No Iraq Recession

There's a bunch of progressive groups experimenting with some interesting "Iraq recession" messaging which sounds promising to me, but as Paul Krugman explains doesn't fit the facts particularly well:

The fact is that war is, in general, expansionary for the economy, at least in the short run. World War II, remember, ended the Great Depression. The $10 billion or so we’re spending each month in Iraq mainly goes to US-produced goods and services, which means that the war is actually supporting demand. Yes, there would be infinitely better ways to spend the money. But at a time when a shortfall of demand is the problem, the Iraq war nonetheless acts as a sort of WPA, supporting employment directly and indirectly.

Krugman mentions the war's impact on the price of oil as one potential caveat. I would also add that the war's been going on long enough at this point that we're feeling some of the long-term consequences of war-related spending along with the short-term ones. Americans are probably somewhat poorer on average than we would be had the war never been fought. But the war's not responsible for the economic slowdown -- in the short-term it's helping to prop the economy up. Indeed, the DC area in particular (though also, I would note, Arizona -- though obviously Saint John's hawkish views reflect pure straight talky principle and owe nothing to the large number of defense contractors he represents) has seen a lot of defense-fueled growth.

Comments

I'm no historian, but wasn't the WWII expansion in large part due to us selling massive amounts of war and war-related goods (planes, oil, jeeps, guns, bullets, food, clothes, etc...) to our allies?

Posted by matthewcc | January 29, 2008 4:35 PM

... which led me to wonder about energy costs. But Krugman has also answered that one:

There is one caveat: high oil prices are a drag on the economy, and the war has some — but probably not too much — responsibility for pricey oil.
.

Posted by Grand Moff Texan | January 29, 2008 4:35 PM

> wasn't the WWII expansion in large part due
> to us selling massive amounts of war and
> war-related goods (planes, oil, jeeps, guns,
> bullets, food, clothes, etc...) to our allies?

For the most part our allies ran out of cash around January 1940; Uncle Sam put the rest on his account (I don't think that Russia ever promised to pay us for anything).

Now, did the Allied spending from 1937-1939 help pull us out of the Depression? Probably. But that was a small fraction of what came later.

Cranky

Posted by Cranky Observer | January 29, 2008 4:50 PM

Yeah, but if we hadn't wasted all that money on the war (and tax cuts) we'd actually have a surplus. And you know what's really great for dealing with a recession? A surplus. Besides, the war almost certainly hasn't helped everyday people that much. There's no draft to tighten the labor supply, and an awful lot of the money has been upwardly distributed via military contractors. WWII functioned like a giant WPA, Iraq not so much.

I don't really think combining the points in necessary, though. A really good stimulus plan (preferably tied into the move to a green economy) can be the major domestic policy recommendation for a recession election, and ending the war the major foreign policy. I don't really think the Rs are going to offer anything to compete with either of those.

Posted by Sam L. | January 29, 2008 4:55 PM

matthewcc,

If you recall, the Allies had run out of money before 1941, as Cranky points out, and was borrowing on credit. I believe lend lease and destroyers for bases are two exemplary examples. Not sure how the Soviets financed all those American fighter planes, but I have the feeling we gave them away.

Though keep in mind that during WW2 the US had a large and secure oil reserve in Texas, whereas Europe was fighting like mad to control the Middle East and the Soviet reserves in the Caucaus (remember Stalingrad?).

I like to point out that in 1944 the US produced more fighter than the Luftwaffe had in total during their peak year (1940 before the Battle of Britain). Talk about industrial output. WW2 was also the only period of time that black Americans achieved full employment.

Posted by freddiemac | January 29, 2008 4:58 PM

"I'm no historian, but wasn't the WWII expansion in large part due to us selling massive amounts of war and war-related goods (planes, oil, jeeps, guns, bullets, food, clothes, etc...) to our allies?" - Posted by matthewcc

Not quite. The expansion happened, in smallpart, because we bought the materiel, but we received no money from foreign governments. We got in-kind payment from Britain of bases that covered 25% of their expenses. Other nations did not actually pay for what they got. After the war, Britain bought some military equipment at a 90% discount. I believe that Rumania was the only nation to actually pay their lend-lease debt, which was very small.

