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Bad News, Good News
Yesterday, I was supposed to be on Street Signs with Erin Burnett to talk about the effect of the Iraq war on the state of the economy. Sadly, they canceled me at the last minute. Bummer. Then when I got home, there it was, waiting, mocking, the Tivo recording of "my show." I felt bad but... I had to watch.
Heh, they got Joe Stiglitz to replace me! Well, anything less than a Nobel prize and I would have been insulted but I feel much better now! Amusingly, Stiglitz and I are good substitutes on this issue. In case you are wondering, we both think that at the present time the net effect of the Iraq war is (modestly) contractionary rather than stimulative due to higher oil prices, higher interest rates and less wealth.
Posted by Alex Tabarrok on July 22, 2008 at 07:05 AM in Television | Permalink
Comments
You would've had more credibility on the issue, Alex. Our loss.
Posted by: Maria at Jul 22, 2008 9:38:15 AM
By net, are you considering the past, or just the current expenditures? My guess that until very recently it was expansionary.
Posted by: aaron at Jul 22, 2008 9:57:43 AM
"net effect of the Iraq war is (modestly) contractionary rather than stimulative"
I don't understand this. When would it ever be stimulative to engage hundreds of thousands of citizens in the act of moving billions of $ of munitions around the world to explode them there, while occasionally getting hurt or killed? In what scenario would that activity result in a growing economy, except in a broken window sort of way?
Posted by: kebko at Jul 22, 2008 10:48:54 AM
kebko - military expenditures are a component of GDP.
Posted by: jason voorhees at Jul 22, 2008 11:11:00 AM
True, Jason, but that doesn't mean we're better off for it. Kebko's point is that stimulating the economy via military expenditures is like breaking everyone's car windows. It will generate GDP (think of all the window-repair services that would see much more business) but it can't really be said to be making the economy better off.
Posted by: brian at Jul 22, 2008 11:18:14 AM
I think the key to kebko's point is that we tend to think of Gross Domestic Product. Destroying a tank and building a new one increases GDP, but does nothing to increase national wealth.
Similarly, I am curious as to how the expansionary vs. contractionary argument takes into account lives lost, other casualties, etc. I guess the money spent taking care of a wounded veteran increases GDP.
Somehow that doesn't make me feel better about it.
Posted by: Bernard Yomtov at Jul 22, 2008 12:19:11 PM
I wonder how excess borrowing for the war is impacting the Fed interest rate policy. Has it made lowering interest rates less effective? Has it helped to hold down inflation?
Posted by: Mario at Jul 22, 2008 12:47:50 PM
Bernard, the vast majority of spending has nothing to do with blowing things up or killing people. Reconstruction is a bit of a misnomer, most of it is simply construction.
Dont' forget to consider the benefits of training, experience, cultural seeding, and networking. Many people have forged valuable relationships with people all over the world, learned technical and leadership skills that there was no opportunity for back in the first half of the decade. And, back then the hardest hit economically were recent college grads who were given an opportunity to what would otherwise have been damning gaps in their resumes.
Posted by: aaron at Jul 22, 2008 1:02:17 PM
Mario, I would expect that, like most government spending, it would be inflationary. The government doesn't spend money effectively, even the the most effective insitution, the military.
I would also expect that the impact of fed policy would be nil. The military spending would most likely increase the money supply, reducing the need for the fed to reduce rates.
Perhaps interest rates on government debt would be lower if we didn't have the war spending. The borrowing should increase our credit risk, causing people to demand higher interest from us. Apparently that hasn't happened, but maybe rates would have fallen otherwise.
Posted by: aaron at Jul 22, 2008 1:17:14 PM
Isn't it fairly common to point out that military expenditures are expansionary? I've heard more times than I can recount that World War II played a large role in ending the Great Depression, for instance. Isn't this all that is meant by noting that the military expenditures of the last 8 years have been expansionary? What it is on net is a different question, but the direction of the expenditures are to increase short-run output.
