Joseph Stiglitz

Stiglitz and his co-author, Harvard professor Linda Bilmes, attribute only $5 to $10 of that price jump to the war, an estimate they qualify as highly conservative.

Deficit war funding concerns economists

The current economic slowdown, which could very well turn out to be a recession, was started by the subprime mortgage crisis. But some economists argue the Iraq war is deepening the economic pain.

Plenty of analysts and policymakers dispute the controversial view that the war is worsening the market-wide credit crunch stalling the economy. But even the most conservative economists acknowledge that Americans will eventually pay the price at home for a war financed entirely with borrowed money.

“Economists are fond of saying that there’s no such thing as a free lunch. It is also the case that there is no such thing as a free war,” Joseph Stiglitz, a Nobel Prize-winning economist and author of the new book “The Three Trillion Dollar War,” told the Joint Economic Committee.

Congress has approved $526 billion for the Iraq war alone, according to the latest analysis by the Congressional Research Service. That makes it the second most expensive military conflict in American history, exceeded only by World War II.

The numbers far outpace the roughly $60 billion that the administration estimated the war would cost before the 2003 invasion.

The American economy, of course, is much larger today, and Iraq spending represents a substantially smaller piece of the economic pie than World War II did. At its peak, government spending for that conflict reached 40 percent of gross domestic product. Experts estimate that direct budgetary spending on Iraq represents roughly 1 percent of GDP — significantly less than cheaper wars in Vietnam and Korea.

“In the context of the size of our economy, the spending is very small,” said Mark Zandi, chief economist of Moody’s

But the war is the first in American history to be financed without any tax hikes or spending cuts to offset its cost. President Bush enacted the second round of his tax-cut agenda a year after the war began, and discretionary spending has only increased over the past five years.

The spending pattern leads many to conclude the war is being financed through deficit spending.

“Where is the sacrifice this time? There’s none, except from the Americans who are fighting and their families,” said Robert Hormats, a vice chairman of Goldman Sachs’ international division who has been a vocal critic of the Bush administration’s financing of the war.

“For the average American, this war has meant no economic inconvenience whatsoever.”

The Bush administration has argued that war spending will help the economy recover that much faster.

In early March, Deputy Defense Secretary Gordon England urged Congress to fund the rest of the administration’s war spending request, saying it would boost the economy because much of the funds would be spent “right here in the United States.”

It’s a stance in line with the conventional wisdom that wars always help the home front, a view rooted in the widespread belief that the ramp up for World War II pulled the economy out of the Great Depression.

Today, though, much less of the war money is going toward domestic production, economists say, and that means fewer benefits at home.

“You want a war that involves a lot of domestic production, not just one that involves sending troops overseas, and you want one where the money gets spent here, not just in Iraq,” said David Wyss of Standard & Poor’s.

Critics also argue that the many billions of dollars in war spending leaves the government with fewer resources to help the economy through its current troubles.

The money spent on Iraq — now more than $10 billion per month — could be spent in ways that would do far more to boost the economy, Stiglitz and others argue. Spending on domestic needs such as infrastructure, energy research or education has secondary and tertiary benefits, they say, unlike the purchasing of a piece of military equipment. Economists refer to this as an “opportunity cost” of the war.

“That tank, once it’s used up, [it’s] used up, while that bridge is there for a long time and improves the efficiency of transportation,” Hormats said.

Americans have also felt painful effects at the gasoline pumps, Stiglitz and others contend, as oil has skyrocketed to roughly $75 per barrel over the past five years. The war disrupted Iraqi oil production, aggravating a supply crunch driven by increased worldwide demand. The conflict also fuels instability in the Middle East, which also pushes up oil prices.


The higher fuel prices trickle down into food, heating and other transportation costs.

Others find plenty of holes in Stiglitz’s position. “To say this economic crisis stems from the war is all polemical crap,” says Peter Morici, professor of international business at the University of Maryland.

War spending typically drags the economy by driving interest rates up, said Vincent R. Reinhart, a former senior Federal Reserve staffer and a scholar at the American Enterprise Institute. But during the Iraq war, interest rates have fallen.

Many analysts contend the high price of oil is being driven almost exclusively by increased demands from China and India.

And some question the economic benefit of government spending on infrastructure or other programs.

There’s much more consensus, however, about the longer-term consequences of financing a war through deficits.

Government borrowing tends to divert money from more productive private investments. Less money for factories and research projects means less economic growth in the long run, Reinhart said. “That is the cost to the economy.”

Deficit spending also leaves the government deeper in the hole, and therefore less able to respond to economic crises such as another terrorist attack or the coming crush of Social Security, Medicare and Medicaid payments, Democrats and other critics argue.

“We should be going into that period of baby boomer retirements in very good fiscal shape. Instead, we’re going into that period in bad fiscal shape, with big deficits,” Hormats said.

But at its core, the debate over economics comes down to one central question: the overall value of the mission.

“If our war efforts prevent another tragedy like the one on 9/11, … tremendous benefits are obtained,” Sen. Sam Brownback (R-Kan.) said during February’s JEC hearing, echoing the view of the Bush administration.

But war opponents argue that Saddam Hussein wasn’t hiding weapons of mass destruction, nor was there any link between his regime and Al Qaeda. Invading Iraq has helped produce more terrorists, they said.

“If you believe a war is important, then you go to the American people and say, ‘Here’s what it is going to cost, and here’s the way we recommend it be paid for,’” Hormats said.

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