With the release of the February jobs numbers, everyone except for the economists now acknowledges we are in a recession. The economy is shedding jobs at a rapid pace and it is only a matter of time until we see the unemployment rate rising. In addition to greater difficulty finding jobs, workers can look forward to falling wages and reduced access to health care insurance and pension coverage.
Naturally, people are looking for an explanation for the cause of the recession, and many have turned to the Iraq War. This view is wrong. The war is a drain on the economy, but it is not the cause of the recession. The recession is due to the collapse of the $8 trillion ($110,000 per homeowner) housing bubble.
It is understandable people would look to the war as the villain in this story. After all, the war is costing around $180 billion a year (at 1.2 percent of GDP). This is a substantial drain on the federal budget and the economy. This money could have gone to productive uses that would have benefited people and made the economy stronger.
For example, the proposed expansion of the state children’s health insurance program (SCHIP) would have cost $7 billion a year, an amount equal to what we spend on the war in two weeks. A proposed $2 billion a year increase in childcare subsidies is equal to four days of spending on the war. The hundreds of millions of dollars each year the federal government devotes to energy conservation amounts to less than a day’s spending on the war.
In short, there is a nearly endless list of areas that can be identified in which the money spent on the war could have been spent in ways that would have made the economy stronger. Since the money was diverted from better uses, the war spending has hurt the economy.
There is another way in which war spending hurts the economy: We have to pay for the war. We could have paid for the war with tax increases, but instead, President Bush chose to pay for it by borrowing, making the deficit considerably larger than it would otherwise be. This additional borrowing makes interest rates somewhat higher than they would be otherwise. Higher interest rates can raise the value of the dollar, which makes the trade deficit larger. (A high dollar makes US-made goods relatively more expensive both here and abroad.) Higher interest rates can also reduce investment and homebuilding.
However, the increase in borrowing associated with the war is actually not very large relative to the size of the economy. It can be expected to have a negative effect, but it is relatively modest and only begins to be felt over time. Last year, the Center for Economic and Policy Research commissioned Global Insight, one of the country’s leading economic forecasting firms, to project the impact of the war on the economy.
Their model projected the impact would be initially positive (war spending generates demand), but eventually the effect of higher interest rates imposes a drag on growth. By the sixth year, the effect is negative; and by the tenth year, the economy was projected to have lost about half a million jobs, mostly in manufacturing and construction.
This is bad news, but it is not the recession that we are seeing now. This recession has a different group of villains. First and foremost on this list is Alan Greenspan, who at least ignored the housing bubble, if he didn’t actively promote it. The list also includes regulators at both the state and federal level who tolerated abuses in the mortgage industry that were completely visible at the time they took place. And there is a long list of politicians and community leaders who encouraged low- and moderate-income families to buy homes in the middle of a housing bubble. And, of course, there are the incompetent economic forecasters (is that redundant?), who could not see an $8 trillion housing bubble in front of their face.
These are the people who deserve the blame for what is likely to be the most severe recession in the post-war period. The public’s wrath should be focused on the Fed, the regulators, the Wall Street crooks, and the others responsible for letting a housing bubble wreck havoc on the economy.
There are plenty of good reasons to be opposed to the war and its negative impact on the economy is one of them. But we should not allow the war to be misused to allow some big-time villains to get off the hook. If we had better spent our money over the last five years, we would be better able to withstand the effects of the housing crash - just as a person who eats well and exercises can more quickly recover from a bout of pneumonia. But laziness and a bad diet are not the cause of pneumonia, and the war is not the cause of this recession.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, “Beat the Press,” where he discusses the media’s coverage of economic issues. You can find it at the American Prospect’s web site.
riverman101: If you hope to vote under your system, spelling and grammar had better not be on the test!
Additionally, one of the major problems with our society today is that the “profits” have been obeyed too much!!
I take your point, Sir, and I believe that the premiss of this article is true, but a few trillion here, and a few trillion there, pretty soon you’re talking about real money, a real recession, a real job loss, three major collapses in the last 7-8 years (Dot.com, Subprime, and Credit card borrowing).
Indeed we’re talking about real money that could have rebuilt America, given good jobs to good craftsmen, and we could have even paid for the oil we invaded to control. At $22/barrel when GWB launched his misbegotten war, we could have bought all of Iraq (and maybe Iran’s) oil outright!
And I mean to be cynical since I haven’t even mentioned the loss of lives in Iraq and amongst our soldiers.
