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Published on Friday, March 14, 2008 by The Nation

The Wages of Peace

by Robert Pollin and Heidi Garrett-Peltier

There is no longer any doubt that the Iraq War is a moral and strategic disaster for the United States. But what has not yet been fully recognized is that it has also been an economic disaster. To date, the government has spent more than $522 billion on the war, with another $70 billion already allocated for 2008.

With just the amount of the Iraq budget of 2007, $138 billion, the government could instead have provided Medicaid-level health insurance for all 45 million Americans who are uninsured. What's more, we could have added 30,000 elementary and secondary schoolteachers and built 400 schools in which they could teach. And we could have provided basic home weatherization for about 1.6 million existing homes, reducing energy consumption in these homes by 30 percent.

But the economic consequences of Iraq run even deeper than the squandered opportunities for vital public investments. Spending on Iraq is also a job killer. Every $1 billion spent on a combination of education, healthcare, energy conservation and infrastructure investments creates between 50 and 100 percent more jobs than the same money going to Iraq. Taking the 2007 Iraq budget of $138 billion, this means that upward of 1 million jobs were lost because the Bush Administration chose the Iraq sinkhole over public investment.

Recognizing these costs of the Iraq War is even more crucial now that the economy is facing recession. While a recession is probably unavoidable, its length and severity will depend on the effectiveness of the government's stimulus initiatives. By a wide margin, the most effective stimulus is to expand public investment projects, especially at the state and local levels. The least effective fiscal stimulus is the one crafted by the Bush Administration and Congress--mostly to just send out rebate checks to all taxpayers. This is because a high proportion of the new spending encouraged by the rebates will purchase imports rather than financing new jobs in the United States, whereas public investment would concentrate job expansion within the country. Combining this Bush stimulus initiative with the ongoing spending on Iraq will only deepen the severity of the recession.

Is Militarism Necessary for Prosperity?

The government spent an estimated $572 billion on the military in 2007. This amounts to about $1,800 for every resident of the country. That's more than the combined GDPs of Sweden and Thailand, and eight times federal spending on education.

The level of military spending has risen dramatically since 2001, with the increases beginning even before 9/11. As a share of GDP, the military budget rose from 3 percent to 4.4 percent during the first seven years of the Bush presidency. At the current size of the economy, a difference between a military budget at 4.4 rather than 3 percent of GDP amounts to $134 billion.

The largest increases in the military budget during the Bush presidency have been associated with the Iraq War. Indeed, the $138 billion spent on Iraq in 2007 was basically equal to the total increase in military spending that caused the military budget to rise to 4.4 percent of GDP. It is often argued that the military budget is a cornerstone of the economy--that the Pentagon is a major underwriter of important technical innovations as well as a source of millions of decent jobs. At one level these claims are true. When the government spends upward of $600 billion per year of taxpayers' money on anything, it cannot help but generate millions of jobs. Similarly, when it spends a large share of that budget on maintaining and strengthening the most powerful military force in the history of the world, this cannot fail to encourage technical innovations that are somehow connected to the instruments of warfare.

Yet it is also true that channeling hundreds of billions of dollars into areas such as renewable energy and mass transportation would create a hothouse environment supporting new technologies. For example, utilities in Arizona and Nevada are developing plans to build "concentrated" solar power plants, which use the sun to heat a liquid that can drive a turbine. It is estimated that this technology, operating on a large scale, could drive down the costs of solar electricity dramatically, from its current level of about $4 per watt to between $2.50 and $3 per watt in the sunniest regions of the country. At these prices, solar electricity becomes much cheaper than oil-driven power and within range of coal. These and related technologies could advance much more rapidly toward cost competitiveness with coal, oil and nuclear power if they were to receive even a fraction of the subsidies that now support weapons development (as well as the oil industry).

Swords, Plowshares and Jobs

How does it happen that government spending devoted to healthcare, education, environmental sustainability and infrastructure can generate up to twice as many jobs per dollar as spending on militarism?

