Friday, April 18, 2008

Economic costs of war

Business Times - 18 Apr 2008


Lost opportunities caused by Iraq war

The rising war expenditure and its impact on the US economy is coming under scrutiny

By LEON HADAR
WASHINGTON CORRESPONDENT

GROVER Norquist, who heads the Americans for Tax Reform organisation, is an influential Washington activist who promotes the agenda of fiscal conservatives. These folks believe that the US federal government should cut its spending and reduce the tax burden on the American people.

Thus, he recently told the New York Times that he decided to jump aboard the team of presumptive Republican presidential candidate, Senator John McCain. Mr McCain 'won, and he's the tax cutter, so I am with him', he explained.

But when the Times reporter noted that much of the increase in government spending by the Bush administration has been a result of the rising costs of the war in Iraq, Mr Norquist was quick to dismiss the notion that there was any direct link between the war in Iraq and the economic problems America is facing.

'The war spending is a fraction of the spend-too-much problem,' he argued. Apparently America can continue spending on fighting costly wars for many years while continuing to lower taxes again and again.

The message to Washington coming from Mr Norquist and other fiscal conservatives is: 'Cut our taxes and we promise not to mention the war!'

There is the 'American economy' and 'economic policy' and then there is the 'American war in Iraq' and 'defence and foreign policy'. And none of these things are connected!

That doesn't seem to make sense to David Henderson, a research fellow with the Hoover Institution at Stanford University who recently received a request to sign an 'Economists' Statement in Support of John McCain's Economic Plan'.

The statement laid out Mr McCain's plans to prevent taxes from rising, to reduce some taxes, such as the corporate income tax, to support free trade agreements, and to restrain the growth of domestic government spending.

But Prof Henderson noticed that something was missing from the statement. You guessed right: The War!

In a letter that he sent to the pro-McCain economists, he stressed that he agreed with almost all the ideas in their plan. 'The problem is that it leaves out a huge part of his economic policy that will make it virtually impossible to achieve what's in the statement,' Prof Henderson noted. 'That huge part is (Mr McCain's) policy on war with Iraq and maybe with Iran.'

War is very expensive and is part of an economic policy and 'by signing the statement, I would be helping Senator McCain maintain the fiction that there's no connection between war and economic policy', Prof Henderson concluded. 'I'm unwilling to do that.'

Indeed, the exchange between the Republican economists and Prof Henderson reflects a growing debate taking place in Washington these days about the impact of the war in Iraq (and in Afghanistan) on the crisis facing the American economy in the form of the recession, the collapse of the housing market, the financial crunch, a weakening US dollar, rising energy prices, and inflationary pressures.

It may not be surprising that officials, lawmakers and economists who support the Bush administration's national security policy tend to dismiss the link between the war and the economy, suggesting that the security interests of the nation should take precedence over any economic considerations.

Opponents of the war, including the leading Democratic presidential candidates, tend to highlight the relationship between Iraq and the economic downturn, arguing that the failed and costly war in Iraq harmed US security interests, while at the same time, taking America into more debt and eventually straight into a recession.

Moreover, there is the issue of opportunity costs - by spending more on defence the federal government has less money available to spend on domestic social and economic programmes.

Speaking during the recent Senate hearings on the report by General David Petraeus, Democratic presidential contender Barack Obama argued that if Washington 'can spend US$10 billion a month rebuilding Iraq', then it 'can spend US$15 billion a year in our own country to put Americans back to work and strengthen the long-term competitiveness of our economy'.

Other Democratic and a few Republican lawmakers who addressed Gen Petraeus also complained about the effects of the war on the economic welfare of their constituencies, responding to pressure from voters who apparently blame at least some of their economic problems on the costs of the war.

Hence, a CNN poll last month found that 71 per cent of Americans thinks that government spending in Iraq is a factor in the economic downturn.

Critics of the war base much of their arguments on the issue on a study done by Joseph Stiglitz, a Nobel Prize-winning economist, and Harvard University lecturer Linda Bilmes whose conclusions were published in the new book they co-authored, The Three Trillion Dollar War.

In fact, the two see a direct link between the war and the US housing crisis, arguing that the debt accumulated by the federal government as a result of rising war expenditures has already risen above half a trillion dollars. That made it difficult for the government to keep the economy going through tax cuts and government spending, and forced the Federal Reserve to do the job by lowering interest rates, which in turn helped create the vicious circle of easy money and irresponsible loans.

The American Friends Service Committee, a leading anti-war group, basing its estimates on the study by Prof Stiglitz and Ms Bilmes, has concluded that the war was costing US$720 million a day or US$500,000 a minute and that the money spent on one day of the Iraq war could buy homes for almost 6,500 families or health care for 423,529 children.

With the American economy falling into a recession, energy prices rising to the stratosphere and the violence in Iraq intensifying, one can expect to see these numbers being mentioned again and again during this election year.


Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.

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