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.