Buying military equipment, selling it on credit, then eating the debt raises GDP, which is one reason why it isn't always the best measure of a good economy.

The bulk of the wartime expansion was because we bought military equipment for ourselves. It should also not be forgotten that there was significant growth from 1933 onwards that was not related to the war.

Posted by Njorl | January 29, 2008 5:00 PM

The war is absolutely killing people in the tourism business.

Posted by Brautigan | January 29, 2008 5:02 PM

Nah, Krugman's stuck in 1930s thinking, when the "animal spirits" of businessmen really were depressed, as opposed to today when everybody expects to get rich. This war is just waste, and waste is bad for business. Financial markets are fast enough and smart enough now to figure out what the long term effects of pouring money down the rathole is, so the negative long term arrives a lot faster.

Posted by Steve Sailer | January 29, 2008 5:10 PM

"Krugman mentions the war's impact on the price of oil as one potential caveat."

We sometimes tend to forget that the US is a huge producer of oil. We are the 3rd largest producer, putting out about 10% of the world total. It's just that we import 2-2.5 times as much as we produce. Rising oil prices increase GDP more than the resulting suppression of growth (a second order effect) decreases it in the short term, possibly even the long term.

Not everything that increases GDP is good. If everyone who had full collision insurance totaled their car tomorrow and bought a new one, that would be great for GDP.

Posted by Njorl | January 29, 2008 5:15 PM

Even in the '30s, if the US government could have spent the money used for guns and bombs and ships and planes on a new car, tv, refrigerator and washing machine for every american, the manufacturing sector would have had the same stimulus. We didn't really have any choice for WWII, but we had no legit excuse to invade Iraq. $100 billion a year spent on clean energy would have made all americans richer.

Posted by MikeJ | January 29, 2008 5:16 PM

Well, let's just start smashing windows in every building in America. Surely that should stimulate the economy as everybody has to buy materials to replace all the broken windows.

I thought this kind of simplistic vulgar-Keynesian war stimulus thinking was widely known to be full of fallacies. Sure, Krugman can be expected to be peddling it; it's one of his hobbyhorses. But it shouldn't be taken seriously by anyone else.

Posted by Brian | January 29, 2008 5:18 PM

It's easy to say that war spending stimulates the economy- and just as easy to say we're buying a big pile of nothing.

Does Krugman really think that if there were no war, we wouldn't go to work and spend our money? That doesn't make any sense to me.

Now, it may be, that for reasons of class warfare, the Republicans would rather put the nation in a depression than spend money on education and infrastructure to support a modern economy.

But the fact remains that our service men and women would be paid more for the same skills in civilian life. If they have to join the military to get those skills, that doesn't say anything about how an economy works, it just says something about how our society works.

Wars are paid for by taxes or by borrowing. If paid for by taxes, that reduces the ability to spend and invest. If paid for by borrowing, the borrowing could just as well have been put towards developing a stronger peaceful economy.

If spending $500 billion on the war was good for the economy, spending the $4 trillion that Bush has added to the national debt should have been absolutely great. We can plainly see it wasn't.

Time to rethink some of the old bromides.

Posted by serial catowner | January 29, 2008 5:32 PM

Have we ever really left a war-based economy? Since WW2, to be more precise. Has our defense budget ever declined in real dollars?

Posted by magisterludi | January 29, 2008 5:43 PM

You have the impression that the attacks on 9/11 and the gratuitous American assault on Iraq have done wonders for McLean, Va.

Posted by bob h | January 29, 2008 5:44 PM

magisterludi,

Not sure how overall things went, but during the Clinton years, as the US shifted to a post-cold war era, real defense spending declined. Then Bush and Co. decided to go back to cold war era policy and implement missle defenses and scrap jstor. And the 9/11 happened, and you know the rest.

Posted by freddiemac | January 29, 2008 5:46 PM

Rumania was the only nation to actually pay their lend-lease debt, which was very small.

