The Economic Hit from the War in Iraq

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Dean Baker
Newsday, February  10, 2008

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Recent polling by the Pew Research Center shows that the economy has overtaken the Iraq war as the public's gravest concern. But as the pundits and presidential candidates react to this finding, a fundamental truth is being obscured: The war itself is a drain on the economy, and it will become more of a drain the longer it continues.

By several estimates, the war has already cost more than $1 trillion, or $3,300 for every person in the country. This figure is the budgetary cost of the war - the tax dollars that pay for soldiers, weapons, as well as medical care and benefits that otherwise could be pumped into the civilian sector. The war reduces the overall size of the national pie, lowering the number of non-military-related jobs. The war also has slowed economic growth by causing interest rates to rise.

Many people think that wars are good for the economy, remembering that World War II pulled the country out of the Great Depression. While war can create demand in a badly depressed economy, in the same way that paying people to dig holes and fill them up again creates demand, in more normal times such as now the resources used in war are simply a drain.

The drain is most apparent when we impose a tax to pay for a war. Taxes would be pulling money out of people's paychecks, giving them less money to spend and less incentive to work. Of course, we did not raise taxes to pay for the Iraq war; instead the government borrowed the money. Borrowing doesn't change the fact that the war imposes a drain on the economy, it just changes the mechanism. So interest rates are somewhat higher than they would otherwise be. Higher interest rates will discourage investment, which reduces employment and also means that the economy will become less productive.

The negative effects of spending on the war will get larger the longer the war continues, and soon it will rank second only to Vietnam as the nation's longest war.

To get an idea of the size of these negative effects, our think tank commissioned Global Insights, one of the country's leading economic forecasting firms with locations around the world, to project the economic impact of increased military spending over a long period of time. We asked them to model the impact of a sustained increase in military spending of 1 percent of GDP (about $145 billion at present), which is somewhat less than current spending on the wars in Iraq and Afghanistan.

While the model shows that increased spending initially provides an economic boost, just as digging holes does, by the 10th year, increased military spending is projected to lead to a loss of 460,000 jobs. Twenty years of increased military spending is projected to lead to a loss of 670,000 jobs.

The construction and manufacturing sectors are projected to be hardest hit, losing 140,000 and 90,000 jobs respectively after 10 years. After 20 years, the job losses in construction rise to 210,000, although they remain at 90,000 for manufacturing.

The increase in military spending also is projected to raise the annual trade deficit by almost $90 billion after 10 years and more than $130 billion after 20 years. This happens because higher interest rates raise the value of the dollar, making U.S. goods less competitive in world markets. Over a 20-year horizon, the increase in defense spending would add more than $2 trillion to the country's foreign indebtedness. This foreign debt will impose future costs in the same way that the government's debt imposes future costs. We eventually will have to pay much more than we do now for oil and other goods that we must import.

The Global Insights model is just one model of the economy, but almost any other model would produce similar, and likely larger, projections of economic harm.

Of course, the key issues associated with the war in Iraq go much deeper than their impact on the economy, but the public should nonetheless be aware that it will pay an economic cost because of the war. In other areas of policy, for example efforts to combat global warming, the potential for economic damage has been used as an argument against even considering many policies. By comparison, the economic damage attributable to the war is likely to be much larger. When will this be raised as an issue in public debate?


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.