The Washington Post reports Economists Debate Link Between War, Credit Crisis. The article is notable both for being poorly reasoned, and for its extensive quotation of faulty or irrelevant arguments made by actual economists.
The article starts by addressing the perception that the war is a cause of the current recession. Senators Voinovich and Obama are quoted to the effect that is it. The public apparently believes this as well:
The link between Iraq and the downturn reflects a growing public perception that individual economic anxieties must stem somehow from the unpopular war — a unified theory of political misery, said Peter D. Hart, a Democratic pollster.
The analysis is politically powerful because people believe it. A CNN poll last month found that 71 percent of Americans say government spending in Iraq is a factor in the economic downturn.
Economist Joseph Stiglitz is called upon to prove the war’s guilt. Stiglitz makes three arguments. One, that the war has reduced the supply of oil, causing a higher oil price (which, though it is not stated, is implied to be a cause of the recession); secondly, that the petro-dollars re-invested in financial markets were partially responsible for the mortgage bond bubble; and third, that the Federal government’s direct expenditures for the war (coupled with tax cuts) has limited its ability to use government spending to stimulate the economy (which it is assumed would prevent or mitigate a recession.) Without fiscal policy, the Fed had with only monetary policy left with which to fight a recession, which it mis-used to create a housing bubble.
While I can agree with Stiglitz that the Federal deficit is worse because of the war, Austrian economists would dispute that fiscal policy has any beneficial effects. However, the ineffectiveness of fiscal policy is not needed to prove that the war is costly. Nor is Stliglitz’s argument about the war’s role in the credit crisis necessary to prove the point, as I will explain.
Post reporter Jonathan Wiseman follows up Stiglitz with, ‘To economists on the left and the right, his analysis strains credulity.’ why? Because ‘traditional economics hold that large budget deficits ‘crowd out’ private lending, raising interest rates and making lending scarce, not profligate.’
To address the last point first, the analysis that holds government borrowing responsible for higher interest rates is correct, all things being equal. That is, it assumes that the total income, out of which loanable funds are supplied to the bond market is fixed, and that the private sector and the government must bid up their interest rate in order to compete for this fixed supply. However, if the Fed is committed to supplying any volume of funds at an interest rate that is fixed below the market rate, more debt means more credit expansion without a rise in interest rates.
Wisemen then quotes a leading Democrat economist who blames the housing bubble on a lack of regulation, and then follows with ‘And most economists still think that oil prices are soaring because of rising demand, not constrained supply.’
Supply and demand work together to determine the price. It would be possible to make quantitative arguments as to the relative influence of supply and of demand in any particular case, but there can be no doubt that, if less oil is produced, than the price will be higher than it otherwise would be.
Lost among the forest of economic fallaicies, the real point is that the the article frames influence of the war as if it acted only through indirect chains of secondary causes: the credit crisis or the oil price.
However, there is a much simple analysis that Wiseman ignores: the war is very costly in a direct sense. Resources that are consumed in the war are not available for production in the private sector, and therefore make us less well off than we otherwise would be. Had the resources not been spent on the war, they could have been consumed by either the goverment or the private sector. The consumption of resources for war means that we have fewer resources available for non-war.
The article is a great example economic obfuscation. The author takes a simple, intuitive, and correct argument — that the war is making us worse off because it is expensive — and uses bad economic reasoning to make it appear wrong.
The truth is very simple: wars are costly. The money has to come from somewhere. Complicated chains of reasoning about indirect links only obscure the point. Costs mean opportunities forgone. By producing more war goods, we have less non-war goods.
While I hate to agree with Obama on anything, he gets it right here:
When you’re spending over $50 to fill up your car because the price of oil is four times what it was before Iraq, you’re paying a price for this war,’ Obama told an audience last month at the University of Charleston in West Virginia. ‘When Iraq is costing each household about $100 a month, you’re paying a price for this war.’