That's rather unlikely, seeing as Romania was on the other side....

Posted by lemuel pitkin | January 29, 2008 5:47 PM

"Have we ever really left a war-based economy? Since WW2, to be more precise. Has our defense budget ever declined in real dollars?"

Yes. In the 1990s most recently.

Posted by Jose Padilla | January 29, 2008 5:48 PM

When was the last time our defense expenditures were accurately monitored? Who wants to discuss this?

Posted by magisterludi | January 29, 2008 5:58 PM

Magisterlud- I make no promises about Bush era defense spending. But defense spending in the Clinton era was substantially lower as a percentage of GDP than it was during WWII or even Vietnam. I believe this is even true of the Reagan years (not the substantial part, though)

I feel kind of betrayed by Krugman here, though. He's supposed to be a middlebrow liberal economist. But even middlebrow should recognize that 5 years is not short term! Plus, I would think its pretty clear that our economy is pretty much running on nitros all the time. That's what credit card debt and refinanced mortgages are all about. You could get a short term stimulus from blowing $100B on defense after 9/11, but its not as if it would have helped the economy in the medium term b/c its not an investment in the economy, just a wasteful expenditure. If you wanted a helpful $100B stimulus, upgrade the transportation infrastructure or something. Its not actually hard to find things worth spending money on.

Posted by mpowell | January 29, 2008 6:22 PM

Particularly given the way this particular war has been run by these particular politicians, rather than some hypothetically generalized war run by historically averaged politician, is a particularly awful, inefficient, and unproductive method of investing in the social and employment infrastructure of the country.

Posted by El Cid | January 29, 2008 6:28 PM

catowner,

It's your post that's a big pile of nothing. No, Krugman is not saying "if there were no war, we wouldn't go to work and spend our money." He's saying that wars generally stimulate economic activity. And this one is no exception.

There's no serious case against the war on economic grounds. That's one reason why public opinion about it is so ambivalent. It just doesn't have much effect on the ordinary lives of most Americans.

Posted by Mixner | January 29, 2008 6:35 PM

Krugman appears to have pulled this out in response to Chalmers Johnson's piece, "How to Sink America", which explains the long-term negative effects of the military-industrial complex.

http://www.antiwar.com/engelhardt/?articleid=12248

Naturally Matt buys into it, being ignorant, as he admits, of economics.

Posted by Richard Steven Hack | January 29, 2008 6:36 PM

Plus, I would think its pretty clear that our economy is pretty much running on nitros all the time. That's what credit card debt and refinanced mortgages are all about.

No, those things are mainly about the housing bubble. They have nothing to do with the Iraq War. And according to the Federal Reserve's most recent report, household net worth increased in the last quarter of 2007.

Posted by Mixner | January 29, 2008 6:46 PM

Economists have a curious blind spot about spending by the state. They consider it to have no content. It is a black hole, and whether it is a war or health spending, it doesn't matter in their little equilibrium centered equations. Krugman has this blind spot less than most (for real drivel, you have to go to Slate's favorite economist, Steve Landsburg). But of course the money spend on Iraq could have been spent elsewhere doing much better things. Or even just necessary things. We are not only talking about funding S-Chip. There are numerous infrastructure and research concerns - for instance, the U.S. government could have done something real about jumpstarting a green manufacturing base, could spend 200 billion dollars this year on developing alternative energies. Etc.
In other words, the opportunity costs of this war are huge. Given the growing possibility of truly dysfunctional environmental change, you can't see these past seven years as anything but a hideous game of let's pretend, demonstrating that rich empires do seem to reach a point at which they just don't function very well anymore.

Posted by roger | January 29, 2008 6:47 PM

Matt - what is progressive about these groups?

also, didn't we invade Iraq to get free oil? How could the price of oil have gone up?

Is this something the progressives did? Are they trying to decrease petroleum consumption? Clever progressives.

Actually, Mixner is correct, the economic cost of the war is largely unnoticed, particularly with all that free oil the US is getting (cleverly being recycled into the US by Joseph Kennedy - damn these progressives are clever!)

