War Economy: Lessons for Obama, Too

The War,
Economics
and McCain

Nathan Gardels
& Joseph Stiglitz


In the following interview, Nobel laureate Joe Stiglitz talks about how the economy has replaced Iraq as the central issue in the presidential campaign, but how the two are closely related.

Nathan Gardels: The American economy, teetering toward recession or worse, has replaced the war in Iraq as the key issue in the presidential campaign. What is the link between U.S. economic woes and the war in Iraq?

Joseph Stiglitz: The war has led directly to the U.S. economic slowdown. First, before the U.S. went to war with Iraq, the price of oil was $25 a barrel. It's now $100 a barrel.
While there are other factors involved in this price rise, the Iraq war is clearly a major factor.



Already factoring in growing demand for energy from India and China, the futures markets projected before the war that oil would remain around $23 a barrel for at least a decade. It is the war and volatility it has caused, along with the falling dollar due to low interest rates and the huge trade deficit, that accounts for much of the difference.

That higher price means that the billions that would have been in the pockets of Americans to spend at home have been flowing out to Saudi Arabia and other oil exporters.

Second, money spent on Iraq doesn't stimulate the economy at home. If you hire a Filipino contractor to work in Iraq, you don't get the multiplier effect of someone building a road or a bridge in Missouri.

Third, this war, unlike any other war in American history, has been entirely financed by deficits. Deficits are a worry because, in the end, they crowd out investment and pile up debt that has to be paid in the future. That hurts productivity because little is left over either for public-sector investment in research, education and infrastructure or private-sector investment in machines and factories.

Until very recently, we haven't sharply felt these three factors depressing the economy because the Federal Reserve Bank responded with the attitude that they must keep the economy going no matter how much President Bush spends on the Iraq war. Seeing a weak economy, they kept interest rates low, flooded the economy with liquidity and looked the other way when bad home-lending practices were shoveling money out the door. Regulation was lax. The spigot was wide open. More than $1.5 trillion was taken out of houses in mortgage equity withdrawals alone over the past five years! That is a huge amount of money to be spent.

At the same time, the U.S. savings rates plummeted to zero. So everything that was being spent, from rebuilding Iraq to redecorating the home, was on borrowed money. All the problems were papered over by borrowing. The bubble ultimately burst when the ratio of housing prices to income -- that is, what people whose incomes are falling could afford -- was no longer sustainable.

Now that we can see beyond the bubble, the economic weakness caused by the Iraq war will be fully exposed. And we'll pay for it in spades -- you might say, with interest.

Gardels: One of the bizarre occurrences of globalization is that the Chinese, who opposed the Iraq war at the U.N., have ended up as a major financier of that war by purchasing U.S. Treasury bonds with the huge dollar reserves they've earned from their trade surplus with the U.S. So, a consumer democracy with no savings borrows from a market-Leninist state to combat terrorism and hold free elections in the first Shiite government in an Arab state in 800 years!
How will we sort it all out?

Stiglitz: And the American people haven't a clue about what they are supporting, which undermines democracy at home as well.

The ironies don't stop there. This is the first American war since the Revolutionary War that has been financed from abroad. At the beginning of every other war, there was real public discourse about which costs should be put on future generations and which should be paid today -- in taxes. This is the first war where we have (BEGIN ITALICS) lowered taxes (END ITALICS) as we went to war.

The Iraq war has not only been financed by foreigners, but it is also the most privatized war in American history. And the results are egregious. For example, a security contractor -- I'm not talking about sophisticated engineers here -- makes well over $1,000 a day, often more than $400,000 a year. A person in the U.S. Army gets paid a fraction of that amount -- about $40,000 annually -- for performing the same tasks. Everybody knows any workplace where one person makes 10 times what the other one does for doing the same job is a recipe for discontent. So, in order to attract soldiers, the U.S. Army has increased sign-up bonuses. We're competing with ourselves! And that raises costs all around.

But that is not the end of the absurdity. On top of that, the U.S. taxpayer is paying disability and death insurance for the contractor, but then the insurance policies exempt paying in the circumstances of "hostilities." Who are we buying insurance for? The taxpayer, then, is essentially paying the insurance companies for nothing. Talk about a sweet deal!

Gardels: What is the big picture in terms of America's economic reckoning with the Iraq war?

Stiglitz: The big picture is that, by our most conservative estimates, this war has cost an almost unimaginable $3 trillion. A more realistic estimate, however, is closer to $5 trillion once you include all the downstream "off budget costs" of long-term veteran benefits and treatment, the costs of restoring the now depleted military to its pre-war strength, the considerable costs of actually withdrawing from Iraq and repositioning forces elsewhere in the region.

Then there are the micro costs. For example, if a solider gets killed, his family gets a $500,000 lifetime payment. That is not included in the public budget when the costs of the war are considered.

These costs are real and are not going away. You can't continue to sweep them under the rug. Like your credit card bill, the costs only grow greater if you ignore them.

Finally, anybody who says we ought to stay in Iraq for even another four years, no less the next 100 years, as John McCain has suggested, has to honestly tell the American people how they are going to pay the $12 billion-a-month bill. Where are we going to come up with another $1.2 trillion? And is that going to make America more secure?

Let's get out sooner rather than later. Above all, let's stop fantasizing. It's those fantasies that got us in trouble.

Gardels: In your view, is this economic mess a result of the neo-con fantasy or a conscious cover-up by the Bush administration to hide the costs from the American public?

Stiglitz: Both. It was a neo-con fantasy that we'd be greeted with garlands. We'd only be responsible for cleaning up the rose petals. Iraqi oil would pay for everything else.

It was also a deliberate attempt to hide the costs from the American people. How else could you justify not providing the American troops with the equipment they need? How else could you justify not giving the Veterans (Benefits) Administration what they need to treat the disabilities of our heroic soldiers who have been both physically and psychologically maimed by this war? That can only be interpreted as a deliberate attempt to hide the real costs of war -- at the expense of weakening our armed forces, which have been debilitated. The Bush administration has put short-run political advantage ahead of the security of the country.

Gardels: The economic costs have now come back to undermine the whole post-9/11 security effort. When John McCain says he's not interested in and doesn't understand the economic aspect of things, and only knows about how to keep America safe, what does that say about his leadership capability?

Stiglitz: If he doesn't understand the economy, he doesn't understand security. If we had infinite resources, we might be able to have perfect security. But America, like every other country, has resource constraints. That means you need to be smart -- that is, economic -- about the money we spend. If you weaken the American economy, you won't be able to find the resources you need for security. The two cannot be separated.

[Joseph Stiglitz was awarded the Nobel Prize for Economics in 2001. He is the author, with Linda Bilmes, of The Three Trillion Dollar War: The True Cost of The Iraq Conflict, just published in the U.S. ]