The Defense Department Sent Your House to Iraq
Some U.S. home builders are facing one of the many disagreeable side-effects of the military occupation of Iraq—higher costs of lumber. In a lumber market where shortages were already appearing, the Defense Logistics Agency suddenly ordered more than 20 million square-feet of plywood sheeting for construction in Iraq. Markets for plywood and its substitutes reacted strongly.
Prices of oriented strand board (OSB), commonly used in new homes, apartment buildings, and commercial structures, jumped to record highs. According to Random Lengths, a lumber industry publication, the price of 7/16 inch OSB hit $445 per thousand square feet in mid-September, compared with $374 three weeks before, and $175 a year before. Other wood products have seen sizable increases as well. A 10-foot 2-by-4 was around $5.50, up from about $4.00 in August. The government indicated that it intended to use the plywood to build bunkers, guard posts, and tent flooring.
There are other, more significant reasons for the record high prices of lumber. One is the Fed's manipulation of interest rates, which has triggered so much mortgage borrowing that new houses are being built at a rate not seen in 17 years. Remodeling with funds from home-equity loans has added to the demand. In addition, weather delayed the start of the building season in many areas of the country and hampered harvesting efforts. Fires in Canada and the West threatened some timber stocks, and Hurricane Isabel produced an additional demand for plywood in North Carolina and Virginia.
Setting the stage for the record lumber prices this summer were misguided environmentalism and a high tariff on Canadian softwood lumber. First, there was the cordoning off of countless acres to protect the spotted owl, which created an artificial scarcity of timber and drove up the price of lumber. Weyerhauser, a forest products firm, cashed in by hiring wildlife biologists to find spotted owls on federal land, resulting in an increase in the value of its own timber. And second, in August of 2001, the Bush Administration initiated a tariff of 19.3 percent on Canadian softwood lumber imports. A few months later we watched the Commerce Department push the tariffs as high as 29 percent . Essentially, the forest products industry was using the federal government to soak builders and home buyers for countless millions of dollars.
The DOD order was particularly damaging to builders who had based contracts on normal lumber prices and were caught off guard. Some have suggested that the market's reaction was irrational "panic" buying. Indeed, the amount of plywood bought for Iraq was not large, compared to the monthly production of around 300 million square feet. But, as the editor of Random Lengths noted, the order occurred "when seasonal demand was at its peak…. The timing made it quite significant."
And the DOD purchase could signal an increased probability of future government orders. As the occupation and proposed Marshall Plan-style reconstruction of Iraq continues, the government may want a lot more lumber. The chief researcher for the National Association of Home Builders, Gopal Ahluwalia, sounded concerned, in an interview for the Washington Post: "…what we do not know is whether the Defense Department intends to buy more. They do not say."
The government's effects on the lumber industry, through tariffs and large Defense Department purchases in an already-tight market, are a small example of a general problem. All government projects involve a reallocation of resources. War, being the most costly of government projects, produces far-reaching and disruptive economic change. Prices rise on anything the government decides it needs for its military effort.
Of course, the government generally borrows or taxes to acquire the funds. It sometimes tries other tactics, such as forcing prices down by law so as to keep its costs low. Since this means a general shortage, the government makes sure it is first in line by requiring citizens to have ration cards before buying certain goods. This was done for a great number of staple goods during World War II.
During an all-out war, some goods become virtually impossible for private individuals to acquire. Cars for the general public were out of production during World War II, because the government was using the available steel, rubber, and glass, not to mention the capital equipment and the labor force. Housing construction during the early 1940s was almost entirely limited to the areas around the production sites for ships, aircraft, and other military goods.
Of course, the current U.S. involvement in Iraq is nothing like the scale of World War II, so the economic damage is far less. But World War II had a definite and achievable end in sight—the defeat of Japan, Germany, and Italy. For the US, it lasted less than four years. We have had troops in, over, or around Iraq for thirteen years, and it does not appear that the raid on American wallets is anywhere near being over.
More so than the reconstruction of Iraq, the broader "war on terror" presents an even greater potential for economic foul-ups. This project has such vague and unattainable objectives as to have no end in sight, and thus the cumulative disruption from many years of conflict could be enormous. From the expansive state's perspective, the war on terror is superior even to the Cold War, which justified the expenditure of so many trillions of dollars. The Cold War had to fizzle out with the collapse of the Soviet Union, while terrorism will always exist to some degree.
So, now and for quite some time to come, we can look forward to the reduced availability of whatever the state decides it needs for the war on terror, the occupation of Iraq, or any other adventures foreign and domestic. That is why it is vital for friends of liberty to work even more vigorously to chain down the welfare-warfare state.
Timothy Terrell is assistant professor of economics at Wofford College and an adjunct scholar of the Ludwig von Mises Institute. He can be contacted at firstname.lastname@example.org.
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.