Posted by Jozef | January 29, 2008 6:58 PM

But of course the money spend on Iraq could have been spent elsewhere doing much better things.

Yeah, that must be why your candidates, Hillary and Obama, keep voting to spend more and more money on Iraq.

Posted by Mixner | January 29, 2008 7:00 PM

Mixner, that is a non-sequitor. What you probably mean is, if my statement is true and if my candidates are voting to spend money on Iraq, then they are to blame for not spending the money elsewhere.
True, dat.

Posted by roger | January 29, 2008 7:07 PM

No, I mean that the fact that even your own candidates keep voting to spend more and more money on the war on Iraq suggests that your claim that the money would be better spent elsewhere is false.

Posted by Mixner | January 29, 2008 7:25 PM

which means that the war is actually supporting demand

The War is creating that demand too, so wouldn't it be a wash?

Posted by Fred F. | January 29, 2008 8:10 PM

Mixner's capacity for logic - not to mention the ability to read English - is, as usual, lacking.

The statement that the money COULD be better spent elsewhere is not identical to the statement that the money WOULD be better spent elsewhere.

Not to mention that Roger's statement used the word "could", not the word "would."

Go back to trolling for torture, Mixner.

Posted by Richard Steven Hack | January 29, 2008 8:12 PM

Wow...

Not one mention of Vietnam? Guns and Butter? The inevitable consequence?

Posted by shah8 | January 29, 2008 8:34 PM

Take it away, then. What about Vietnam?

Posted by Mixner | January 29, 2008 8:57 PM

Doesn't the long term call up of the Reserves and National Guard have a negative economic impact? I'd imagine that would hobble a lot of companies.

Posted by aleks | January 29, 2008 9:05 PM

"Doesn't the long term call up of the Reserves and National Guard have a negative economic impact?"

Particularly on their families back home. Even if your employer holds a job for you, many people end up taking a major financial hit.

Posted by CParis | January 29, 2008 9:25 PM

"Particularly on their families back home. Even if your employer holds a job for you, many people end up taking a major financial hit."

When I was in the Army Reserve, most of the men in my unit were cops of some sort in civilian life: NYPD, state troopers, county sheriffs, etc. In most cases, when they went on active duty their civilian employers paid the difference between their military and civilian salaries, so they didn't lose any pay. In fact, a few would volunteer to go on active duty for a couple of months (as drill sergeants in Ft. Dix) to take a paid break from the police work.

Posted by Fred | January 30, 2008 12:36 AM

Mixner, you do have an odd idea about candidates. You don't chose them, at least liberals don't, on the fuehrerprinzip. Truth, in other words, doesn't shine out of their every pore. Rather, they are compromised creatures, mostly pathetic halfwits, which one choses over even more pathetic halfwits. in a corporate media run circus called an election. For instance, it was pathetically halfwitted of the Democrats not to simply stop the funding of the war this spring, period. Alas, one couldn't call upon the opposition party to the Democrats to take up the slack, since that consisted of corrupt cretins who were busy gloatingly approving of genocide in Mesopotamia for as long as it took to get their full ROI from Raytheon.

I know it must puzzle you that most liberals don't take their truths from their fuehers, since staying in lock step with the fuehrer is the only way to the hoechste Wahrheit for the conservative crowd, now celebrating President Mission Accomplished for seven disastrous years.

Posted by Roger | January 30, 2008 1:06 AM

Good grief, Roger. Just how drunk were you when you wrote that?

Posted by Mixner | January 30, 2008 2:26 AM

"That's rather unlikely, seeing as Romania was on the other side...."-Posted by lemuel pitkin

After a coup in 1944, Romania switched sides. They suffered over 150,000 dead and wounded fighting against the Germans. The materiel they received via lend-lease was negligible compared to that received by the UK and USSR.

Posted by Njorl | January 31, 2008 1:00 PM

"That's rather unlikely, seeing as Romania was on the other side...."-Posted by lemuel pitkin

After a coup in 1944, Romania switched sides.

Posted by Njorl | January 31, 2008 1:05 PM