War Could Bomb Your Pocketbook
Expect skittish markets, higher deficits and slower growth.
February 21, 2003
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COMMENTARY
latimes.com
By Joseph E. Stiglitz, Joseph E. Stiglitz is the 2001 Nobel laureate in
economics.
A little more than half a century ago, World War II
brought the United States and the world out of the Great
Depression, earning for war a positive reputation at least
in the realm of economics.
At the time, some went so far as to suggest that
capitalism needed war and that without war there would
be an inevitable slide into recession.
Today we know that both propositions are nonsense.
The boom of the '90s showed that peace is far better for
the economy than war. And the Gulf War showed that
wars can actually be bad for the economy. It is far more
probable than not that a war in Iraq would be like the
Gulf War.
World War II represented a total mobilization, beginning
from a situation where there were vast amounts of idle
resources. An Iraq war, like the Gulf War, is likely to
entail very limited resources, probably less than 1% of
GDP.
Even without these expenditures, though, there are
massive deficits, which will be even more massive if
President Bush has his way with his tax proposals.
There is an increasing consensus -- joined recently by
Federal Reserve Chairman Alan Greenspan -- that the
country can ill afford even more deficits, so any
increased military spending will come at the expense of
social expenditures and badly needed investments in
research, infrastructure and education.
Accordingly, there is likely to be little if any short-term stimulus, while long-term
growth will be hurt. Whatever one can say about whether spending money
dropping bombs on Iraq enhances long-term national security, it does not do
anything for long-term economic growth at home.
Of course, we cannot be precise about the economic effect of a war on Iraq
because no one knows how such a war would play out or what its aftermath might
look like. Of this we can be sure: The uncertainties we face as we seemingly
move inevitably toward war are bad for the economy, coming as they do upon a
host of other uncertainties.
Our economy has not fared well over the last two years. Almost 2 million private
sector jobs have been destroyed; a $3-trillion, 10-year non-Social Security surplus
has been turned into a $2-trillion deficit; and if the president's proposals succeed,
these deficits will balloon, with deficits as far as the eye can see, even when the
economy returns to full employment.
Monetary policy has proved remarkably ineffective. Our trade deficit has
continued to grow. Corporate, accounting and financial scandals have rocked
confidence in our business establishment, contributing to the plummeting stock
market. Markets do not like uncertainty; they hold off on investment, waiting for it
to be resolved. And because the outcome of this particular military venture
appears so uncertain, there is all the more reason to maintain a wait-and-see
stance.
Consider the most favorable scenario: a short war with no repercussions outside
Iraq. A new and democratic regime in Iraq might need to spend billions repairing
the damage, not only from the war but from the decade-long sanctions, and it
probably will have to depend largely on its own resources. As large new supplies
of oil enter the market, the global price would become depressed, hurting the
oil-producing parts of the U.S. as well as other oil exporters. In this scenario, the
U.S. as a whole benefits, but parts of the nation go into deep recession, similar to
the devastation that befell the oil-producing states when oil prices dropped in the
1980s.
Then consider what most observers view as a more realistic scenario: The war
lasts longer than anticipated, costs more than we thought and leads to some
disturbances elsewhere in the oil-producing Islamic world; and there are some, if
limited, terrorist attacks on the West. In this event, we need to recall the
consequences of the Arab oil embargo of the early 1970s. And this time it could be
far worse. Soaring oil prices can bring on global havoc and recession. In the
course of the conflict, or in Saddam Hussein's waning days, the Iraqi oil fields may
be left in flames. We may not like the task of nation-building, but could we in good
conscience simply walk away?
We will be called upon to spend still more rebuilding Iraq than we spent removing
Hussein from power. Some have suggested that one of the motivations for going to
war is to seize control of these oil fields. But international scrutiny will be intense.
Presumably, the international community will insist that there be competitive
bidding for the right to develop these fields. U.S. firms may or may not win these
bids, but even if they do, competition should limit their profits. And even if they
manage to garner for themselves more than a normal rate of return, the broader
benefit to the American economy will be very limited.
Meanwhile, previous experiences have taught us that even limited terrorist attacks
can have ruinous effects on the economy. Indeed, they are designed to deliver a
big bang for the buck, to scare people. In the attempt to impede terrorism, flows of
goods and services across borders will probably be held up; even financial flows
may be impaired.
It is not a pretty picture. War seldom presents a pretty picture. But we are a rich
country, able to withstand economic mismanagement and even a war that does not
go as well as we might like. This war is unlikely to be good for the economy; it is
more likely to be bad, possibly very bad. We will probably be poorer, and our
growth slower than it otherwise would be.
No rational country goes to war to help its economy, but neither should any country
wage war without weighing carefully the costs and benefits of going or not going
to war, an analysis that brings in a consideration of all the relevant scenarios.
We should be thankful. At least we will not experience either the human carnage
or material destruction that may well befall Iraq.
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