Is War a Generator of Expenses or an Economic Stimulus?

Today, policy makers view war as a generator of expenses rather than an economic stimulus.

The New York Times, "Economic Scene" , March 27, 2003

Ending months of debate and speculation, the Bush administration this week asked Congress for nearly $75 billion to cover the costs of the Iraq war through the end of September.

Coming amid an economic slowdown, the request raises a question: Why don't we hear more about how this spending mighthelp the economy?

After all, just a generation ago, critics of military spending not only had to argue that it was unnecessary for national security, they also had to counter the widespread belief that cutbacks would wreck the economy.

"War brings prosperity. This was the conclusion drawn by Americans who watched the war economy of World War II bring an end to the Great Depression," the antiwar intellectual Seymour Melman wrote in "The Permanent War Economy," published in 1974. The book sought to reverse that perception.

Few if any macroeconomic scholars would have endorsed the simple notion that "war brings prosperity." But two influences led that idea to percolate into public consciousness: the prominence of Keynesian theory and the experience of wartime production.

Keynesians held that the Depression had persisted because New Deal spending had not been big enough to restart the economy. The war forced the government to abandon fears of large-scale spending.

The war pumped up demand for unemployed workers and underused factories. Indeed, the Depression "made World War II possible," the macroeconomist Robert J. Gordon of Northwestern University argued in an interview. "We had vast wasted resources -- unutilized factories, unemployed workers."

"Our capacity to build automobiles was only being used at one-half," he added, so it was relatively easy to ramp up production of military equipment like tanks and ships.

The wartime demand for military production was so obvious that after the war many people feared the economy would slip quickly back into recession. Where, if not from government, would the demand come from?

Postwar demand came, of course, from consumers and their rapidly multiplying children, the baby boomers.

But the cold war also kept military spending high by historic (though not World War II) standards. And the Depression left scars on the public psyche, producing the fear that without continuous large government outlays, the private economy would falter.

Mainstream Keynesian theory held that government spending was needed to bolster the economy during recessions. Few macroeconomists argued that government should keep spending large sums even when the private economy was expanding.

But that idea did have influential backing, particularly from Alvin Hansen of Harvard, the dean of prewar Keynesians. He promoted the idea of "secular stagnation," which held that inefficiencies in the economy were constantly threatening recession, even during booms, unless the government kept spending high.

"Hansen, unlike the standard Keynesians, argued that you not only needed countercyclical management, you needed full-time pump priming," said John Nye, an economic historian at Washington University in St. Louis.

Most macroeconomic scholars were more judicious, but Mr. Hansen's ideas were popular. Professor Nye noted that "many of his ideas got swallowed up" into the popular wisdom that the economy needs constant stimulus and, hence, that high military spending is good for the economy.

From the stagflation of the 1970's to the prosperity of the 1990's, experience has mostly reversed these popular perceptions. The 1990's boom demonstrated that a strong economy can persist not only amid budget surpluses but also after substantial post-cold-war military cuts.

As for the war in Iraq, it is tiny compared with previous wars.

"The order of magnitude compared to the size of the economy is far less," Professor Gordon said. A short war "fought out of inventory," he said, would not have much immediate effect on the economy, at least as far as spending is concerned.

The "expenditures to prosecute the war are relatively small," concurred Laurence Meyer, a former Federal Reserve governor now at the Center for Strategic and International Affairs.

So today, supporters and opponents of the Iraq war argue over its military and diplomatic merits, not its economic effects. Economic evaluations, for their part, emphasize the negative effects of uncertainty and possible oil shocks, rather than any positive effects of military spending.

"Most people who believe that this war will be good for the economy see it in a different way -- as a way of quickly getting rid of geopolitical uncertainty," Dr. Meyer said.

Today, policy makers see war not as an economic stimulus but as a generator of expenses that have to be covered one way or the other, with negative effects on both the government budget and the private economy.

The budget question is whether the security benefits of war justify the costs or, perhaps, whether alternative strategies would cost more.

Three economists at the University of Chicago Graduate School of Business recently compared the costs of the Iraq war with the costs of an alternative strategy of containment. (Their paper is available here.) They wrote the essay "to clarify our thinking about the war and to address some views that are widely held but not carefully scrutinized," said Steven J. Davis, who worked with Kevin M. Murphy and Robert H. Topel on the estimates.

They use a generous estimate of $125 billion for the direct costs of the war and peg the cost of containment at $13 billion a year for troops and equipment.

Assuming a 3 percent chance that the Iraqi regime "morphs from malign to benign in any given year," an estimate based on the persistence of other "contained" repressive regimes, containment would last 33 years, they estimated. "The most apt comparison is probably to North Korea," Professor Davis said, noting that the regime continued "in essentially the same form" even after Kim Il Sung died in 1994.

"This dwarfs any reasonable estimate of U.S. war costs," they concluded.