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September 24, 2002Will War Wreck the Economy?Larry Lindsey, the president’s chief economic adviser, whom I did not previously suspect of idiocy, has provided the latest validation of what I think I’ll start calling Bock’s Law. It has been my observation that going into government, especially in a high-visibility job, lowers a person’s IQ by at least 50 points. Maybe it only applies to economists, many of whom are capable of quite sensible analysis when outside the corridors of power but often find themselves having to defend the indefensible when policies are adopted for political rather than economic reasons. But I suspect the law has much wider applicability. Anyway, Larry Lindsey told a writer for the London Telegraph last week that a war with Iraq would actually be good for the economy. "When there is a regime change in Iraq, you add three million to five million barrels [per day] of production [of oil, of course] to world supply. The successful prosecution of the war would be good for the economy." Secretary of the Treasury Paul O’Neill said he agreed. Even though administration officials have been estimating that prosecuting a war with Iraq will cost taxpayers from $100 billion to $200 billion – and those guesses are really just guesses because our leaders have not vouchsafed to us just what kind of a war they have in mind, perhaps because they haven’t decided yet – "Whatever it is that’s finally decided to be done, we will succeed and we can afford it," the estimable Mr. O’Neill reassured an audience in Maine. Poor Paul O’Neill, yet another validation of the law. A couple of months ago he had to pretend to take pop singer Bono seriously as a crackerjack analyst of economic development schemes. Later he got in trouble for committing a gaffe – Washingtonspeak for an inconvenient truth – about Brazil’s creditworthiness. Now he’s uttering complete blather in service of – is it really his country or is it the administration that happens to be in power at the moment that he is serving? How humiliating all this must be in the quiet moments when he confronts his own soul, if he ever has them. COST ALREADY HIGH The direct cost to taxpayers in the wake of the September 11 terrorist attacks have already been substantial. The AP ran a story Sept. 9 with an Office of Management and Budget estimate of what has been spent already – or committed – and it already comes to more than $100 billion. The OMB estimated that the national government has spent $30 billion on the "war on terrorism," $35 billion on homeland security, $21 billion on New York recovery, $5 billion for victim compensation, $8 billion bailing out the airlines, and around $3 billion on "other." It is important to remember that while some Pollyannas might view government spending as pump-priming that will eventually bolster the economy and get the economy moving again, this is bad economics. Jude Wanniski (who is usually right on economics though occasionally eccentric on other matters) recently decried the "Keynesian argument that World War II had ‘positive economic effects,’ in that it ended the Great Depression via spending. If that were true, the Great Depression would have returned in 1945 when the war ended and spending dropped like a stone." These days, of course, there’s little danger that spending will drop when a war ends, if this one ever does. War or peace, good times or bad, government spending continues to rise. COUNTING REAL COSTS The great French economist Frederic Bastiat dealt with the fallacy that spending to fix things that are broken is good for the economy, long ago. Politicians back then (he wrote in the 1840s) used to claim that broken windows in a neighborhood could be viewed as an economic boon, because fixing them would mean employment for glaziers, glasscutters and the like. Bastiat pointed that such repair work (even if necessary) was simply the restoration of what had been before, not the creation or building of something new, and therefore not an economic advance. Furthermore, spending money on repairing windows means it is not available for other purposes, from enjoyment to investment. When we take money from the productive sector and have government spend it on virtually anything, it steals from investment and innovation. Spending it on death and destruction, which is what war is about, compounds the misappropriation. Unless you think Iraqi buildings and Iraqi lives have no economic value (let alone whatever other value they may have), the destruction a war will create in that country must be added to the costs of war. And you can be reasonably sure that American taxpayers will be asked to pay for most of the costs of reconstruction in Iraq after our military forces (and the Iraqis, of course) are done blowing things up. Count on an American presence and significant American costs for decades to come. We’re still paying Egypt and Israel annual subsidies for their graciousness in meeting with former President Carter at Camp David more than 20 years ago. Former national security adviser Sandy Berger recently testified that rebuilding the Iraqi economy will cost between $50 billion and $150 billion. You can be sure both estimates are lowball. Unless things change considerably, it is unlikely that other countries will "volunteer" their taxpayers to pony up for this war, as some did for the previous Gulf War. If anything, Uncle Sam is likely to hand out substantial bribes to various countries to bolster the simulacrum of international support. Russia has demanded a free hand without any pesky "human rights" rhetoric while it brutally suppresses the rebellion in Chechnya and meddles in Georgia. Before it’s over it will be demanding money, and not just a guarantee that the $8 billion debt Saddam Hussein owes them will be paid by somebody (dig deep, American taxpayers). There are some perks that come with sitting on the UN Security Council, after all. POLITICAL AND ECONOMIC COSTS France, which also sits on the Security Council, wants a cut of the Iraqi oil fields. The French were cut out of Kuwait after the last war and they don’t intend to let that happen again. Cutting the French in will make world oil markets a little less free than they would be otherwise, and the price of oil a bit higher. Germany and the EU will want concessions on trade issues. Expect the Europeans to be safer for a while longer from the dread threat of genetically modified burgers or grain products, and the enormously inefficient system of EU farm subsidies to get a new lease on life. Turkey will want a free hand with its Kurdish minority, perhaps even acknowledgment by the "international community" that they are nasty terrorists who can be dealt with brutally. China will want Dubya to quit cozying up to Taiwan. Saudi Arabia and other Middle Eastern regimes will want assurances that they’ll get plenty more money and weapons if an invasion of Iraq stirs up fundamentalist rebellions in their brutal dictatorships. And they’ll want blind eyes or even endorsements of the most brutal tactics possible. RISK AND UNCERTAINTY I talked with Esmael Adibi, who runs the Anderson Center for economic forecasting at Chapman University in Orange, CA, the other day, on another matter, and we got to talking about the prospects for economic recovery. The main uncertainty in trying to make educated guesses about the economic future, he suggested, is the prospect of war. That’s the main reason the stock market is so unsteady; investors hate uncertainty. Talk of possible war has driven the price of oil up, and if war actually occurs the price is likely to rise higher. To be sure, Mr. Adibi said that if a war were over quickly and something resembling economic normalcy returned, there might actually be an economic boost, because the uncertainty everyone is facing would be resolved. But if the war took a long time and the price of oil were pushed substantially higher for six months or longer, the U.S. economy could take some serious hits. A prolonged war would also hurt Asian economies that are much more dependent on Mideast oil than the U.S. and are a significant market for U.S. products and services. Depressing those markets would have a depressive effect on the U.S. economy, especially those sectors that are sensitive to or dependent on exports. To be sure, some sectors of the economy and some companies and individuals will prosper during a war. For the most part they will be those with political connections, further politicizing an economy many of whose instabilities are due to overpoliticization already. THE PRICE OF EMPIRE Among the most misleading analyses of empire was that of Lenin, who argued that the advanced capitalist countries undertook imperial building for economic reasons – to use surplus capital or to gain access to raw materials. To be sure, in the early phases of most of the European empires, access to materials or to workers was part of the calculation. But while there will be winners, building an empire is a bad investment. Empires fall because of political discontent in the colonies and hinterlands, to be sure. But they also fall because they simply become too expensive and those charged with paying the costs eventually get tired of paying and paying and getting resentment and hatred in return. That is likely to happen eventually to the sole superpower, but apparently we will have to suffer significant additional economic deterioration before it does. – Alan Bock
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