Posted by: jason voorhees at Jul 22, 2008 1:21:01 PM
Aaron,
My point is that measuring effect on GDP may be an interesting exercise, but it is a pretty poor way to measure the real economic effects of the war. It does not not count the loss of lives, the cost of injuries, etc.
Posted by: Bernard Yomtov at Jul 22, 2008 1:33:41 PM
Higher interest rates??? Try: high economists! How the hell can you say interest rates are
HIGH? The 30-year treasury note is around 4%, which is about zero to minus-1 real. Dock off the taxes
that people are paying on them (which they are, right, China?) and it's certainly negative.
Please Alex, tell me where I can loan my money and get these "higher interest rates" you're talking about.
I know, you said highER, but it's hard to imagine how they could be much less, in such a way that it affects
productive investment. The major component of "interest" on loans today is the risk premium, not interest
as such.
I'll worry about "higher interest rates" when saving actually earns me real wealth.
Posted by: Person at Jul 22, 2008 2:26:37 PM
Person, I'm tempted to say take it up with Joe Stiglitz! :) Of course, lots of things are going on but think about it this way; Without the war the deficit would be lower and more money would be available in the currently tight credit markets.
Posted by: Alex Tabarrok at Jul 22, 2008 2:43:32 PM
Leave it to Team Bush to throw a war that did not stimulate the economy.
Posted by: spencer at Jul 22, 2008 2:54:46 PM
I'd like to see stats on how much of the war chest was "misappropriated" (that's Ollie North-speak for looted, stolen, purloined).
Those funds can't be counted as "expansionary" unless you're talking specifically about the bank accounts of Cheney's vile friends.
Posted by: meter at Jul 22, 2008 4:49:34 PM
P.J. O'Rourke (I think) once said, "the military is just the post office with nuclear weapons."
Posted by: adam at Jul 22, 2008 9:17:16 PM
Sadly, they canceled me at the last minute
I can hear the other conversation now:
Sneaky CNBC Producer (CP): Dr. Stiglitz, we understand that you think the Iraq war is bad for the economy.
Joseph Stiglitz (JS): Yes.
CP: We're doing a segment where we need someone to tka ethat side of the argument, we already have someone on the other side. Are you interested?
JS: Gee, I don't know, I was planning on going out to eat for lunch, your segment would make me rush to eat. I think I'll pass.
CP: Ok, thanks anyway, I'll try another time.
Later, in a different phone conversation:
CP: Hello, Dr. Stiglitz?
JS: Yes, I was about to order lunch?
CP: Sorry to interrupt, just making a follow up courtesy call. We got an economist from GMU to cover your side of the debate.
JS (coughing, seemingly in pain): Hmmmmm, you know what, I'll take that spot after all if it is not too late.
CP (smiling ear to ear): Oh cool, I'll just bump him.
Posted by: happyjuggler0 at Jul 22, 2008 9:41:49 PM
adam pays me the greatest compliment! It wasn't P.J. O'Rourke who said "The Pentagon is the Post Office with nuclear weapons." It was me! (As far as I know.)
http://www.marginalrevolution.com/marginalrevolution/2006/08/fiasco.html
Posted by: Alex Tabarrok at Jul 22, 2008 10:45:30 PM
Bernard, point taken and echoed.
I think the real question is "should any goverment spending be included in GDP".
Perhaps we should have a new metric that subtracts it out.
Posted by: aaron at Jul 23, 2008 11:02:35 AM
I suppose it is natural for economists, or at least some of them, to wonder about the effects of the war in Iraq on the U.S. domestic economy. It does lead itself to some economically-informed speculation, and why not try to get an informed idea.
But really, what it the purpose of the question? If we discover the the bombing and burning of overseas human flesh is a "net benefit" to the U.S. economy, all things considered, do we start another little war when this one dies down? Or if the loss of thousands of U.S. soldiers and National Guard, plus thousands more of Iraqis lead to a small loss to GDP, is that a consequence to be weighed in the balance the next time a President decides to swing for the fences?
Is this war really such a close call that our opinions of it might be swayed by the net effect on U.S. GDP? Is that what matters?
Posted by: Mike at Jul 29, 2008 12:40:35 AM
