Mises Daily Articles
War and the Economy
The National Bureau of Economic Research dates the peak of the last business cycle at March 2001, and has yet to call a trough, which is to say it hasn't yet observed an end to the contraction or the beginnings of an economic recovery.
The number of months we have traveled from the end of the last peak to the current day is 24. The NBER has used its method for dating business cycle pronouncements on peaks and troughs since the 1850s. The average period of contraction runs 8 months. The current downturn is the longest on record since the Great Depression, and next month it will become the second longest since 1882.
This is another way of saying: folks, this is getting serious. Yet what is Washington talking about? Not the decline in employment, savings, the dollar, nor the increase in debt, deficits, government spending, and prices. No, Washington wants war with Iraq. It plans to spend at least $100 billion to bring it about, in a year in which the deficit will balloon to $400 billion plus and American incomes and payrolls are under serious strain.
The Mises Institute has worked relentlessly to call attention to the dangers of the recessionary environment (and the dangers of the bubble that preceded it), as well as the distraction and destruction of war. Bill Moyers, who has a show on PBS, found himself intrigued by this combination of being against the war but for a free and globally engaged commercial republic. I went on his show to talk about this [TRANSCRIPT], but his curiosity tells me that a primer on war and economy is needed.
Behind the current confusion of ideological categories is the longstanding canard that war is good for the economy. If what you care about is a prosperous economy, why wouldn't it make sense to spend hundreds of billions of dollars on huge industrial products like military planes and tanks? Why not employ hundreds of thousands in a great public-works program like war? Why not destroy a country so that money can funnel to American companies in charge of rebuilding it? Doesn't all of this help us out of the recession?
All these questions somehow come back to Bastiat's "Broken Window" fallacy. In the story, a boy throws a rock through a window. Regrets for this act of destruction are all around. But then a confused intellectual pops up to explain that this is a good thing after all. The window will have to be fixed, which gives business to the glazier, who will use it to buy a suit, helping the tailor, and so on. Where's the fallacy? It comes down to focusing on the seen (the new spending) as versus the unseen (what might have been done with the resources had they not had to be diverted to window repair).
Let us never forget that the military is the largest single government bureaucracy. It produces nothing. It only consumes resources which it takes from taxpayers by force of law. Making matters worse, all these resources are directed toward the building and maintenance of weapons of mass destruction and those who will operate them. The military machine is the boy with the rock writ large. It does not create wealth. It diverts it from more productive uses.
How big is the US military? It is by far the largest and most potentially destructive in the history of the world. The US this year will spend in excess of $400 billion (not including much spy spending). The next largest spender is Russia, which spends only 14% of the US total. To equal US spending, the military budgets of the next 27 highest spenders have to be added together. If you consider this, and also consider the disparity of the US nuclear stockpile and the 120 countries in which the US keeps its troops, you begin to see why the US is so widely regarded as an imperialist power and a threat to world peace.
This is very hard for Americans to understand. We tend to think of the American nation as a mere extension of our own lives. We all work hard. We mind our own business. We tend to our families and involve ourselves in local civic activities. We love our history and are proud of our founding. We are pleased by our prosperity (even if we don't know why it exists). We think most other Americans live the way we do. We tend to think our government (if we think about it at all) is nothing but an extension of this way of life.
A deadly military empire? Don't be ridiculous. The military is just defending the country. Bush is a potential tyrant? Get real! He's a good man. Those crazy foreigners who resent the US are really no better than those people who attacked us on September 11, 2001: they envy our wealth and hate us for our goodness. We are a godly people, which makes our enemies ungodly, even demonic. This is a short summary of a widely held view, one that those who seek a government-dominated society use to build their public-sector empire.
What most Americans refuse to face is that what the government does day to day, and in particular its military arm, is not an extension of the way the rest of us live. Government knows only one mode of operation: coercion. It does not cooperate; it coerces. Because it is constantly overriding human choices, it makes unrelenting error, most often producing consequences opposite of the stated intention. This is no less true in its foreign operations than it is in its domestic ones.
Consider the most recent military action in Afghanistan. The Taliban was nothing but a reincarnation of the opposition tribes the US supported when the country was being run by the Soviets in the 1980s. Back then we called them freedom fighters. When the Taliban fled the capital city last year, the US knew where to look for them because the US assisted in building their hideouts during the last war.
What did the war do to the country? All hoopla aside, it is no freer, no more democratic, and no more prosperous. The warlords are running the country and women are still subject to fundamentalist Islamic dictate. How many civilians did the US kill? Thousands, perhaps many thousands. During the war, every day brought news of a few dozen innocent dead, all verified by humanitarian organizations monitoring the situation. We don't have a definitive final tabulation because the US bombed radio and TV stations and worked to keep news of the dead from leaking.
