September 24, 2002
War Wreck the Economy?
Lindsey, the president’s chief economic adviser, whom I did not
previously suspect of idiocy, has provided the latest validation
of what I think I’ll start calling Bock’s Law. It has been my observation
that going into government, especially in a high-visibility job,
lowers a person’s IQ by at least 50 points. Maybe it only applies
to economists, many of whom are capable of quite sensible analysis
when outside the corridors of power but often find themselves having
to defend the indefensible when policies are adopted for political
rather than economic reasons. But I suspect the law has much wider
Larry Lindsey told a writer for the London Telegraph last
week that a war
with Iraq would actually be good for the economy. "When
there is a regime change in Iraq, you add three million to five
million barrels [per day] of production [of oil, of course] to world
supply. The successful prosecution of the war would be good for
of the Treasury Paul O’Neill said he agreed. Even though administration
officials have been estimating that prosecuting a war with Iraq
will cost taxpayers from $100 billion to $200 billion – and those
guesses are really just guesses because our leaders have not vouchsafed
to us just what kind of a war they have in mind, perhaps because
they haven’t decided yet – "Whatever it is that’s finally decided
to be done, we will succeed and we can afford it," the estimable
Mr. O’Neill reassured an audience in Maine.
Paul O’Neill, yet another validation of the law. A couple of months
ago he had to pretend to take pop singer Bono seriously as a crackerjack
analyst of economic development schemes. Later he got in trouble
for committing a gaffe – Washingtonspeak for an inconvenient truth
– about Brazil’s creditworthiness. Now he’s uttering complete blather
in service of – is it really his country or is it the administration
that happens to be in power at the moment that he is serving? How
humiliating all this must be in the quiet moments when he confronts
his own soul, if he ever has them.
direct cost to taxpayers in the wake of the September 11 terrorist
attacks have already been substantial. The AP ran a story Sept.
9 with an Office of Management and Budget estimate of what has been
spent already – or committed – and it already comes to more than
$100 billion. The OMB estimated that the national government has
spent $30 billion on the "war on terrorism," $35 billion
on homeland security, $21 billion on New York recovery, $5 billion
for victim compensation, $8 billion bailing out the airlines, and
around $3 billion on "other."
is important to remember that while some Pollyannas might view government
spending as pump-priming that will eventually bolster the economy
and get the economy moving again, this is bad economics. Jude Wanniski
(who is usually right on economics though occasionally eccentric
on other matters) recently
decried the "Keynesian argument that World War II had ‘positive
economic effects,’ in that it ended the Great Depression via spending.
If that were true, the Great Depression would have returned in 1945
when the war ended and spending dropped like a stone."
days, of course, there’s little danger that spending will drop when
a war ends, if this one ever does. War or peace, good times or bad,
government spending continues to rise.
great French economist Frederic Bastiat dealt with the fallacy that
spending to fix things that are broken is good for the economy,
long ago. Politicians back then (he wrote in the 1840s) used to
claim that broken windows in a neighborhood could be viewed as an
economic boon, because fixing them would mean employment for glaziers,
glasscutters and the like. Bastiat pointed that such repair work
(even if necessary) was simply the restoration of what had been
before, not the creation or building of something new, and therefore
not an economic advance.
spending money on repairing windows means it is not available for
other purposes, from enjoyment to investment. When we take money
from the productive sector and have government spend it on virtually
anything, it steals from investment and innovation. Spending it
on death and destruction, which is what war is about, compounds
the misappropriation. Unless you think Iraqi buildings and Iraqi
lives have no economic value (let alone whatever other value they
may have), the destruction a war will create in that country must
be added to the costs of war.
you can be reasonably sure that American taxpayers will be asked
to pay for most of the costs of reconstruction in Iraq after our
military forces (and the Iraqis, of course) are done blowing things
up. Count on an American presence and significant American costs
for decades to come. We’re still paying Egypt and Israel annual
subsidies for their graciousness in meeting with former President
Carter at Camp David more than 20 years ago. Former national security
adviser Sandy Berger recently testified that rebuilding the Iraqi
economy will cost between $50 billion and $150 billion. You can
be sure both estimates are lowball.
things change considerably, it is unlikely that other countries
will "volunteer" their taxpayers to pony up for this war,
as some did for the previous Gulf War. If anything, Uncle Sam is
likely to hand out substantial bribes to various countries to bolster
the simulacrum of international support. Russia has demanded a free
hand without any pesky "human rights" rhetoric while it
brutally suppresses the rebellion in Chechnya and meddles in Georgia.
Before it’s over it will be demanding money, and not just a guarantee
that the $8 billion debt Saddam Hussein owes them will be paid by
somebody (dig deep, American taxpayers). There are some perks that
come with sitting on the UN Security Council, after all.
AND ECONOMIC COSTS
which also sits on the Security Council, wants a cut of the Iraqi
oil fields. The French were cut out of Kuwait after the last war
and they don’t intend to let that happen again. Cutting the French
in will make world oil markets a little less free than they would
be otherwise, and the price of oil a bit higher.
and the EU will want concessions on trade issues. Expect the Europeans
to be safer for a while longer from the dread threat of genetically
modified burgers or grain products, and the enormously inefficient
system of EU farm subsidies to get a new lease on life.
will want a free hand with its Kurdish minority, perhaps even acknowledgment
by the "international community" that they are nasty terrorists
who can be dealt with brutally. China will want Dubya to quit cozying
up to Taiwan.
Arabia and other Middle Eastern regimes will want assurances that
they’ll get plenty more money and weapons if an invasion of Iraq
stirs up fundamentalist rebellions in their brutal dictatorships.
And they’ll want blind eyes or even endorsements of the most brutal
talked with Esmael Adibi, who runs the Anderson Center for economic
forecasting at Chapman University in Orange, CA, the other day,
on another matter, and we got to talking about the prospects for
economic recovery. The main uncertainty in trying to make educated
guesses about the economic future, he suggested, is the prospect
of war. That’s the main reason the stock market is so unsteady;
investors hate uncertainty. Talk of possible war has driven the
price of oil up, and if war actually occurs the price is likely
to rise higher.
be sure, Mr. Adibi said that if a war were over quickly and something
resembling economic normalcy returned, there might actually be an
economic boost, because the uncertainty everyone is facing would
be resolved. But if the war took a long time and the price of oil
were pushed substantially higher for six months or longer, the U.S.
economy could take some serious hits.
prolonged war would also hurt Asian economies that are much more
dependent on Mideast oil than the U.S. and are a significant market
for U.S. products and services. Depressing those markets would have
a depressive effect on the U.S. economy, especially those sectors
that are sensitive to or dependent on exports.
be sure, some sectors of the economy and some companies and individuals
will prosper during a war. For the most part they will be those
with political connections, further politicizing an economy many
of whose instabilities are due to overpoliticization already.
PRICE OF EMPIRE
the most misleading analyses of empire was that of Lenin, who argued
that the advanced capitalist countries undertook imperial building
for economic reasons – to use surplus capital or to gain access
to raw materials. To be sure, in the early phases of most of the
European empires, access to materials or to workers was part of
the calculation. But while there will be winners, building an empire
is a bad investment.
fall because of political discontent in the colonies and hinterlands,
to be sure. But they also fall because they simply become too expensive
and those charged with paying the costs eventually get tired of
paying and paying and getting resentment and hatred in return. That
is likely to happen eventually to the sole superpower, but apparently
we will have to suffer significant additional economic deterioration
before it does.
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