Selective Thinking

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Dean Baker
The Guardian Unlimited, October 29, 2007

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Both the annual and total cost of the wars in Iraq and Afghanistan are growing rapidly. President Bush has requested $190 billion, approximately 1.3 percent of GDP, to finance the wars in 2008, which would bring the total cost by the end of the year to more than $800 billion. Opponents of the war have highlighted the budgetary impact of this spending. For example, advocates of increased spending on the State Children’s Health Insurance Program pointed out that the sum in dispute between President Bush and Congress is less than two weeks of war funding at the 2008 rate. However, there has been almost no public discussion of the economic impact of war spending.

This is striking because standard economic models project that such a large increase in military spending would slow economic growth and reduce the number of jobs. The basic story is that military spending pulls resources away from economically productive uses such as investment and consumption. This is readily apparent when a war is paid for with a tax increase, in which case the money is directly sucked out of people’s pockets.

However, the war must be paid for even if we don’t raise taxes. In most economic models, the resources to pay for the war in the absence of a tax increase come through an indirect route. War related spending raises interest rates. This in turn crowds out business investment and housing construction. Higher interest rates also lead to a higher value of the dollar, which raises the trade deficit. The reduction in investment, housing construction, and net exports, and the resulting loss of jobs, free up the resources needed to pay for the war.

The Center for Economic and Policy Research asked Global Insight, one of the country’s largest economic forecasting firms, to model the impact of war related spending on the economy. Their model showed that after initially providing a stimulus to the economy, the effect of war related spending turned negative by the sixth year, and gets increasingly negative through time.

By the tenth year, higher military spending was projected to have reduced employment by 470,000 jobs, largely due to declines in car production, housing construction, and an increase in the trade deficit. The model projected that construction employment would be 140,000 lower and manufacturing employment 95,000 lower because the of the impact of higher military spending. The cumulative trade deficit over the first decade is projected to be more than $700 billion higher as a result of spending on the war.

The Global Insight model is of course just one model of the economy, but its model is very similar to the other models that generally used to the economic impact of various policies. Other widely used models would almost certainly show a comparable negative effect of war related spending.

Since people are rightly concerned about the health of the economy, it would be reasonable to expect that the negative impact of the war on growth and jobs would feature prominently in the public debate. Workers in the hardest hit sectors – construction, manufacturing, and especially the auto industry – might be especially concerned about the war’s impact. In spite of such projections, opponents of the war have generally chosen not to make an issue of job loss and the other negative economic effects of the war.

This invites an obvious comparison with the debate over global warming. There will be some economic cost associated with the measures necessary to limit global warming. This cost will likely be comparable to the economic costs associated with fighting the war. However there is a remarkable contrast in the debate over the two issues.

While opponents of the war in Iraq have almost never even mentioned the job loss caused by the war, President Bush and other opponents of taking steps to curb global warming, refuse to even consider most measures because of the potential harm to the economy. In effect, President Bush’s position is that if measures to reduce global warming lead to any reduction in economic growth, then the price is unacceptable.  

It is simple commonsense that the economic costs of the Iraq war and containing global warming be assessed by a common standard. If the cost of containing global warming in unacceptable, as President Bush has argued, then the bar for justifying the continuation of the Iraq war must be correspondingly high. It is every bit as painful to lose a job due to Iraq war spending as it is to lose a job due to restrictions on greenhouse gas emissions. President Bush and other supporters of the war should be forced to acknowledge this simple fact.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.