Three factors play a role in determining the overall job effects of any target of government spending. Let's compare the construction of Camp Victory, the main US military base on the western outskirts of Baghdad, with weatherizing existing homes in New England to increase their energy efficiency. The first factor to consider is the jobs that get created directly by each project. The second is the job creation in the industries that supply products for building the camp or weatherizing the homes. These would include the steel, concrete, weapons and telecommunications industries for building Camp Victory; and lumber, insulation and trucking industries for home weatherization. Finally, new jobs will result when people who are paid to build Camp Victory or weatherize a house spend the money they have earned--a weapons engineer at Camp Victory buying a lawnmower during his vacation leave at home or a construction worker in New England buying a new car.

How does one spending target create more jobs for a given amount of dollars spent? Still considering Camp Victory construction versus New England home weatherization, there are, again, three factors:

1. More jobs but lower-paying jobs. Average pay is lower in the construction industry working on home weatherization in New England than in mounting weapons installations at Camp Victory. So a given pool of money is divided among more employed people.

2. More spending on people, less on machines and supplies. In weatherizing a home, the machinery and supplies costs are relatively low, while the need for construction workers is high. Building a high-tech military base in Baghdad entails enormous investments in steel and sophisticated electronic equipment and relatively less spending for people on the job.

3. More money stays within the US economy. We roughly estimate that US military personnel spend only 43 percent of their income on domestic goods and services, while the overall population spends an average of 83 percent of their income on domestic products and 17 percent on imports.

It is important to know which of these three factors is relatively more important in generating the overall increase in jobs. In particular, it would not necessarily be a favorable development if the overall increase in employment opportunities is mainly just a byproduct of creating lots of low-paying jobs.

In fact, if we were simply to send a rebate to taxpayers for the full amount of the Iraq War budget--i.e., a measure similar to Bush's current stimulus plan--the increased spending on personal consumption would produce lots of what are now bad jobs, in areas such as retail, hotels, restaurants and personal services. Because of this, a transfer of funds from the military to tax rebates and personal consumption increases would produce a 25 percent increase in employment but an 11 percent decline in overall wages and benefits paid to working people.

The opposite is true with education as the spending target. Here, both the total number of jobs created and the average pay are higher than with the military. It's less clear-cut when it comes to healthcare, energy conservation and infrastructure investments. More jobs will be created than with military spending, and the total amount of wages and benefits going to workers will also be significantly higher than with military spending. But the average pay for a healthcare worker or those engaged in mass transit or construction is lower than in the military.

Is it better for overall economic welfare to generate more jobs, even if average wages and benefits are lower? There isn't a single correct answer to this question. It depends on the size of these differences: how many low-paying jobs are being generated, and how bad are these jobs? How many high-quality jobs would be sacrificed through a transition out of the military, where the average pay is relatively high? Indeed, by completely shutting off Iraq War-related spending and transferring the money in equal shares to education, healthcare, energy conservation and infrastructure, average salaries would decline. However, the majority of new jobs created by these peaceful alternatives would command salaries above a reasonable living-wage standard of $16 an hour.

Pushing Unemployment Down

As of January there were 7.6 million people unemployed in a labor force of 154 million, producing an official unemployment rate of 4.9 percent. This was a significant increase over the 4.5 percent unemployment rate in mid-2007, and thus one important sign of a weakening economy. Unemployment is likely to keep rising as the economic slowdown continues.

In our current context, what would be the overall job effects of transferring the entire 2007 Iraq War budget of $138 billion into healthcare, education, energy conservation and infrastructure investments? If we assume that all else would remain equal in the labor market, a net increase (i.e., the total expansion of jobs in public investments minus the reduction in military jobs) in the range of 1 million jobs would therefore reduce the total number of unemployed people to around 6.6 million. The unemployment rate would fall to about 4.3 percent.

This is still an unacceptably high unemployment rate. But if the public-investment-directed spending shift out of Iraq were combined with a stimulus package of roughly the same size as the Iraq War budget--i.e., in the range of the Bush Administration's $150 billion stimulus--the overall impact would be a strong program to fight recession and create decent jobs.

In particular, through this combination of a spending shift out of Iraq and a stimulus program focused on public investment, there is a good chance that unemployment would fall below 4 percent. When unemployment fell below 4 percent in the late 1960s and late 1990s, the high demand for workers led to rising wages and benefits, in particular at the low end of the job market. Poverty fell as a result. Near full employment in the late '60s also brought better working conditions and less job discrimination against minorities.

