War Could Bomb Your Pocketbook
Expect skittish markets, higher deficits and slower growth.
By Joseph E. Stiglitz
Joseph E. Stiglitz is the 2001 Nobel laureate in economics.
February 21, 2003
A little more than half a century ago, World War II brought the United
States and the world out of the Great Depression, earning for war a positive
reputation at least in the realm of economics.
At the time, some went so far as to suggest that capitalism needed war and
that without war there would be an inevitable slide into recession.
Today we know that both propositions are nonsense. The boom of the '90s
showed that peace is far better for the economy than war. And the Gulf War
showed that wars can actually be bad for the economy. It is far more
probable than not that a war in Iraq would be like the Gulf War.
World War II represented a total mobilization, beginning from a situation
where there were vast amounts of idle resources. An Iraq war, like the Gulf
War, is likely to entail very limited resources, probably less than 1% of
Even without these expenditures, though, there are massive deficits, which
will be even more massive if President Bush has his way with his tax
proposals. There is an increasing consensus -- joined recently by Federal
Reserve Chairman Alan Greenspan -- that the country can ill afford even more
deficits, so any increased military spending will come at the expense of
social expenditures and badly needed investments in research, infrastructure
Accordingly, there is likely to be little if any short-term stimulus, while
long-term growth will be hurt. Whatever one can say about whether spending
money dropping bombs on Iraq enhances long-term national security, it does
not do anything for long-term economic growth at home.
Of course, we cannot be precise about the economic effect of a war on Iraq
because no one knows how such a war would play out or what its aftermath
might look like. Of this we can be sure: The uncertainties we face as we
seemingly move inevitably toward war are bad for the economy, coming as they
do upon a host of other uncertainties.
Our economy has not fared well over the last two years. Almost 2 million
private sector jobs have been destroyed; a $3-trillion, 10-year non-Social
Security surplus has been turned into a $2-trillion deficit; and if the
president's proposals succeed, these deficits will balloon, with deficits as
far as the eye can see, even when the economy returns to full employment.
Monetary policy has proved remarkably ineffective. Our trade deficit has
continued to grow. Corporate, accounting and financial scandals have rocked
confidence in our business establishment, contributing to the plummeting
stock market. Markets do not like uncertainty; they hold off on investment,
waiting for it to be resolved. And because the outcome of this particular
military venture appears so uncertain, there is all the more reason to
maintain a wait-and-see stance.
Consider the most favorable scenario: a short war with no repercussions
outside Iraq. A new and democratic regime in Iraq might need to spend
billions repairing the damage, not only from the war but from the
decade-long sanctions, and it probably will have to depend largely on its
own resources. As large new supplies of oil enter the market, the global
price would become depressed, hurting the oil-producing parts of the U.S. as
well as other oil exporters. In this scenario, the U.S. as a whole benefits,
but parts of the nation go into deep recession, similar to the devastation
that befell the oil-producing states when oil prices dropped in the 1980s.
Then consider what most observers view as a more realistic scenario: The war
lasts longer than anticipated, costs more than we thought and leads to some
disturbances elsewhere in the oil-producing Islamic world; and there are
some, if limited, terrorist attacks on the West. In this event, we need to
recall the consequences of the Arab oil embargo of the early 1970s. And this
time it could be far worse. Soaring oil prices can bring on global havoc and
recession. In the course of the conflict, or in Saddam Hussein's waning
days, the Iraqi oil fields may be left in flames. We may not like the task
of nation-building, but could we in good conscience simply walk away?
We will be called upon to spend still more rebuilding Iraq than we spent
removing Hussein from power. Some have suggested that one of the motivations
for going to war is to seize control of these oil fields. But international
scrutiny will be intense. Presumably, the international community will
insist that there be competitive bidding for the right to develop these
fields. U.S. firms may or may not win these bids, but even if they do,
competition should limit their profits. And even if they manage to garner
for themselves more than a normal rate of return, the broader benefit to the
American economy will be very limited.
Meanwhile, previous experiences have taught us that even limited terrorist
attacks can have ruinous effects on the economy. Indeed, they are designed
to deliver a big bang for the buck, to scare people. In the attempt to
impede terrorism, flows of goods and services across borders will probably
be held up; even financial flows may be impaired.
It is not a pretty picture. War seldom presents a pretty picture. But we are
a rich country, able to withstand economic mismanagement and even a war that
does not go as well as we might like. This war is unlikely to be good for
the economy; it is more likely to be bad, possibly very bad. We will
probably be poorer, and our growth slower than it otherwise would be.
No rational country goes to war to help its economy, but neither should any
country wage war without weighing carefully the costs and benefits of going
or not going to war, an analysis that brings in a consideration of all the
We should be thankful. At least we will not experience either the human
carnage or material destruction that may well befall Iraq.
© Los Angeles Times