Our entire country is on the proverbial debt train and we’ll be lucky if we can even service the minimum payment!!!
Shame on these greedy bastards!
Ben Bernanke is institutionalizing the regressive monetary policy that Greenspan refined. The US Gov. continues to pander to big business (especially the financial industry) by understating the rate of inflation, and reducing interest rates. This monetary policy results in devaluing the US dollar, fueling high inflation and transfering wealth from the 99% to the 1% at a rapid rate.
If the Iraq invasion ended today, the US economy would seriously crash. Although the occupation is being financed with borrowed money, it is keeping the military/industrial/media complex humnming like a well oiled machine.
What the HELL are you talking about riverman?! Your comments are as confusing as they are vague. If you are insinuating that only men should be granted the right to vote then you should head back to the late 1800’s where you belong. You espouse that, “science says nearly all men are in the top 1% of logic intellect.” What does that mean? Just because you put the phrase “science says” in front of a sentence doesn’t make what you are saying true. How can ALL men be in the first percentile when they represent approximately HALF of all people? I’m afraid that your “logic test” would do little but waste time and further disenfranchise voters who have not gone through the accepted channels of white male upbringing. Furthermore, I believe the problem with our system is that common men AND women are too busy living their lives, buying houses, and complaining about gas prices to get involved politically. Lets orchestrate a nation wide boycott and walk off our jobs until our demands are met. I bet you we could get health care and impeachment trials overnight.
A-born, just ignore riverman. S/he can’t see the illogic of the logic argument that s/he supports. Just ignore riverman and hope s/he goes away.
If riverman doesn’t go away, at least s/he has exercised the right to free speech. And the rest of us shall have exercised our right not to engage with its drivel.
the sooner a very serious depression, the sooner the fed gov will have to relent on their war against HEMP. INDUSTRIAL HEMP, the most valuable plant on earth!
i cannot wait until ‘HEMP FOR VICTORY 2′
This distinction between the war and the housing bubble is an artificial talking point. When it turned out the war was going to last more than 90 days and the CiC did not have funds to pay, the Fed obligingly lowered interest rates to 1% and held them there for almost a year. This allowed GWB to leverage money for the war with money allocated for other things at a very low rate of interest. It also encouraged homeowners to refinance, squeezing out all their available equity to buy expensive televisions, super-duper computers, etc. most of which items are Asian-made and ironically financed by loans to the US from China and Japan. At the high end of that trend was the “Flip This House” craze, that even spawned a TV series. All of this commerce ultimately depended on the continual increase in the value of housing – but this trend can only go so far. In my Hollywood neighborhood for instance, condos are being built that are advertised as going from $600K to $2M. Real estate prices are said to have dipped 10% over these last few months as the condos go up, but clearly there is no larger pool of buyers for a $1.8M condo than there would be for a $2M condo. Prices have outstripped the ability of workers earning stagnant wages to pay and who find their ticket to the “ownership society” cancelled. The credit crunch of earlier wars, particularly Vietnam, have left their scars on our economy, it is true that the debt burden for this war are relatively low – but the cost of keeping that debt low for the government has exacerbated a crisis already brewing for the American economy as a whole. Since it’s only the public who suffers, as always, there was little incentive to do anything about it. The banks, however, had poorly evaluated the effect that their deregulation had on the quality of the loans they were underwriting – largely because those who sell loans will get more remuneration if they sell more loans while deregulation had undermined the accountability for the bank overall. As contracts expire drawn up in the time where interest rates were stifled, the puncture begins and the damage spreads to areas of the economy that had considered themselves little affected. Combined with the skyrocketing price of oil, a threat to the dollar looms that could affect everyone in the world.
most articles i have seen have attributed the us ‘recession’ to multiple reasons and not the war alone.these include, amongst others - the war, the housing bubble, the high cost of gas…as publicola points out, a trillion here , a trillion there is sizable money. 800 billion are war appropriations. but this does not include the ‘100 ‘amonth extra payed for gas in the car or the other ‘100′ to heat your home- the extra energy cost certainly in part due to the war.or the loss of confidence in the dollar presuming the additional interest and health payments from the war that will become due.
in contrast to ss or medicare, these are ‘voluntarily’ assumed costs.
furthermore there is an inherent problem in valuing the costs as apercentage of the total economy, when the total economy/ GDP cannot be estimated. since we cannot live without food or energy,if producers could dould double the price of these - we would still pay. this cannot be said to hold for the latest car or computer.i maintain that food and energy costs are underrepresented in estimates of the economy.
