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. Last Updated: 07/27/2016

Some Postwar Home Truths for the President

There used to be a theory -- especially popular among historians of Germany -- that wars happen because of domestic politics. So, it was to sidestep the threat of socialism and democracy that the Kaiser opted for war; and Hitler went to war, some said, because of an insuperable domestic crisis caused by the strains of German rearmament. This kind of argument always appeals to those who hate the idea that wars might be waged for plain old strategic reasons. The "primacy of foreign policy" -- Leopold von Ranke's famous principle -- makes the rather boring assumption that statesmen are mainly interested in international affairs, as opposed to their own bank balances. It's so much more interesting to imagine that they wage war because they are in hock to sinister economic interests.

I feel nostalgia for the days of the "primacy of domestic politics." Indeed, I am almost tempted to make the case that President George W. Bush is waging war for domestic political reasons, just for old time's sake. It's not so hard to argue. Leave aside the mantra that Bush and his colleagues are merely the Washington reps of Texas oil. Just take a look at his poll ratings and see what a domestic-political dividend he is reaping from this war. His popularity had been waning. From the 90 percent approval rating recorded on Sept. 21, 2001, his standing had declined, by the eve of the Iraq invasion, to just 58 percent. At a stroke, the war has pushed his approval rating back above 70 percent. When Saddam Hussein next appears -- whether as a defendant at The Hague or a corpse in the Baghdad morgue -- we can expect Bush to revisit 9/11 levels of popularity.

Yet the sad reality is that even a ticker tape parade down Baghdad's main drag will contribute next to nothing to Bush's chances of re-election. And I suspect he knows it. For the real story of American politics is not the primacy of domestic politics, but rather the primacy of domestic economics. And the worrying thing from his point of view is how little the economy seems likely to be affected by this war.

Commentators trying to anticipate the economic consequences of the conflict have struggled to find appropriate wars with which to compare it. This is because Iraq is, in economic terms, a pretty small war: smaller than Korea and Vietnam, far smaller than World War II. True, unlike that other small war fought against Hussein by the president's father, the costs of this war are not likely to be met by foreign taxpayers. But even though the fiscal brunt of the war -- and of the inevitable occupation -- will largely be borne by the United States, it will not be especially heavy. The correct parallel is not with the other wars the United States has waged this century, but with the policing operations the British Empire routinely undertook in the 19th century.

Only by making some huge assumptions -- including an oil price hike, the very reverse of what we have seen since the war began -- was it possible for the political scientist William D. Nordhaus to conjure up (in the New York Review of Books) a total bill for the war of $1.6 trillion -- an implausible figure equivalent to around 15 percent of GNP. More realistically, Democrats on the House Budget Committee plumped for $121 billion (1.1 percent of GNP). In requesting just $75 billion to finance the war, Bush has been accused of erring on the optimistic side (0.7 percent of GNP). But it's easy to see whom the financial markets believe.

Historically, investors have tended to think that "gunfire is bad for money." That was shorthand for the belief that states that went to war were more likely either to default on their outstanding debts or to debase their currencies by printing money. In nearly every case, the major wars of the 19th and 20th centuries led to significant jumps in the combatants' long-term interest rates and depreciations of their currencies as investors dumped bonds and banknotes. With one exception: It didn't happen to Britain when she waged wars against peripheral states that challenged her imperial mastery. These wars only had fiscal significance when they went wrong -- as in the Boer War fiasco. So far, Iraq looks a lot more like the war in the Sudan, which culminated in 1898 with the annihilation of the Mahdi's followers at Omdurman.

Being simultaneously the world's biggest military power and most successful economy has its advantages, and the United States enjoys these today as much as Britain did in the Victorian era. Like the sterling then, the dollar is still the first choice international reserve currency. Like British consols, long-dated U.S. Treasuries are the global investor's favorite low-risk security. Hence the immediate effect of war has not been to push up bond yields or drive down the dollar; rather the reverse. It was the absence of war that had those deleterious effects, during that phoney peace when hi-jinks at the UN Security Council held up a resolution of the crisis.

Between March 10 and March 21 -- the day after the U.S. deadline to Hussein expired -- yields on 10-year Treasuries rose by 52 basis points. But since the war began they have fallen back down to 3.96 percent, roughly where they were two months ago. Between Feb. 12 and March 10, the dollar lost roughly 3 percent of its value against the euro. But since the invasion of Iraq it has recovered nearly all that ground. There are two reasons why. The markets seem to believe Bush's assertion that the war will not be expensive. There is no discernible sense that the deficit will rise much above 3.6 percent of GDP. Nor does anyone seem to fear that the deficit will be financed by money creation. Lower oil prices -- a near certain outcome of the war -- mean that overall inflation will go down, not up. But therein also lies bad news for Bush. Yes, this war will be short, cheap and non-inflationary. But it will also do little, if anything, to change the downward trend of the economy -- which is precisely why no one on Wall Street is worried about inflation, war or no war.

The problem that won't go away is (per FDR) fear itself. The proportion of the population expecting the economy to get worse has doubled, from 34 percent in May last year to 67 percent last month. The war has done little to change that mood. People may approve of Bush's handling of foreign policy, but less than half of those asked approve of his handling of the economy.

It seems as if history is repeating itself with the tape speeded up: not so much farce as fast forward. Living in New York today is like living through the 1920s,'30s and '40s simultaneously. At one and the same time, you've got prohibition (of cigarettes), depression and war. Of these three, however, it is the economic slowdown that will have the biggest impact on the next presidential election. And that must give Bush a nasty feeling that his own family's history is about to be repeated too.

On Jan. 16, 1991, the United States went to war against Iraq. Almost overnight, the first President Bush's approval rating jumped from 64 percent to 85 percent. But after that war ended, the victor's laurels withered as the economic slowdown made itself felt. By the time Americans voted in December 1992, his approval rating had been below the halfway line for six months. George II may soon face a similar scenario. If he wins the war but loses on the economy he will not be the first incumbent to do so. Nor the first Bush.

Niall Ferguson is the author of "Empire: The Rise and Demise of the British World Order and the Lessons for Global Power." This comment appeared in The Wall Street Journal on April 9.