Stocks And Bombs


"This stock-market situation what are the military options?" That was the caption of a New Yorker cartoon last month. But these days reality has a way of outrunning satire; way back in June the CNBC pundit Larry Kudlow published a column in The Washington Times with the headline "Taking Back the Market by Force." In it he argued for an invasion of Iraq to boost the Dow.

Pretty amazing stuff, though not as amazing as a July column in The New York Post by John Podhoretz, whose headline read "October Surprise, Please," followed by the injunction "Go On, Mr. President: Wag the Dog."

In general it's a bad omen when advocates of a policy claim that it will solve problems unrelated to its original purpose. The shifting rationale for the Bush tax cut it's about giving back the surplus; no, it's a demand stimulus; no, it's a supply-side policy should have warned us that this was an obsession in search of a justification.

The shifting rationale for war with Iraq Saddam was behind Sept. 11 and the anthrax attacks; no, but he's on the verge of developing nuclear weapons; no, but he's a really evil man (which he is) has a similar feel.

The idea that war would actually be good for the economy seems like just one more step in this progression. But one must admit that there are times when war has had positive economic effects. In particular, there's no question that World War II pulled the United States out of the Great Depression. And today's U.S. economy, while not in a depression, certainly could use some help; the latest evidence suggests a recovery so slow and uneven that it feels like a continuing recession. So is war the answer?

No: World War II is a very poor model for the economic effects of a new war in the Persian Gulf. On balance, such a war is much more likely to depress than to stimulate our struggling economy.

There is nothing magical about military spending it provides no more economic stimulus than the same amount spent on, say, cleaning up toxic waste sites.

The reason World War II accomplished what the New Deal could not was simply that war removed the usual inhibitions. Until Pearl Harbor Franklin Roosevelt didn't have the determination or the legislative clout to enact really large programs to stimulate the economy. But war made it not just possible but necessary for the government to spend on a previously inconceivable scale, restoring full employment for the first time since 1929.

By contrast, this time around Congress is eager to spend on domestic projects; if the administration wants to pump money into the economy, all it needs to do is drop its objections to things like drought aid for farmers and new communication gear for firefighters. In other words, if the economy needs a burst of federal spending, neither economics nor politics requires that this burst take the form of a war.

And in any case it's not clear how much stimulus war would provide. One assumes that the necessary munitions are already in stock, so there will be no surge in factory orders. There will be spending on peacekeeping won't there? but it will be spread over many years.

Meanwhile there is the potential economic downside, which may be summed up in one word: oil.

Iraq itself currently supplies so little oil to the world market that wartime disruption of its production would pose little problem. But neither the Arab-Israeli war of 1973 nor the Iranian revolution of 1979 directly affected oil production.

Instead, the indirect political repercussions of conflict were what caused oil prices to surge. This time around, Arab leaders have warned that an invasion of Iraq would open the "gates of hell." That doesn't sound good for the oil market.

It's worth remembering that each of the oil crises of the 1970's was followed by a severe recession and that the milder oil price spike before the gulf war was also followed by a recession. Could rising crude prices undermine our weak economic recovery, creating a double-dip recession? Yes.

None of this should deter us from invading Iraq if the administration makes a convincing case that we should do so for security reasons. But it's foolish and dangerous to minimize the potential economic consequences of war, let alone claim that it will be good for the economy.

Originally published in The New York Times, 9.13.02