Does the War Have Economic Costs?
The Washington Post reports Economists Debate Link Between War, Credit Crisis. The article is notable both for being poorly reasoned, and for its extensive quotation of faulty or irrelevant arguments made by actual economists.
The article starts by addressing the perception that the war is a cause of the current recession. Senators Voinovich and Obama are quoted to the effect that is it. The public apparently believes this as well:
The link between Iraq and the downturn reflects a growing public perception that individual economic anxieties must stem somehow from the unpopular war — a unified theory of political misery, said Peter D. Hart, a Democratic pollster.
and:
The analysis is politically powerful because people believe it. A CNN poll last month found that 71 percent of Americans say government spending in Iraq is a factor in the economic downturn.
Economist Joseph Stiglitz is called upon to prove the war's guilt. Stiglitz makes three arguments. One, that the war has reduced the supply of oil, causing a higher oil price (which, though it is not stated, is implied to be a cause of the recession); secondly, that the petro-dollars re-invested in financial markets were partially responsible for the mortgage bond bubble; and third, that the Federal government's direct expenditures for the war (coupled with tax cuts) has limited its ability to use government spending to stimulate the economy (which it is assumed would prevent or mitigate a recession.) Without fiscal policy, the Fed had with only monetary policy left with which to fight a recession, which it mis-used to create a housing bubble.
While I can agree with Stiglitz that the Federal deficit is worse because of the war, Austrian economists would dispute that fiscal policy has any beneficial effects. However, the ineffectiveness of fiscal policy is not needed to prove that the war is costly. Nor is Stliglitz's argument about the war's role in the credit crisis necessary to prove the point, as I will explain.
Post reporter Jonathan Wiseman follows up Stiglitz with, "To economists on the left and the right, his analysis strains credulity." why? Because "traditional economics hold that large budget deficits 'crowd out' private lending, raising interest rates and making lending scarce, not profligate."
To address the last point first, the analysis that holds government borrowing responsible for higher interest rates is correct, all things being equal. That is, it assumes that the total income, out of which loanable funds are supplied to the bond market is fixed, and that the private sector and the government must bid up their interest rate in order to compete for this fixed supply. However, if the Fed is committed to supplying any volume of funds at an interest rate that is fixed below the market rate, more debt means more credit expansion without a rise in interest rates.
Wisemen then quotes a leading Democrat economist who blames the housing bubble on a lack of regulation, and then follows with "And most economists still think that oil prices are soaring because of rising demand, not constrained supply."
Supply and demand work together to determine the price. It would be possible to make quantitative arguments as to the relative influence of supply and of demand in any particular case, but there can be no doubt that, if less oil is produced, than the price will be higher than it otherwise would be.
Lost among the forest of economic fallaicies, the real point is that the the article frames influence of the war as if it acted only through indirect chains of secondary causes: the credit crisis or the oil price.
However, there is a much simple analysis that Wiseman ignores: the war is very costly in a direct sense. Resources that are consumed in the war are not available for production in the private sector, and therefore make us less well off than we otherwise would be. Had the resources not been spent on the war, they could have been consumed by either the goverment or the private sector. The consumption of resources for war means that we have fewer resources available for non-war.
The article is a great example economic obfuscation. The author takes a simple, intuitive, and correct argument — that the war is making us worse off because it is expensive — and uses bad economic reasoning to make it appear wrong.
The truth is very simple: wars are costly. The money has to come from somewhere. Complicated chains of reasoning about indirect links only obscure the point. Costs mean opportunities forgone. By producing more war goods, we have less non-war goods.
While I hate to agree with Obama on anything, he gets it right here:
When you're spending over $50 to fill up your car because the price of oil is four times what it was before Iraq, you're paying a price for this war," Obama told an audience last month at the University of Charleston in West Virginia. "When Iraq is costing each household about $100 a month, you're paying a price for this war."
Comments (10)
fundamentalist
I have often wondered why the majority of economists ignore sound theory for explaining bubbles, booms and busts (sound like the names of strippers). Then it occurred to me: if you ignore sound theory, you can attribute the cause of events to your political enemy’s policies. You must also keep the public ignorant of sound theory so that they will accept your stupid reasoning. Someone said that you can’t make a politician understand something when his income depends on not understanding it. If the majority of Americans understood Austrian economics, they would lynch most politicians. So politicians have a profound interest in keeping the public ignorant.
Published: May 19, 2008 9:46 AM
Dennis
Yes, the Iraqi War arguably has been a significant, but by no means the only, contributor to higher oil prices.
However, unless I misunderstand Keynesian economics, which the overwhelming majority of the economics profession, politicians, press and opinion molders, and the populace strongly support, wars involve increased government spending, which in Keynesian terms is a stimulus to output and economic growth.
In the Keynesian framework, unless the economy is at full employment and resource utilization, which it is now not since it is in or teetering on a recession, the Iraqi War is a stimulus that should lead to higher economic growth.
