The Washington Post reports Economists
Debate Link Between War, Credit Crisis. The article is notable both for
being poorly reasoned, and for its extensive quotation of faulty or
irrelevant arguments made by actual economists.
The article starts by addressing
the perception that the war is a cause of the current recession. Senators
Voinovich and Obama are quoted to the effect that is it. The public
apparently believes this as well:
The link between Iraq and the downturn reflects a growing public perception that individual economic
anxieties must stem somehow from the unpopular war — a unified theory
of political misery, said Peter D. Hart, a Democratic pollster.
and:
The analysis is politically
powerful because people believe it. A CNN poll last month found that 71
percent of Americans say government spending in Iraq is a factor in the
economic downturn.
Economist Joseph Stiglitz is
called upon to prove the war's guilt. Stiglitz makes three arguments. One,
that the war has reduced the supply of oil, causing a higher oil price
(which, though it is not stated, is implied to be a cause of the recession);
secondly, that the petro-dollars re-invested in financial markets were
partially responsible for the mortgage bond bubble; and third, that the
Federal government's direct expenditures for the war (coupled with tax cuts)
has limited its ability to use government spending to stimulate the economy
(which it is assumed would prevent or mitigate a recession.) Without fiscal
policy, the Fed had with only monetary policy left with which to fight a
recession, which it mis-used to create a housing bubble.
While I can agree with Stiglitz
that the Federal deficit is worse because of the war, Austrian economists
would dispute that fiscal policy has any beneficial effects. However, the
ineffectiveness of fiscal policy is not needed to prove that the war is
costly. Nor is Stliglitz's argument about the war's role in the credit crisis
necessary to prove the point, as I will explain.
Post reporter Jonathan Wiseman
follows up Stiglitz with, "To economists on the left and the right, his
analysis strains credulity." why? Because "traditional economics
hold that large budget deficits 'crowd out' private lending, raising interest
rates and making lending scarce, not profligate."
To address the last point first,
the analysis that holds government borrowing responsible for higher interest
rates is correct, all things being equal. That is, it assumes that the total
income, out of which loanable funds are supplied to the bond market is fixed,
and that the private sector and the government must bid up their interest
rate in order to compete for this fixed supply. However, if the Fed is
committed to supplying any volume of funds at an interest rate that is fixed
below the market rate, more debt means more credit expansion without a rise
in interest rates.
Wisemen then quotes a leading
Democrat economist who blames the housing bubble on a lack of regulation, and
then follows with "And most economists still think that oil prices are
soaring because of rising demand, not constrained supply."
Supply and demand work together
to determine the price. It would be possible to make quantitative arguments as
to the relative influence of supply and of demand in any particular case, but
there can be no doubt that, if less oil is produced, than the price will be
higher than it otherwise would be.
Lost among the forest of
economic fallaicies, the real point is that the the article frames influence
of the war as if it acted only through indirect chains of secondary causes:
the credit crisis or the oil price.
However, there is a much simple
analysis that Wiseman ignores: the war is very costly in a direct sense. Resources
that are consumed in the war are not available for production in the private
sector, and therefore make us less well off than we otherwise would be. Had
the resources not been spent on the war, they could have been consumed by
either the goverment or the
private sector. The consumption of resources for war means that we have fewer
resources available for non-war.
The article is a great example
economic obfuscation. The author takes a simple, intuitive, and correct
argument — that the war is making us worse off because it is expensive
— and uses bad economic reasoning to make it appear wrong.
The truth is very simple: wars
are costly. The money has to come from somewhere. Complicated chains of
reasoning about indirect links only obscure the point. Costs mean
opportunities forgone. By producing more war goods, we have less non-war
goods.
While I hate to agree with Obama
on anything, he gets it right here:
When you're spending over $50 to
fill up your car because the price of oil is four times what it was before Iraq, you're paying a price for this war," Obama told an audience last month at the University of Charleston in West Virginia. "When Iraq is costing each household about $100
a month, you're paying a price for this war."
Robert Blumen
Robert Blumen is an independent
software developer based in San Francisco, California
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