This constant harping on a people’s gramar and speling seems abit of a distraction to this reader.
I attribute this recession to the new lasseiz-faire capitolism that on one hand (I’m going to try to avoid being a three-handed economist here) cries out that “the government should not interfere with the economy,” and when the thing craps out cries “we need government bailouts now!” Yes, I heard this morning the government is going issue bonds to help put money in the hands of those that have made risky colaterolized debts. OK, I’m not an economist, but that sure as hell sounds as if it means that the government is going to end up owning all of that bad paper from the mortgage bubble that was created when all the capitolists wanted the government to mind its own business and de-regulate (often only by not enforcing laws that are on the books).
So once again we the middle class are getting spanked by the invisible hand. You know, the one that they say should be left to guide the economy until, well, now, when they can get the gov to pay their double dividend.
Corporate welfare apparently is ok, social welfare is not.
I’m just guessing here - but when someone uses the name “riverman” I wouldn’t respond with s/he.
Misspellings and poor grammar are VERY distracting to me. Clean it up folks or the rest of the world may think Americans are pretty dumb.
Oops. They already do.
people …people… ask yourself why the first thing companies do in a downturn is shed jobs. remember their primary loyalty is to their stockholders- not to the workforce, the community or the nation. gotta keep the stock up so the owning class gets a good rate of return. a truly democratic society would protect its workers and keep people working- perhaps the rich can sell a home or yacht or jet or two. people without work don’t spend money. elementary, you say but this seems to be missed by even the most left of critics. capitalism and democracy don ‘t mix- they are at opposite purposes. we need a managed economy to help ALL segments prosper and still protect the environment and the people. seems a no brainer yet all i read is ways to humanize capitalism. what a waste of breath and time. . .
Here’s a question: where is the $200 billion coming from that the fed is pumping into financial markets? Where is it coming from, and who is getting it to spend or as leverage? Is it being taken out of some other place, or being “created” from essentially nothing?
I’m looking for a real answer here. Does anyone out there understand this at a deeper level?
Thanks.
andersdl: “If the Iraq invasion ended today, the US economy would seriously crash. Although the occupation is being financed with borrowed money, it is keeping the military/industrial/media complex humnming like a well oiled machine.”
So the Iraq War is essentially another “bubble” within our ‘live for today’ economy? Interesting point of view and sounds about right. Afterall, our entire financial sector is now being finance by borrowed (err, “auctioned”) money from the last solvent bank in town (the Fed) in a last gasp to re-inflate that bubble.
A naive question - so where does this $200 billion and for that matter the other billions already “auctioned” off to the banks really come from? Is this the Fed literally printing more money? If so is this a guarantee of further inflation in all sectors? I have this vision of a currency printing press going at full speed with Bernanke only slowed by how quickly the money can be printed and everytime he finds out that the press has printed a few billion more, viola, time for another “auction”. Is that too simple an impression? Also are the Banks just taking this money and putting it in, essentially, a vault (instead of lending the money out for profit) and turning around and telling us that as of today they are that much more solvent and doesn’t this “loan” have to be repaid? If so where do the funds to repay come from if loans to you and I aren’t being made with it? This is essentially the same question posed by Pappy_Yokum above a little more flushed out.
It turns out what the Fed is giving them is access to $200 billion in U.S. Treasuries in exchange for collateral which can include “mortgage-backed securities as collateral, provided they are government-backed or enjoy gold-plated Triple A ratings”. They have to be paid back within 28 days. So they are temporarly trading the junk nobody will touch for the “good stuff”. Isn’t this what got us to where we are today in the first instance? So I really did learn all I need to know in Kindergarten (Hot Potato anyone)?
For those who have listened to Greenspan in his chats with Congress, it is clear that he was cheer leading the brave new world of structured finance and applauding the subprime mortgage activity with a phony populism: it helps Americans achieve home ownership in the “ownership society”. There is no doubt about his role. The financial crisis is purely the work of those who agitated for the repeal of Glass Steagal and finally had their way after 1999. Greenspan was their guru.
High interest rates are not an issue, though that is the way things should be in a rational world of deficit spending. Bernanke is pursuing the opposite policy by lowering interest rates, which is the only alternative he has if he wants to ward off the deflationary impact of a liquidity crisis created by the mindless speculation of unregulated banks and financial shysters. The result is the destruction of the dollar in the international market.