Of course, we cannot assume that everything about the labor market would stay unchanged after a huge job expansion in healthcare, education, energy conservation and infrastructure investments, while jobs connected with the military contracted. There would no doubt be skill shortages in some areas and labor gluts in others. There would also probably be an increase in inflation that would have to be managed carefully.

These concerns are real. But it is still true that large-scale job creation within the United States is possible as an outgrowth of ending the Iraq War, reallocating the entire Iraq budget to important domestic public investment projects and fighting the recession with further increases in public investments.

What if the Iraq War budget is transferred only partially to domestic public investments? Let's assume, optimistically, that a new Administration takes serious initiatives to end the Iraq War immediately after coming into office next January. This new Administration would almost certainly not have the wherewithal to shut down operations within one year. And even if it could completely end the war within a year, the government should still commit significant funds to war reparations for the Iraqi people.

The job expansion within the United States will decline to the extent that spending of any sort continues in Iraq rather than being transferred into domestic public investments. But even if the net transfer of funds is, say, $100 billion rather than $138 billion, several hundred thousand new domestic jobs would still be created. There is also no reason that the domestic public investment expansion has to mirror the decrease in the Iraq War budget. Any stimulus program initiated over the next few months--either a Bush-style program or one focused on public investment--would entail spending beyond the current Iraq budget levels.

Public Investment and Recession

There's also a strong argument for a stimulus program that emphasizes public investment at the state and local level. State and local government revenues--which primarily finance education, healthcare, public safety and infrastructure--are always badly hit by economic downturns and will be especially strapped as a result of the current recession. State and local government revenues decline when the incomes and property values of their residents fall. Property tax revenues will fall especially sharply as a result of the collapse of housing prices. Moreover, state and local governments, unlike the federal government, cannot run deficits and are forced to maintain balanced budgets, even in a recession. This means that unless the federal government injects new revenue into the state and local budgets, spending on public investments will decline.

Deficit Reduction: The Responsible Alternative?

The federal fiscal deficit in 2007 was $244 billion. Shutting down the Iraq War and using the fiscal savings to cut the deficit would mean a 57 percent deficit reduction.

Is this the best use of the funds released by the Iraq War? Of course, the government cannot run a reckless fiscal policy, no matter how pressing the country's social and environmental needs. But a $244 billion deficit in today's economy is not reckless. It amounts to about 1.8 percent of GDP. This is slightly below the average-sized deficit between 1960 and 2006 of 1.9 percent of GDP. The largest deviation from this long-term average occurred under Ronald Reagan's presidency, when the deficit averaged 4.2 percent of GDP--i.e., more than twice as large as the current deficit as a share of the economy.

The recession and stimulus program will of course produce a large increase in the deficit. Recessions are not the time to focus on deficit reduction. But even if we allowed the deficit to double from its 2007 level--to about $500 billion--its size, as a share of GDP, would still be below the average figure for the entire Reagan presidency, including both the boom and recession years.

We would certainly need to worry about the deficit today, and even more after the recession ends, if it were persistently running at Reagan-era levels. This is because the government would soon be consuming upward of 20 percent of the total federal budget in interest payments, as it did at the end of the Reagan era. This is opposed to the 10 percent of total government spending we now pay to the Japanese and Chinese bondholders, US banks and wealthy private citizens who own the bulk of US government debt. But because the deficit has been at a reasonable level coming into the recession, the primary problem with the Treasury's fiscal stance is not the size of the deficit per se but how the money is being spent--that we are using the money for Iraq and a private consumption-led stimulus rather than public investment.

There are many good reasons government policy should now initiate major commitments to investment in the areas of healthcare, education, environmental sustainability and infrastructure. All these spending areas stand on their own merits. But moving the $138 billion spent on the Iraq War in 2007 into public investments will also increase employment, adding up to 1 million jobs. On top of this, expanding public investment spending is the single most effective tool for fighting the recession.

A great deal is at stake here. The Iraq War has been about death and destruction. Ending the war could be a first serious step toward advancing a viable program for jobs, healthcare, education and a clean-energy economy.

Robert Pollin is professor of economics and co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts. His recent books include A Measure of Fairness: The Economics of Living Wages and Minimum Wages in the United States (co-written, Cornell). Heidi Garrett-Peltier is a PhD candidate in economics at the University of Massachusetts and a research assistant at PERI.
Copyright © 2008 The Nation

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