"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.

Comments

[Magic]

"The national debt has increased 50% in eight years..."

I know, pay it off with magic (inflate it away). Perhaps everyone should just quit their jobs, as producing things is obviously no longer necessary. Just borrow stuff from abroad, and then inflate the debt away. Rinse and repeat. Hey, it works for borrowers, why not everyone else too?

[bakho]

Part of the argument is that money going for Iraq could have been spent on domestic infrastructure and workforce investments. It is unlikely that Bush would have done that anyway. However, iraq will constrain domestic investments going forward.

[Chris]

Another downside not mentioned. The war, really a war on Muslim nationalism and anti-colonialism (invading Iraq was to recolonize the Muslim Middle East by setting up a US colony there to protect Israel and control the other Muslim nations), has made Islam a long term enemy that will work for decades into the future to damage and harm the US. So the longer the US empire tries to maintain itself the longer the US will be strained by war expenditures. A bad prospect for the future.

[hari]

To what extent is the borrowing (debt) from SWFs reflected in the overall budget? Is something remiss here or not?
Stiglitz is an ideological preemptor not an analytical nutral party to illustrate with basic analysis exactly how poor America has become due to the baggage of Iraq War.

His rant is inadequate - why our host doesn't buy it either.

Someone has to dis-assemble the national budget and do the necessary due deligence to identify exactly how Bush/Cheney perpetrated off-budget and/or agency designated expenditures not identified with the overall budget. Recall almost all the war budget sums were Ad Hoc supplements. Congress was unable to get a handle on it - before it was too late.

[piglet]

"His rant is inadequate"

What exactly is "inadequate" about somebody finally using some basic common sense? What is inadequate is the state of ignorance and illusion in which much of the American public - including most of its economic punditry - is still caught up.

[X Man]

I'd like to believe that Stiglitz is going for a rhetorical effect here and he's smart enough to see that our economic problems go far beyond the Iraq war. This administration has mismanaged economic policy from day one. (Remember Paul O'Neill and "The Price of Loyalty"?)