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Monday, August 18, 2008

"America’s War-Torn Economy"

I'm still have doubts about the claim that the Iraq war has hurt the economy (more doubts here), but Joseph Stiglitz doesn't:

No quick fix for America’s war-torn economy, by Joseph Stiglitz, Project Syndicate: Some say there are two issues in the coming US elections: the Iraq war and the economy...; ...neither is faring well. In some sense, there is only one issue, and that is the war, which has worsened America’s economic problems. ...

It used to be thought that wars were good for the economy. After all, the Second World War is widely thought to have helped lift the global economy out of the Great Depression. But, at least since Keynes, we know how to stimulate the economy more effectively, and in ways that increase long-term productivity and enhance living standards.

This war, in particular, has not been good for the economy, for three reasons.

First, it has contributed to rising oil prices. When the US went to war, oil cost less than $25 a barrel, and futures markets expected it to remain there for a decade. Futures traders knew about the growth of China and other emerging markets; but they expected supply to increase in tandem with demand.

The war changed that equation. Higher oil prices mean Americans ... are paying hundreds of millions of dollars to Middle East oil dictators and oil exporters elsewhere in the world rather than spending it at home.

Moreover, money spent on the Iraq war does not stimulate the economy today as much as money spent at home on roads, hospitals, or schools, and it doesn’t contribute as much to long-term growth. .... It’s hard to imagine [much] bang ... from bucks spent on a Nepalese contractor working in Iraq.

With so many dollars going abroad, the US economy should have been in a much weaker shape than it appeared. But ... the economy’s flaws were covered up by a flood of liquidity from the Federal Reserve and by lax financial regulation. ...

In a sense, the strategy worked: a housing bubble fed a consumption boom, as savings rates plummeted to zero. The economic weaknesses were simply being postponed to some future date; ... things began to unravel in August last year.

Now [the Bush administration] has responded with a stimulus package that is too little, too late, and badly designed. ...

There is a third reason that this war is economically bad for America. Not only has the US already spent a great deal on this war — $12bn a month, and counting — but much of the bill remains to be paid, such as compensation and healthcare for the 40% of veterans who are returning with disabilities...

Moreover, this war has been funded differently from any other war in America’s history... Normally, countries ask for shared sacrifice... Taxes are raised. ... When America went to war, there was a deficit. Yet remarkably, Bush asked for, and got, a reckless tax cut for the rich. That means that every dollar of war spending has in effect been borrowed.

For the first time since the Revolutionary War, ... America has had to turn to foreigners for financing, because US households have been saving nothing. The numbers are hard to believe. The national debt has increased 50% in eight years, with almost $1-trillion of this increase due to the war — an amount likely to more than double within 10 years. Who would have believed that one administration could do so much damage so quickly? America, and the world, will be paying to repair it for decades to come.

    Posted by on Monday, August 18, 2008 at 12:06 AM in Economics, Iraq and Afghanistan | Permalink  TrackBack (0)  Comments (6)

          

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