The "economists" and commentators that Robert refers to in his posting are trapped by the inherent fallacies of the Keynesian system in attempting to correctly explain current economic conditions. Remember Keynes's comment regarding the building of pyramids.
But then again, the purpose of Keynesian economics is not to correctly explain any economic phenomena, but to provide a (pseudo-) scientific justification for the policies pursued by governments and largely supported by the populace.
Published: May 19, 2008 10:19 AM
itchibahn
Quote: "When you're spending over $50 to fill up your car because the price of oil is four times what it was before Iraq, you're paying a price for this war," Obama told an audience last month at the University of Charleston in West Virginia. "When Iraq is costing each household about $100 a month, you're paying a price for this war."
That's a stupid remark! War isn't the main reason the oil prices has gone up, but it's because of few other factors, such as the market manipulation, and larger amount of increase in oil consumption.
China and India has the largest population in the world and more people there now own vehicles. They are making cars that are extremely affordable, and caused surge of oil consumption.
PCShare.Com
Published: May 19, 2008 11:22 AM
The military consumes a ton of oil too, don't forget the SPR!!!!
Well it has been stated correctly here that if all of these so called Environmentalist Politicians want to help the environment and lower the price of petrol then the easiest thing to do is to stop the war and they will accomplish both goals.
The fact is that the military consumes a ton of petrol. Those planes, trucks, ships and armored vehicles suck down the jet fuel and diesel like crazy. This does raise the price of petrol for everyone.
On to my favorite item that the Government has not business in that being storage of commodities. The government has been quietly filling the Strategic Petroleum Reserve for some time now. Why would any sane person consider this? The answer is easy, the Bush administration and the government in general has no clue about how to manage inventory as they have no incentive for doing so. Had they been smart they would have emptied the SPR and gotten rid of it. Then they could pat themselves on the back by saying they lowered the price of oil. But no, they want control so they just keep paying higher prices.
Published: May 19, 2008 1:26 PM
And it isn't just in petrol prices.
There are literally hundreds of thousands of contractors and other folks working directly or indirectly for this war effort. These folks are not increasing the productive capacity for consumers so consumers are less wealthy as a result.
Now this goes back to the another age old fallacy of the value of defense. At best there is some value for defending the borders. But there is no economic benefit to having soldiers around the world.
Published: May 19, 2008 2:56 PM
John
Justin Raimondo thinks they're filling up the SPR to capacity (it's at about 97% now) in preparation for an attack on Iran.
Published: May 19, 2008 4:20 PM
Bruce Koerber
Costs! The war has benefits as you can easily see if you 'follow the money.'
We have, here, two classes (the middle class is being wiped out): the politically connected and the politically manipulated. Costs of the war are the lot of the politically manipulated but guess what, they do not count, and therefore costs of the war are not given any significant media coverage.
The ones that matter are the class populated by the ego-driven interventionists and their minions. They benefit from the war, they start the wars, they perpetuate the wars, they extend their tentacles as a result of the war, and they flood the media with propaganda to mesmerize and manipulate the oppressed class.
Economics without ethics is sterile and in these dark days it is used as an empirical tool for the manipulative ego-driven interventionist.
War is immoral. That is the final analysis.
And now it is a scientifically proven fact ( as clearly shown by the divine economy theory) that there is no moral authority for intervention in the economy.
Published: May 19, 2008 9:40 PM
kh
The price of oil is not going up that much in terms of gold, Euros, Yen or RMB. The price of oil is largely going up because the US$ is going down.
Why does everyone ignore this?
Published: May 20, 2008 2:57 AM
James Redford
It's not that the actual price of oil is going up, it's that a number of currencies are being devalued via fiat money creation, including the U.S. dollar and the euro. That is to say, the price of the U.S. dollar has declined (i.e., one can obtain more dollars in an exchange with the same amount of goods).
It takes a lot of money to pay for invasive wars of aggression and police-states.
When tracked against gold, the price of oil has remained unchanged:
Dan Shapley, "Maybe Ron Paul Was Right: The Price of Oil Hasn't Budged Since 2001 (If You Pay for Black Gold with Gold)," The Daily Green (Hearst Communications, Inc.), April 15, 2008 http://www.thedailygreen.com/environmental-news/latest/oil-gold-commodities-47041507
Christopher M. Keane and Cindy Martinez, "Crude Oil Pricing Impact by Currency Fluctuations," Geoscience Currents (American Geological Institute), No. 7 (April 10, 2008) http://www.agiweb.org/workforce/Currents-007-OilByCurrency.pdf
When tracked against currencies which haven't been inflated, such as the Polish złoty, the price of oil has remained unchanged:
Lew Rockwell, "Peak Oil?," March 27, 2008 http://www.lewrockwell.com/blog/lewrw/archives/020222.html
Published: May 20, 2008 10:49 AM
Mike Davis
The idea that any positive economic benefit could come as a result of war has to be the ultimate "broken window fallacy".
Published: May 21, 2008 2:34 AM