“The public wrath should be focused on the Fed, the regulators, the Wall Street crooks, and the others responsible for letting a housing bubble wreck havoc on the economy.” Very true! But isn’t this the modus operandi of the financial powers that be? Isn’t it true that since 1913, these geniuses have driven the financial system from inflation to deflation and back again, demonstrating no real ability to manage the people’s economy, and working instead to exploit the economy for the benefit of a tiny minority?
Don’t think for a minute that this financial crisis does not benefit this same financial minority at the expense of everyone else! We the people will be paying for their crimes for generations to come.
The public does not merely need to get mad, it needs to get even and use this financial crisis as a stimulus to throw the bums out, to get rid of the Federal Reserve System and the exploitive class warriors who own it and use it in the name of the common interest against the common interest.
The Fed cannot be fixed. It needs to be sent to the crusher and recycled. The debt-based system of finance that benefits a tiny financial elite needs to be completely replaced. The money power should be entrusted to the Treasury. We need a monetary system based on the Constitution. Money is a public utility and should never have been privatized.
The first step is to exorcise the ghost of Alexander Hamilton. We had a revolution in this country, except in the area of finance.
cruxpuppy: Have you left your house lately or spoken with an “average American”? Your talking about a Country which by all indications might just give John McSame a narrow presidential victory. So I ask you, a revolution by whom exactly? The ten of us blogging on this site today? Only a total collapse of the economy ala the Great Depression might (maybe) spark radical changes/revolution. But I doubt that would even do the trick. Again, this is the same Country that let a Court determine who won the presidency without so much as a broken window on Main Street. Total apathy anyone?
The money supply is increasing at about 15% per year, according to my economic savior, the Mogambo Guru. His daily column can be found at: http://www.atimes.com/atimes/Front_Page.html
Watch as inflation heats up this year, due to this extra money in the system, as well as the tumbling dollar.
Some think this is deliberate, as the deficit can be inflated away (along with your retirement savings and any other loose change you have).
captn72:
better to light one candle than bemoan the darkness, so they say. What the hell else is a mother’s son to do? Cheer up!
Well, the deficit may be small compared to the economy, but the effects that the debt has on the economy is what we need to note.
Recent increases in the national debt have been due to the fact that Bush cut taxes and then turned around and spent a lot on the war. When the debt increases, the more interest we have to pay in order for other countries to finance our debt. This brings the value of the dollar down, not up, as the article suggests. I don’t know if that’s a typo, but it’s wrong.
If the dollar goes down, commodities including oil go up. If oil goes up, gasoline goes up. If gasoline goes up, that’s a drag on the economy because you’re paying more for the same stuff.
I bet we’ve spent close to $2 trillion more for gasoline than what we would have if we had the same price for oil that we did back in the 1990’s.
THE EFFECT OF DEFICIT SPENDING is mistaken by the author. W He discounts the war and the deficit effects and doesn’t take into account that they are cumulative, in that the prior deficits need to be added to the current for the true relationship to GDP, which is a phony guideline. For instance suppose the current debt to GDP is 4%. This 4% must be compounded with the previous 4%’s which remain outstanding. This is how credit evaluations are determined. In the case of Reagoon and Bush’s this amounts to at least 24% of outstanding debt compared to GDP, which is 100%. This is the typical corporate fascist spin about debt to minimize its impact and cost to the public. What is the public debt? It’s GOVERNMENT loans with the proceeds going to the CORPORATE WELFARE KINGS with the principal and interest paid by the individual American taxpayers.
A sweet deal indeed, getting loan proceeds with the principal and interest paid by others, the American taxpayers.
Is this spin city or what !
” Naturally, people are looking for an explanation for the cause of the recession, and many have turned to the Iraq War. This view is wrong. The war is a drain on the economy, but it is not the cause of the recession. The recession is due to the collapse of the $8 trillion ($110,000 per homeowner) housing bubble.”
DUH ! The “credit crisis” was brought about by the Iraq “war” via policies designed to compensate for the war spending.
From Nobel prize economist Stiglitz:
http://www.theaustralian.news.com.au/story/0,25197,23286149-2703,00.html
” The spending on Iraq was a hidden cause of the current credit crunch because the US central bank responded to the massive financial drain of the war by flooding the American economy with cheap credit.”
Anyone who deliberately obscures “war” issues is an active participant in the war crimes.