to steal Iraq’s oil). In the modern era, with the international community setting limitations on genocide and total war, that has become exceedingly difficult. So, using weapons to dominate others to get something from them, particularly to steal their resources, is not economically efficient. And most would think it suffers from ethical problems too, but that is a whole other matter.
Following on kivals comment:
Weapons, it could be argued, are the inputs for creating security, a correlate of prosperity.
What would the U.S. and the World look like if we dismantled the 700+ US military bases around the world? Would it be safer, more secure, more productive?
At some point, a reduction in military spending would pose security risks. So what is the optimum amount of defense spending (and on what systems, bases, etc.) that maximizes security while minimizing the drag on the economy?
There are limits on genocide and total war, but they are not set by the ‘international community’. Genocide is still practiced, but has gotten harder to hide and ignore because of global media. The limit on total war comes from nuclear weapons, not law.
I think it’s true in general that the costs of war have come to exceed the benefits, for the society as a whole. But no society is a monolith, and it is still possible for a minority to benefit while the majority bears the costs.
rlaing,
I did not mean to imply that the international community limits genocide or total war through the UN or through international treaties, but rather through the ability, as much by the people directly as by the governments, to punish transgressors through a variety of soft methods. The ill will that Bush has created universally, even though so far he has stopped far short of genocide or total war, will almost inevitably harm US interests over the long-term in many ways.
However, I agree that the danger of more aggressive wars persists because a minority, particularly a minority with access to power, can still benefit while the majority pays the costs.
gimmeshelter,
It seems unlikely that spending as much on arms as the rest of the world combined, especially while sitting on a vast nuclear arsenal, is even remotely connected to providing security. The defense budget appears to be primarily composed of (1) corporate welfare for defense companies and (2) weaponry that may be used to intimidate or destroy those who would try to prevent US corporations from exploiting their resources. The US could cut defense expenditures by 90 percent and still lead the world in such outlays and be perfectly secure. However, with such a limited budget oil wars would be out of the question and the US government would have to act like a responsible member of the international community and not a predatory thug.
In addition to closing the 737 bases we now have around the world, we need to change our trade and foreign policy of forcing poor countries to accept NEW bases in order to receive aid or custom from us. Those who refuse (Hugo Chavez comes to mind) are called “uncooperative in the war on terror.” We also do not need to spend uncountable billions on new nuclear weapons (illegal), new “humane” land mines that deactivate after 6 months, weaponry in space, spy crap to watch us, et cetera et cetera et cetera. My personal opinion of the Largest Embassy in the World and the permanent bases still being built in Iraq are that the administration wants to be able to protect the oil companies to whom we are giving control over Iraq’s oil for their 25-30 year leases.
Pardon That last sentence should read: the administration wants to be able to protect the oil companies to whom we are giving control over Iraq’s oil for their 25-30 year leases IF IRAQ SIGNS THE OIL SHARING AGREEMENTS WE ARE TRYING TO PUSH THROUGH THEIR PARLIAMENT.
Kivalis,
Appeal by Dean Baker to Standard Economics Model is ridiculous, since Standard Economics Model lost all its credibility on its recieving part, middle class. Your own argument is more than valid, provided owners of this country were interested in their publicly stated goals: security, welfare of the people etcetera. One may argue that current American policy follows in steps of Maynard Keynes, the deficit spending with perpetual creative destruction a.k.a. known as Trotskyite perpetual revolution in its new neo-con form - perpetual war.
However, I doubt that our military as intelligent as their neo-con puppetiers. I suspect, that neo-cons are simply useful idiots (in Lenin’s terminology), who were hired by their paymasters, whose only goal to keep their machine running.
Some people call that machine military-industrial complex; others suspect even smaller group of hyper rich, who do not have anything tangible, as feudal landlords or industrial barons once had. They are all Dow Jones Industrials and no cattle. The moment their bluff is called, their house of cards will collapse. Unfortunately, for last 30 years all American people, via pension and mutial funds, are bounded to their rullette and would oppose any essentual change in the system.
So, to keep things going, one need to add new dope to the old one. This dope is also known as War on Terror.
We all may rest assured that to-day plot in NJ is but live rehearsal of more to come toward November 2008.
Bernice:
Now we know what we suspected only 5 years ago: due to 12 years of embargo Iraq was the least prospected part of the Gulf region, given the speed of pumping of oil and new technology of exploration. Specialists knew about that when Rummy was mysteriously talking of more targets in Iraq back in 2002. Now they talk openly that Iraq’s reserves are second after Saudi’s, if we are to believe shrewd Saudi.
Thus, forget about moving bases out of Iraq: bases are the main reason for the US being there in the first place.
I don’t want to be rude but IMHO only draft may save us from catastrophe.
The pleasantness of Iraq is that military cannot apply their full air force without risking damaging oil fields, for so far the fight in Iraq is waged for oil revenues. But if cornered, both Iraq and Iran may derail the whole current system. Bolsheviks once did it. Busheviks may repeat it.
That may save us from nuclear annihilation.
observer,
It’s funny how the neocons never consider bombing and leveling Wall Street as part of the implementation of the idea of creative destruction.
Dean Baker and his co director Mark Weissbrot are surely two of the most clear thinking individuals on the planet today and have a marvelous ability to make economics clear to those of us not trained in it.
By the way, pursuant to observer’s comment about the quantity of oil in Iraq; Venezuela at today’s oil prices has the largest reserves in the world. This is owing to a very heavy crude; which at these prices, is now economical to pump.
OFF-TOPIC BUT A MUST SEE:
http://nationalinitiative.us/
The article points out something that is often missed: when Bush talks of “the economy” he is referring to specific vested corporate interests, in this case, military- industrial and energy (oil and gas). Policies designed to shore up or promote specific vested economic sectors act as a drag on the market by privileging these sectors and thus retarding growth and innovation.
We have certainly seen that with respect to energy corporations when they undermined the electric car, while the auto industry buckled under that pressure, as well as the threat posed this innovation posed to existing internal combustion products. One wonders what the state of the U.S. auto industry would be today if that innovation had developed as it could have in the 1990s.
The problem is that current economic calculations are inadequate to explain anything important - even money.
The rebuild of recently tornado damaged areas will show up as growth. The real result is people are dead (no economic value in most calculations) and large expenditure to restore what was there before the tornado. Building codes requiring sturdier buildings that would have reduced the damage by 10% would not have a generally calculated value. It may be figured as a loss.
The value of explosives is calculated as economic growth. True only if they are used for a peaceful productive purpose - a very limited amount. Most explosives are loss, loss, loss. (Wasted resources, environmental damage in building them, big waste when they are used)