|
The War and the Recession
By Dean Baker
11/03/08 "Commondreams" -- -
With the release of the February jobs numbers, everyone
except for the economists now acknowledges we are in a
recession. The economy is shedding jobs at a rapid pace and it
is only a matter of time until we see the unemployment rate
rising. In addition to greater difficulty finding jobs, workers
can look forward to falling wages and reduced access to health
care insurance and pension coverage.
Naturally, people are looking
for an explanation for the cause of the recession, and many have
turned to the Iraq War. This view is wrong. The war is a drain
on the economy, but it is not the cause of the recession. The
recession is due to the collapse of the $8 trillion ($110,000
per homeowner) housing bubble.
It is understandable people
would look to the war as the villain in this story. After all,
the war is costing around $180 billion a year (at 1.2 percent of
GDP). This is a substantial drain on the federal budget and the
economy. This money could have gone to productive uses that
would have benefited people and made the economy stronger.
For example, the proposed
expansion of the state children’s health insurance program (SCHIP)
would have cost $7 billion a year, an amount equal to what we
spend on the war in two weeks. A proposed $2 billion a year
increase in childcare subsidies is equal to four days of
spending on the war. The hundreds of millions of dollars each
year the federal government devotes to energy conservation
amounts to less than a day’s spending on the war.
In short, there is a nearly
endless list of areas that can be identified in which the money
spent on the war could have been spent in ways that would have
made the economy stronger. Since the money was diverted from
better uses, the war spending has hurt the economy.
There is another way in which
war spending hurts the economy: We have to pay for the war. We
could have paid for the war with tax increases, but instead,
President Bush chose to pay for it by borrowing, making the
deficit considerably larger than it would otherwise be. This
additional borrowing makes interest rates somewhat higher than
they would be otherwise. Higher interest rates can raise the
value of the dollar, which makes the trade deficit larger. (A
high dollar makes US-made goods relatively more expensive both
here and abroad.) Higher interest rates can also reduce
investment and homebuilding.
However, the increase in
borrowing associated with the war is actually not very large
relative to the size of the economy. It can be expected to have
a negative effect, but it is relatively modest and only begins
to be felt over time. Last year, the Center for Economic and
Policy Research commissioned Global Insight, one of the
country’s leading economic forecasting firms, to project the
impact of the war on the economy.
Their model projected the impact
would be initially positive (war spending generates demand), but
eventually the effect of higher interest rates imposes a drag on
growth. By the sixth year, the effect is negative; and by the
tenth year, the economy was projected to have lost about half a
million jobs, mostly in manufacturing and construction.
This is bad news, but it is not
the recession that we are seeing now. This recession has a
different group of villains. First and foremost on this list is
Alan Greenspan, who at least ignored the housing bubble, if he
didn’t actively promote it. The list also includes regulators at
both the state and federal level who tolerated abuses in the
mortgage industry that were completely visible at the time they
took place. And there is a long list of politicians and
community leaders who encouraged low- and moderate-income
families to buy homes in the middle of a housing bubble. And, of
course, there are the incompetent economic forecasters (is that
redundant?), who could not see an $8 trillion housing bubble in
front of their face.
These are the people who deserve
the blame for what is likely to be the most severe recession in
the post-war period. The public’s wrath should be focused on the
Fed, the regulators, the Wall Street crooks, and the others
responsible for letting a housing bubble wreck havoc on the
economy.
There are plenty of good reasons
to be opposed to the war and its negative impact on the economy
is one of them. But we should not allow the war to be misused to
allow some big-time villains to get off the hook. If we had
better spent our money over the last five years, we would be
better able to withstand the effects of the housing crash - just
as a person who eats well and exercises can more quickly recover
from a bout of pneumonia. But laziness and a bad diet are not
the cause of pneumonia, and the war is not the cause of this
recession.
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.
Click on "comments" below to read or post comments
Comment Guidelines
Be succinct, constructive and
relevant to the story.
We encourage engaging, diverse
and meaningful commentary. Do not include
personal information such as names, addresses,
phone numbers and emails. Comments falling
outside our guidelines – those including
personal attacks and profanity – are not
permitted.
See our complete
Comment Policy
and
use this link to notify us if you have concerns
about a comment.
We’ll promptly review and remove any
inappropriate postings.
Send Page To a Friend
In accordance
with Title 17 U.S.C. Section 107, this material
is distributed without profit to those who have
expressed a prior interest in receiving the
included information for research and educational
purposes. Information Clearing House has no
affiliation whatsoever with the originator of
this article nor is Information ClearingHouse
endorsed or sponsored by the originator.)
|
