Historically, wars boost economic growth. Military conflicts demand vast resources, which in turn boosts industries and production. Moreover, the government spends a lot of money before and during a war, and all of that spending creates growth.
Early on, it looked like the current war was having a similar effect. Last August, for example, we learned that the U.S. economy grew by 2.4% in the second quarter of 2003. What accounted for the growth? The war. Defense spending grew 44.1% the quarter, the biggest growth in a quarter since the Korean War over 50 years ago. The Commerce Department explained that defense spending alone contributed about 1.7% of the GDP growth, which means the rest of the economy only grew at about 0.7%. In other words, outside of Defense spending, there was practically no economic growth at all.
But growth is growth and this was good news at the time. So, does this mean the war is good for the economy? The irreplaceable James K. Galbraith explained in the LA Times today that, as a matter of long-term policy, it is not.
Soon enough, profiteers see their chances. Bottlenecks happen. Prices go up. Long before unemployment disappears, wars generate inflation. Indeed, inflation — and the depreciation of private wealth and public debt that it brings — is the ages-old way in which governments pay for war.
Wars upset the trade balance. They gobble imports. And they tend to pull critical resources — scientific talent and key materials — away from exports. Our trade deficit is already staggering. As the economy grows, it will get worse. Under wartime conditions, it will get worse still.
Wars aggravate the national external debt. Already we borrow half a trillion dollars yearly from abroad. How long will Japan and China keep sending us goods and piling up uncashed IOUs in return? No one knows.
Some point to the WWII example of how a war can help an economy in a time of need. Galbraith explained why the analogy doesn’t work.
World War II conquered the Depression, reindustrialized the country and built the middle class. But that was special. The U.S. fought WWII with full mobilization, super-high taxes, super-low interest rates, big deficits, price controls and rationing. Iraq isn’t going to be like World War II.
Economically, the Iraq war is more like Vietnam: insidiously underestimated, sold to the public and Congress on false premises, improperly budgeted and inadequately taxed. During the Vietnam years, there was also economic growth at first. But then came creeping inflation, followed by worldwide commodity shocks, the oil crisis of 1973, international monetary disorder and a decade of economic troubles.
Could it happen again? Yes, it could.
Did Team Bush think through the economics of a long and costly war? There is no evidence it did. It counted on the war being quick, cheap and self-financing. If it thought about the long-range economics, there seems to have been only one goal: control of oil.
The tragic cost of the war has nothing to do with economics and everything to do with young men and women who are making the ultimate sacrifice. That said, those who see the war in Iraq has a boon for our domestic economy may want to heed Galbraith’s warnings.