The New York Times ">reports concerning the newest proposed war: "General [Richard] Myers gave a stark warning that the American attack would result in Iraqi civilian casualties despite the military's best efforts to prevent them." Americans don't like to think about this, but it is a reality nonetheless. As for best efforts, one would have to turn a blind eye to the history of US warfare to believe it.
With regard to Iraq in particular, let us remember that the US has waged unrelenting war on that country for twelve years, with bombings and sanctions that the UN says have killed millions. The entire fiasco began with the Iraqi invasion of its former province, Kuwait, which the US ambassador was warned about in advance and responded that the US took no position on the border-oil dispute then brewing.
But let's return to the economic costs associated with war. It does not stimulate productivity. It destroys capital, in the same sense that all government spending destroys capital. It removes resources from where they are productive—within the market economy—and places them in the hands of bureaucrats, who assign these resources to uses that have nothing to do with consumer or producer demand. All decisions made by government bureaucrats are economically arbitrary because the decision makers have no access to market signaling.
What's interesting this time around is how the markets seem to have caught on. The prospect of war is inhibiting recovery. The stock market is now at 1998 levels, with five years of increased valuations wiped out. The recession itself, the longest in postwar history, may have been the inevitable response to the economic bubble that preceded it, but the drive to war is prolonging it. It could get worse and likely will. Consumer confidence is falling, as is consumer spending. Unemployment is rising. The dollar is falling. Commodity prices are rising. All signs point to a man-made economic calamity.
The deficit is completely out of control. The idea of tax cuts is fine, but let's not pretend as if the bill for government spending doesn't need to be paid by someone at some point. It will be paid either through inflation or higher taxes later. In the meantime, deficits crowd out private production because they need to be financed through bond holdings. War will only make the problem worse. From time immemorial, war has gone along with fiscal irresponsibility.
War also goes hand in hand with government control of the economy. Bush has increased spending upwards of 30 percent since he took the oath of office. He has imposed punishing tariffs on steel, hardwood, and wheat. He has created the largest new civilian bureaucracy erected since World War II. He has unleashed the federal police power against the American people in violation of the constitution. All of this amounts to a war on freedom, of which commercial freedom is an essential part. This is why no true partisan of free enterprise can support war.
But what about September 11? Doesn't that event justify just about anything? Let us not forget that this was a multiple hijacking, of which there have been hundreds over the decades since commercial flight became popular. The difference this time was that the hijackers gave up their lives rather than surrender. It was a low-budget operation, and needed no international conspiracy to bring it about. It was easily prevented by permitting pilots to protect their planes and passengers by force of arms, but federal bureaucrats had a policy against this.
In any case, there is no evidence that Iraq had anything to do with 9–11. The Iraqi regime is liberal by Muslim standards and for that reason hated by Islamic fundamentalists. Unlike Saudi Arabia, it tolerates religious diversity, permits gun ownership, and allows drinking. It has a secular culture, complete with rock stars and symphony halls, that few other Muslim states have.
es it is a dictatorship, but there are a lot of these in the world. Many of them are US allies. The focus of the Bush administration on Iraq has more to do with personal vendettas and Iraqi oil. In waging war, the Bush administration proposes to spend twice the annual GDP of the entire Iraqi economy! The US will spend $2 for every $1 it will destroy—the very definition of economic perversity. What's more, an attack will only further destabilize the region and recruit more terrorists intent on harming us.
Meanwhile, the prospect of war has markets completely spooked. Is this a narrow economic concern? Not in any way. Prosperity is an essential partner in civilization itself. It is the basis of leisure, charity, and a hopeful outlook on life. It is the means for conquering poverty at the lowest rung of society, the basis on which children and the elderly are cared for, the foundation for the cultivation of arts and learning. Crush an economy and you crush civilization.
It is natural that liberty and peace go together. Liberty makes it possible for people from different religious traditions and cultural backgrounds to find common ground. Commerce is the great mechanism that permits cooperation amidst radical diversity. It is also the basis for the working out of the brotherhood of man. Trade is the key to peace. It allows us to think and act both locally and globally.
What makes no sense is the belief that big government can be cultivated at home without the same government becoming belligerent abroad. What also makes no sense is the belief that big-government wars and belligerent foreign policies can be supported without creating the conditions that allow for the thriving of big government at home. The libertarian view that peace and freedom go together may be the outlier in current public opinion. But it is a consistent view, the only one compatible with a true concern for human rights, and for social and global well-being.