The War on Iraq and the Economy

Dale Tussing

President Bush has set the cost of the war on Iraq at $79 billion, and a pliant Congress has accepted the estimate and provided that amount in a supplemental appropriations bill. Few expert observers believe the cost can be limited to that amount. Whatever its ultimate cost, the war on Iraq uses economic resources which therefore can’t be used for education, healthcare, or other domestic uses. Besides these obvious costs, the war has generated massive uncertainty among consumers, businesses, and securities investors, which has prolonged and deepened the recession which has lasted the whole duration of the Bush presidency. But we are accustomed to thinking that war spending stimulates the economy. In spite of (or because of) the resource costs of the war, and in spite of the uncertainty the war has produced, it’s fair to ask whether the war will do the economy the favor of a much-needed demand spike.

I will look briefly at these three subjects – the cost of the war as measured in needed domestic spending; the effect of uncertainty on the economy; and whether the war is likely to speed recovery from the recession. The issue of the war and policies dealing with the recession are so interwoven that I will also discuss the downturn and the president’s plans for dealing with it.

The current recession was originally expected to be of short duration and relatively minor magnitude. Unemployment began to fall in early 2002, and there were other signs of the start of a recovery. While the stock market had dropped considerably and business investment had slowed, consumers were surprisingly confident and consumer spending was resilient. Consumers’ robust confidence was widely expected to carry the economy back to prosperity in late 2002 and in 2003.
That is not what happened, however. Instead, the uncertainty produced by the period of war preparation, during which the Bush administration went through the motions of diplomatic solutions to the Iraq crisis, crushed the recovery and assured that the Bush recession would be deeper and longer than warranted by the underlying economic fundamentals.

This is not the judgment only of left and liberal experts. It is the consensus of economists and securities analysts. The Economist Magazine reports that the Institute for Supply Management’s (ISM’s) manufacturing index fell sharply in March (the most recent month of data), “which analysts put down to uncertainty caused by the war with Iraq.” The ISM’s index for non-manufacturing production fell even more. Consumer-confidence figures from the University of Michigan “also suggest deepening gloom,” continuing to fall in March. The Chief Economist of the Conference Board, a business research group, predicted that economic growth rates would be flat in 2003 because of “war-related anxiety.”

Unemployment fell from its peak in February, 2002, bottomed in January, 2003, and then rose again in both February and March. Leading indicators such as payroll employment suggest that the slide is not yet finished. The war has added months – and billions in economic losses – to the Bush recession.

An optimist might say that the war has proved to be quick and decisive, which should be expected to diminish uncertainty and jump-start the economy. But as this is written, there is utterly no sign that consumers, businesses, or the stock market have regained any confidence. The continuing costs of prosecuting the war, the unknown costs of reconstruction, and rumors of new Bush adventures in Syria, Iran, or even North Korea, surely have something to do with the persistence of pessimism. Even if and when confidence returns, productive capacity lost in the added months of recession is gone forever.

The best way to fight this recession would be for the federal government to provide emergency aid to states, and to extend Unemployment Insurance eligibility from 26 to 39 or 52 weeks. Instead, the Bush Administration chooses war spending and tax cuts for the wealthy.

Extending unemployment compensation puts money in the hands of workers who will spend all of it, and immediately. They continue their current patterns of expenditures, buying groceries, paying rent, and caring for their families. The effect on the economy is immediate.

The recession has caused enormous problems for states and cities. For many jurisdictions, the fiscal crisis is the greatest in their histories. Medicaid and public school spending are viewed as discretionary spending, and are particularly threatened. A quick and sure way to fight the recession right now would be for the federal government to provide revenue-sharing block grants to states, so states can protect their Medicaid programs and avoid damaging cuts in school spending.

The effect of the Bush tax cuts is smaller, dollar for dollar, than such policies, because the wealthy spend a smaller fraction of their incomes than the average person. Equally serious, the effects of such tax cuts are delayed, because of the time it takes for private spending to rise and then for businesses to respond to spending increases in the form of hiring and production expansion. Most of the effects of the Bush tax reductions would occur as much as two years from now. By contrast, grants to the states could have the immediate effects of preserving present programs.

War spending is up and domestic spending is down. But are the reductions in domestic spending truly a cost of the war? Isn’t it instead true that the conservative Bush administration had no intention, war or no war, of adequately funding these social programs? Some might argue that the lost social spending isn’t actually a cost of the war, because had there been no war, social programs would have been cut nonetheless.

But the answer is yes, those spending reductions are a cost of the war, regardless of the Bush administration’s intentions.

The best way to think about the question is to compare the composition of the federal budget and of Gross Domestic Product under Bush to that under the previous Clinton administration. The two are markedly different. Among other differences, the Bush budget, and the Bush vision of GDP, involves more defense spending, including both a permanent increase in the defense budget, and the added costs of the war on Iraq; and less spending on healthcare, education, and other social programs. Even the Leave No Child Behind Act, which Bush took bows for a year ago, is not fully funded by his new budget. When one considers the shape of the entire budget, and even more so when one considers the composition of GDP, it is clear that the Bush vision is a package: more war and military spending, and less peacetime and domestic spending. They are not individual, isolated ideas. They are a coherent unity. Every dollar spent on war is a dollar taken from vital social programs.

The Bush government’s unilateralism in foreign policy and war guarantees that these costs are borne mainly by Americans. Bush’s father’s Gulf War, by contrast, spread the costs over dozens of coalition members, in all parts of the globe, and the US bore less than half of the costs.

In spite of its costs in resources and uncertainty, is the war on Iraq likely to spur economic recovery, as World War II, the Korean War, and even the Viet Nam War are known to have done? Like those wars, this war is financed by deficits. This year the Bush administration will break the all-time record one-year for federal deficits, set during the Reagan Administration. Yet the answer is that the war brings little, if any, useful labor demand stimulation, and much less than the domestic spending programs already mentioned. There are two reasons.

Those past wars have involved major mobilization of laborpower, and domestic employers had to seek replacements, thus creating very large net additions to labor demand. But in the war on Iraq, there has been little if any laborpower mobilization. For the most part, the military involved in fighting and in logistic support have been regular, permanent servicemembers. There was no draft. There has been some callup of reserves; but for the most part, reservists’ jobs are being held for them rather than being filled by replacements.

Second, to the extent that the war has involved new (including replacement) production of weapons and equipment, most of it has been produced by capital-intensive techniques involving low labor content per dollar of output. War spending today doesn’t involve the labor demand increases that past wars have seen, especially when compared with other demand management techniques available.

Perhaps unsurprisingly, then, there is nothing good to be said about the economics of this war. It takes resources away from vital domestic purposes. It prolongs and deepens the recession through the uncertainty it has created. And unlike past wars, it doesn’t even spur the additional spending that is needed to bring recovery.

Dale has been an activist in the Syracuse area since the 1960s. He teaches Economics at Syracuse University.