War * Prosperity

"WARS have traditionally been bullish for the economy. We expect this one will be no exception."

That's what National Review said a few weeks ago about Operation Desert Storm.

Depending on who you talk to, the war in the Persian Gulf could boost the economy out of recession. Or have little effect at all. Or make things even worse.

Proponents of the idea that wars spur growth point to the great increases in real GNP that occurred during World War II, the Korean War and the Vietnam War.

From 1941 to 1944, the United States' GNP was up 12.5 percent annually. In the time of the Korean War, from 1949 to 1953, GNP increased 6.1 percent annually. And during the early years of the Vietnam War, from 1964 to 1969, GNP increased 4.4 percent annually.

There's no denying that the number of people employed in the U.S. increased during World War II and the two hot wars of the Cold War. But does it necessarily follow that war has a net positive effect upon our economy? No way.

War, by definition, diverts the resources of a country's economy from the satisfaction of human needs to the destruction of goods. The increase in employment that occurs in wartime comes not from the creation of new goods for production or consumption by the populace, but from the forced concentration of resources in a particular sector, what President Eisenhower called the military-industrial complex.

And where do those goods go? To the Persian Gulf, to be dropped on Saddam Hussein's Republican Guard.

The money that goes for the War--at last estimate, about $86 billion for war-related expenses and another $40 billion for debt forgiveness and other assistance to U.S. allies--won't go to build new homes, buy new computers for businesses or purchase coffee for 126 billion commuters' breakfasts. It's been diverted to the war, and most of its is simply being poured down a rathole.

Some of this money will go from the pockets of those who gain employment in the military supply industries to the economy at large. In the case of the war against Iraq, however, this will help the U.S. economy little, as there will be little new investment in manufacturing from a war largely waged with previously-purchased materials.

OF COURSE, wars increase production of military goods and increase employment in the military and industrial sectors. Today, some people may have military-related jobs that didn't exist before the war. (And after the war, Iraq and Kuwait will have to rebuild. Perhaps U.S. businesses will be called to do some of the rebuilding, but that means they won't be building in the U.S.)

But the war will not create new wealth.

When employment is "created" in some military-supply industries, it is destroyed in other sectors. As taxes and government borrowing increase, capital is diverted from investment in other industries.

Wartime spending, in other words, decrease the amount of money invested in what people what people really want or need (new sweaters or the machines to make them) to what the military wants (new body bags or the machines that make them). While this may provide employment in the short run, in the long run at least some of the economy's resources have been irreversibly diverted.

CONSUMER CONFIDENCE and the predictions of many economists about the war point to the negative effect the war will have on the economy.

Even before the war, consumer spending had slowed to a growth rate of less than one percent a year. From July until December of last year, consumer confidence fell 40 percent. Now that the end of the war is in sight, this trend may reverse. Economists note that the war's effects, however, may not be seen immediately.

Increased taxes during the current recession would put a damper on the already shaky economy, most economists (including Alan Greenspan, chair of the Federal Reserve) agree. But financing a war through borrowing can (and almost always does) lead to an increase in inflation. Given an $80 billion cost for the war, says Brad DeLong, assistant professor of economic history, inflation will probably increase by one extra percentage point for each of the next few years.

Indeed, as credit has eased recently and bank reserves increased, the specter of inflation looms large. Once recovery begins, some financial analysts say, increased borrowing could help rev up inflation.

The saving grace in the postwar economy may be what even Secretary of State James Baker admits was the major reason we went to war: oil. "The economic lifeline of the industrial world runs from the Gulf, and we cannot permit a dictator such as [Saddam Hussein] to sit astride that economic lifeline," Baker said in November.

Many economists note that a decrease in the price of oil, combined with increased consumer confidence at having won the war, would go a long way towards counteracting the recession. Right now there's a worldwide oil glut (even with Iraq and Kuwait exporting nothing), and with prospects for war in the Gulf interrupting supply getting less every day, some experts predict that oil prices may drop to as low as $10 to $12 a barrel. And while predictions vary, changes in the world economy have weakened OPEC and made it more difficult for the cartel to jack up prices.

If oil prices do decline, the Federal Reserve will be able to continues to lower interest rates, while at the same time the decrease in price will dampen inflation. And the U.S. will pull itself out of recession.

But when we pull out of the recession, it will be despite, not because of, the war.

We need to produce things people want--like sweaters and the machines that make them. During wartime, we produce things people don't want--like bodybags and the machines that make them.