War's Economic Toll

A little more than half a century ago, World War II brought the United States and the world out of the Great Depression, earning for war a positive reputation at least in the realm of economics. At the time, some went so far as to suggest that capitalism needed war and that without it there would be an inevitable slide into recession.

Today we know that both propositions are nonsense. The boom of the '90s showed that peace is far better for the economy than war. And the Gulf War showed that wars can actually be bad for the economy. It is far more probable than not that a war in Iraq would be like the Gulf War.

World War II represented a total mobilization, beginning from a situation where there were vast amounts of idle resources. An Iraq war, like the Gulf War, is likely to entail very limited resources, probably less than 1 percent of GDP.

Even without these expenditures, though, there are massive deficits, which will be even more massive if President George W. Bush has his way with his tax proposals. There is an increasing consensus -- joined recently by Federal Reserve Chairman Alan Greenspan -- that the country can ill afford even more deficits, so any increased military spending will come at the expense of social expenditures and badly needed investments in research, infrastructure and education.

Accordingly, there is likely to be little if any short-term stimulus, while long-term growth will be hurt. Whatever one can say about whether spending money dropping bombs on Iraq enhances long-term national security, it does nothing for long-term economic growth at home.

Of course, we cannot be precise about the economic effect of a war on Iraq because no one knows how such a war would play out or what its aftermath might be. Of one thing we can be sure: The uncertainties we face as we seemingly move inevitably toward war are bad for the economy, coming as they do upon a host of other uncertainties.

Our economy has not fared well over the past two years. Almost 2 million private sector jobs have been destroyed; a $3 trillion, 10-year non-Social Security surplus has been turned into a $2 trillion deficit; and if the president's proposals succeed, these deficits will balloon, with deficits as far as the eye can see, even when the economy returns to full employment.

Monetary policy has proved remarkably ineffective. Our trade deficit has continued to grow. Corporate, accounting and financial scandals have rocked confidence in our business establishment, contributing to the plummeting stock market. Markets do not like uncertainty; they hold off on investment, waiting for it to be resolved. And because the outcome of this particular military venture appears so uncertain, there is all the more reason to maintain a wait-and-see stance.

Consider the most favorable scenario: a short war with no repercussions outside Iraq. A new and democratic regime in Iraq might need to spend billions repairing the damage, not only from the war but from the decade-long sanctions, and it will probably have to depend largely on its own resources. As large new supplies of oil enter the market, the global price would become depressed, hurting the oil-producing parts of the United States as well as other oil exporters. In this scenario, the United States as a whole benefits, but parts of the nation go into deep recession, similar to the devastation that befell the oil-producing states when oil prices dropped in the 1980s.

Then consider what most observers view as a more realistic scenario: The war lasts longer than anticipated, costs more than we thought and leads to some disturbances elsewhere in the oil-producing Islamic world; and there are some, if limited, terrorist attacks on the West. In this event, we need to recall the consequences of the Arab oil embargo of the early 1970s. And this time it could be far worse. Soaring oil prices can bring on global havoc and recession. In the course of the conflict, or in Saddam Hussein's waning days, the Iraqi oil fields may be left in flames. We may not like the task of nation building, but could America in good conscience simply walk away?

We will be called upon to spend still more rebuilding Iraq than we spent removing Hussein from power. Some have suggested that one of the motivations for going to war is to seize control of these oil fields. But international scrutiny will be intense. Presumably, the international community will insist that there be competitive bidding for the right to develop these fields. U.S. firms may or may not win these bids, but even if they do, competition should limit their profits. And even if they manage to garner for themselves more than a normal rate of return, the broader benefit to the U.S. economy will be very limited.

Meanwhile, previous experiences have taught us that even limited terrorist attacks can have ruinous effects on the economy. Indeed, they are designed to deliver a big bang for the buck, to scare people. In an attempt to impede terrorism, flows of goods and services across borders will probably be held up; even financial flows may be impaired.

It is not a pretty picture. War seldom presents a pretty picture. But the United States is a rich country, able to withstand economic mismanagement and even a war that does not go as well as we might like. This war is unlikely to be good for the economy; it is more likely to be bad, possibly very bad. We will probably be poorer, and our growth slower than it otherwise would be.

No rational country goes to war to help its economy, but neither should any country wage war without weighing carefully the costs and benefits of going or not going to war -- an analysis that involves consideration of all the relevant scenarios.

America should be thankful. At least we will not experience either the human carnage or material destruction that may well befall Iraq.

Joseph E. Stiglitz, the 2001 Nobel laureate in economics, contributed this comment to the Los Angeles Times.