War in Iraq Aims a Bullet at the Heart of the Economy

James K. Galbraith teaches at the LBJ School of Public Affairs at the University of Texas in Austin and is chair of Economists Allied for Arms Reduction,, a global network of economists concerned with peace and security issues.

However badly the war is going in Iraq, on the home front it is still a good thing for George Bush -- so far.

A year ago, the push to Baghdad doubled the economic growth rate and got a recovery started. Now, the literally untold billions in military payrolls and equipment purchases that keep the war going also help to propel our economy along.

For the record:

12:00 a.m. May 5, 2004 For The Record
Los Angeles Times Wednesday May 05, 2004 Home Edition California Part B Page 13 Editorial Pages Desk 1 inches; 36 words Type of Material: Correction
Louis XIV’s wars -- The finance minister who advised Louis XIV against his costly wars was Colbert, not Turgot as incorrectly stated in an April 26 commentary on the potential economic effects of the Iraq war.

This is normal. All wars bring cheerful economic news at first. They stimulate production. They raise capacity utilization, which helps business cover costs and improve earnings. This is good for the stock market. Wars create jobs and also usually draw young men and women away from the labor force, cutting unemployment. (So far, this war has been fought by a handful of overstretched professional soldiers, so the job effects have been small. That could change, especially if the draft is resurrected, as some would like.)

But the good news doesn’t last.


Soon enough, profiteers see their chances. Bottlenecks happen. Prices go up. Long before unemployment disappears, wars generate inflation. Indeed, inflation -- and the depreciation of private wealth and public debt that it brings -- is the ages-old way in which governments pay for war.

Wars upset the trade balance. They gobble imports. And they tend to pull critical resources -- scientific talent and key materials -- away from exports. Our trade deficit is already staggering. As the economy grows, it will get worse. Under wartime conditions, it will get worse still.

Wars aggravate the national external debt. Already we borrow half a trillion dollars yearly from abroad. How long will Japan and China keep sending us goods and piling up uncashed IOUs in return? No one knows.

And what do we get for our blood and treasure? Security is priceless, of course -- if, in fact, you get it. But in material terms, do we get, for instance, cheaper oil from our Saudi ally? Certainly not at the moment. Bob Woodward does tell us that Prince Bandar ibn Sultan, the Saudi ambassador to the U.S., has arranged a few months of relief for his friend, George W. Bush, this coming fall. But don’t expect that largess to outlast the election.

The U.S. had one good economic experience with war. World War II conquered the Depression, reindustrialized the country and built the middle class. But that was special. The U.S. fought WWII with full mobilization, super-high taxes, super-low interest rates, big deficits, price controls and rationing. Iraq isn’t going to be like World War II.

Economically, the Iraq war is more like Vietnam: insidiously underestimated, sold to the public and Congress on false premises, improperly budgeted and inadequately taxed. During the Vietnam years, there was also economic growth at first. But then came creeping inflation, followed by worldwide commodity shocks, the oil crisis of 1973, international monetary disorder and a decade of economic troubles.

Could it happen again? Yes, it could.

Did Team Bush think through the economics of a long and costly war? There is no evidence it did. It counted on the war being quick, cheap and self-financing. If it thought about the long-range economics, there seems to have been only one goal: control of oil.

Spain’s Philip II believed that control of the gold of Peru and silver of Mexico would guarantee his nation’s predominance in Europe. Elizabeth I and Sir Francis Drake disagreed. Louis XIV and Napoleon I trusted in conquest to enrich France. Their ministers -- Turgot and Talleyrand -- knew better. Winston Churchill vowed not to preside over the end of the British Empire. But his successors gave it up when they couldn’t afford it anymore. Luckily, the U.S. was there to take over, and we had the support of the free world. But that was then.

By going into Iraq with few allies, we’ve assumed the entire economic cost. The home-front damage is small now, but it will build over time. And it will take time and effort to repair. The future American economy will especially need a new energy direction, emphasizing conservation and renewable energy, and concerted investment in the world’s next generation of technologies -- both to reduce our oil dependence and to help balance our trade deficits.

Let’s hope Sen. John F. Kerry makes this point on his manufacturing tour this week.

And let’s hope that Americans understand. Real security begins at home.