ECONOMIC COMMENTARY:

The US Economy and the Costs of War

MON, 04/21/2008—Martin Neil Baily, a chair of the Council of Economic Advisers under President Bill Clinton, and now director of the business initiative at the Brookings Institution, in an opinion piece that ran Sunday in the New York Times, says no. Claiming to be opposed to the Iraq War, he nonetheless suggests that the nearly $500 billion spent on Iraq to date—all of it borrowed money—cannot be blamed for the credit crisis, or for high oil prices.

But Baily is looking at things way too narrowly.

First of all, as Joseph Stiglitz, a Nobel economist and chief economist at the World Bank, has noted, the real cost of the Iraq War is probably now closer to $3 trillion, in terms of future costs of veterans benefits, replacement of equipment, and payment on the debt that has been piling up because of the government’s unwillingness to make the public pay for the war in real time. That whopping bill is in the minds of the international investors who have been deserting the dollar in droves, causing it to approach Third World status as a currency.

But there are other links too, between the war and US economic crisis and decline.

One is the misdirection of much of the nation’s remaining industrial strength into war production. The late industrial engineer Seymour Melman long ago demonstrated how the military-industrial complex, by producing things not on a competitive but rather a cost-plus basis, destroys economic competitiveness, sucks up research and development talent and resources, and investment capital, and ends up producing nothing of use either for society or for the national trade account. Melman (who was a professor of mine when I studied at Columbia University), went further to argue that military production has a kind of viral impact across the economy, that sickens the whole system. One example: if investors see higher returns in military industries, they will shift their investments away from other industries, leaving them starved for capital.

We can see the results of this military-industrial virus in the failure of Boeing to produce its next generation jet, the Dreamliner, on schedule, in the pathetic performance of the nation’s dying domestic automotive industry, and in the failure of the country’s once vibrant entrepreneurial economy to do anything significant to tackle the challenge of global warming and the crying need for non-polluting, renewable energy sources.

The nation’s universities have no problem winning massive grants for defense projects, but academic researchers are hard-pressed to get grants for alternative energy research. There certainly is no federal money available for scholarships to students who want to go into environmental or energy majors, but there’s no lack of money for students who want to sign up for ROTC programs.

One could argue that at least the war is providing jobs for some of the nation’s growing army of the unemployed, but that would be to ignore the wastefulness of the work, and the enormous needs facing the nation. How much better to use federal funds to employ people at projects like reforestation, wetlands restoration, teaching, highway repair, school construction, slum renovation, etc., than at jobs involving killing overseas. It is ludicrous to assert that there is no connection between the hundreds of billions of dollars a year being spent on the military, and the fact that Philadelphia’s school district, the fifth largest in the nation, is bankrupt and run by the state, and that even so, many of its students, packed 40 to a classroom, have to sit on classmates’ desks and study from science and history textbooks printed in the 1980s, because of lack of funds. (With 43 cents of every federal tax dollar going to military spending, and at least a quarter to a third of that being related to the Iraq War, it's simply ludicrous to assert that there isn't a profound impact of the war on the US economy!)

I just went for a run in Philadelphia’s Fairmount Park yesterday, along Wissahickon Creek. The beautiful running path takes one past a covered bridge, a cabin, scenic stone bridges, and other visual delights, all constructed by workers funded by the Civilian Conservation Corps. a New Deal public works program that hired the unemployed during the depths of the Great Depression.

No such program exists today, because this government is in the killing business.

Nor can oil prices and commodities prices, which Baily suggests are soaring in price not because of the Iraq War, but because of increasing demand from places like India and China, be so casually separated from America’s warmongering.

Firstly, even oil traders will acknowledge that there is a premium on oil in part because of the threat to 20 percent of the world’s oil posed by the Bush/Cheney administration’s growing belligerence towards Iran, and its threats to attack the world’s number-two oil producer, a move which would effectively close off the Persian Gulf as an oil-producing venue indefinitely. The Iraq War hasn’t just reduced oil production in Iraq, the world’s third-biggest oil producing nation; it has led to fears of a much wider disruption in oil supplies from Iran, Kuwait and Saudi Arabia--and oil investors make their price decisions based on future prospects, not on current usage.

Second, the administration’s obsession with waging a vastly unpopular war has led it to avoid doing anything that might cause the American public to feel pain from that conflict. That would include trying to mandate any kind of reduction in oil demand in the US, by for instance increasing the tax on gasoline, or mandating improved mileage standards for automobiles and trucks.

Much of the rise in oil prices, of course, is only being felt by Americans, because it is an increase in the dollar price for oil. For Europeans and Asians, whose currencies are appreciating against the dollar, oil prices are not rising, and may even be falling. So to the extent that the massive US spending on a war funded on credit is contributing to the dollar’s collapse, so is that spending leading to the soaring oil prices that are dragging down the domestic economy.

There is another problem with Baily’s argument too, and it is one that many American economists, with their almost religious faith in markets and the identification of people as simply consumers, make. Specifically it is that people are worried by all this war and fear mongering, and people who are fearful do not invest and spend the way people who are confident about the future do.

This is an intangible thing, but I think it’s a good bet that many Americans are putting off investments, whether in a new house or a new car, or even in a new business venture, because of fears of a wider war in the Middle East, or of an economic collapse here at home, or because of another jump in oil prices. Many people may not even be aware that they are making such calculations, and yet they are.

In short, Baily is wrong. The Iraq War is certainly having a profound negative effect on the US economy, in both short, and in long-term ways.

The worst of these effects will show up when, a decade or more hence, as the oceans are rising, coastal cities are being devastated by storm surges, and croplands are being parched, we will look back at the lost opportunities to act decisively on climate change that were squandered by an administration obsessed with making war on a group of Third World nations, and with grabbing control of a resource—oil--that it should have been working hard to replace altogether as an energy source.

About the author: Philadelphia journalist Dave Lindorff is a 34-year veteran, an award-winning journalist, a former New York Times contributor, a graduate of the Columbia University Graduate School of Journalism, a two-time Journalism Fulbright Scholar, and the co-author, with Barbara Olshansky, of a well-regarded book on impeachment, The Case for Impeachment. His work is available at www.thiscantbehappening.net.