Stocks and Bombs
"…..if the administration wants to pump
money into the economy, all it needs to do is drop its
objections to things like drought aid for farmers and new
communication gear for firefighters. In other words, if the
economy needs a burst of federal spending, neither
economics nor politics requires that this burst take the form of a war."
The New York Times
September 13, 2002
By PAUL KRUGMAN
This stock-market situation - what are the military options?" That was the
caption of a New Yorker cartoon last month. But these days reality has
a way of outrunning satire; way back in June the CNBC pundit Larry
Kudlow published a column in The Washington Times with the
headline "Taking Back the Market - by Force." In it
he argued for an invasion of Iraq to boost the Dow.
Pretty amazing stuff, though not as amazing as a July column in
The New York Post by John Podhoretz, whose
headline read "October Surprise, Please," followed by
the injunction "Go On, Mr. President: Wag the Dog."
In general it's a bad omen when advocates of a policy claim that it will
solve problems unrelated to its original
purpose. The shifting rationale for the Bush tax cut - it's about
giving back the surplus; no, it's a demand stimulus;
no, it's a supply-side policy - should have warned us that this
was an obsession in search of a justification.
The shifting rationale for war with Iraq - Saddam Hussein was behind
Sept. 11 and the anthrax attacks; no, but he's
on the verge of developing nuclear weapons; no, but he's a really evil man
(which he is) - has a similar feel.
The idea that war would actually be good for the economy seems like just
one more step in this progression. But one
must admit that there are times when war has had
positive economic effects. In particular, there's no question that
World War II pulled the United States out of the Great Depression.
And today's U.S. economy, while not in a
depression, could certainly use some help; the latest evidence
suggests a recovery so slow and uneven that it feels
like a continuing recession. So is war the answer?
No: World War II is a very poor model for the economic
effects of a new war in the Persian Gulf. On balance, such a
war is much more likely to depress than to stimulate our struggling economy.
There is nothing magical about military spending - it provides no more
economic stimulus than the same amount
spent on, say, cleaning up toxic waste sites.
The reason World War II accomplished what the New Deal could not was
simply that war removed the usual inhibitions. Until Pearl
Harbor Franklin Roosevelt didn't have the determination or the legislative clout to enact
really large programs to stimulate the economy. But war made it not
just possible but necessary for the government
to spend on a previously inconceivable scale, restoring full
employment for the first time since 1929.
By contrast, this time around Congress is eager to spend on domestic
projects; if the administration wants to pump
money into the economy, all it needs to do is drop its
objections to things like drought aid for farmers and new
communication gear for firefighters. In other words, if the
economy needs a burst of federal spending, neither
economics nor politics requires that this burst take the form of a war.
And in any case it's not clear how much stimulus war would provide.
One assumes that the necessary munitions are
already in stock, so there will be no surge in factory orders.
There will be spending on peacekeeping - won't there?
- but it will be spread over many years.
Meanwhile there is the potential economic downside, which may
be summed up in one word: oil.
Iraq itself currently supplies so little oil to the world market that wartime
disruption of its production would pose
little problem. But neither the Arab-Israeli war of 1973
nor the Iranian revolution of 1979 directly affected oil
production.
Instead, the indirect political repercussions of conflict were what
caused oil prices to surge. This time around, Arab
leaders have warned that an invasion of Iraq would open the "gates of hell."
That doesn't sound good for the oil
market.
It's worth remembering that each of the oil crises of the 1970's
was followed by a severe recession - and that the
milder oil price spike before the gulf war was also followed by a recession.
Could rising crude prices undermine our
weak economic recovery, creating a double-dip recession? Yes.
None of this should deter us from invading Iraq if the administration makes a
convincing case that we should do so for security reasons. But it's foolish
and dangerous to minimize the potential economic consequences of war, let
alone claim that it will be good for the economy.
nytimes.com
Copyright 2002 The New York Times Company |
