Mises Daily Articles
Will War Bring Prosperity?
Mainstream economists like to attribute recessions to external events, rather than to domestic affairs. For instance, David Wyss, an economist with Standard & Poor's in New York, said, "If you include the most recent downturn, then we have had four out of the past four recessions caused by the Middle East."
But that's a myth. While events that cast uncertainty over the supply of oil were undoubtedly a contributing factor, they were not "the trigger." The actual origins of 20th-century recessions can be traced closer to home, such as price and regulatory controls and, namely, decisions made inside the vast marble palace that serves as the headquarters of the Federal Reserve.
Another myth that has held steady about the 20th century is that war--and its evils of taxation, inflation, slavery, destruction, and mass murder--cured the Great Depression in economic activity of the 1930s, not only in America, but in Europe as well. This warped view concedes the legitimacy of the New Deal's interventions to artificially raise prices and wages by restricting supply, which is the sole reason why the effects of the crash of 1929 lasted for over a decade and became known as the Great Depression.
However, many Keynesian-trained mainstream economists and intellectuals believe that war is good for many things. In fact, it appears as a magic elixir that solves so many political problems: voter and patriotic apathy; the alleged threat posed to civilization from low taxes, high savings, and decreased state spending; and the dangers unleashed should the public lose the desire to carry the military-industrial complex on their backs.
Commentators from Robert Bartley, the Wall Street Journal editorial page, and Larry Kudlow (who wrote, "The shock therapy of decisive war will elevate the stock market by a couple-thousand points"), to Paul Krugman and John Kenneth Galbraith, are only a few examples among legions who believe war has economic benefits to society.
This can be traced to the miseducation they received from mainstream economics training. These mainstream commentators on the ups and downs of the economy interpret these events through their training that the business cycle is a natural unavoidable phenomenon of the free-market system of savings, investment, production, and consumption. In response to consumer failure to maintain sustainable levels of spending, which they cite as the cause of recessions and the Great Depression, their prescriptions to prevent another Great Depression require welfare- or warfare-state spending, preferably both.
Unfortunately, this is the mainstream view of the history of the 20th century, taught by professors and repeated by columnists and pundits far and wide, and the unfortunate effect of this interpretation of history is that the same mistakes are repeated again and again.
And it now seems that the Bush administration might be making that mistake again. It seems possible that the coming invasion and occupation of Iraq will happen because the Bush administration believes in the Keynesian/Great Depression myth of perpetual war for perpetual prosperity. As then-Secretary of State James Baker said at the beginning of the first Gulf War, the war was all about "jobs, jobs, jobs."
The president's chief economic adviser, Larry Lindsey, was recently interviewed by the London Telegraph, whom he told, "The successful prosecution of the war would be good for the economy." This is a little strange coming from an economist. His claim is based on the benefits from a post-Saddam puppet regime: "When there is a regime change in Iraq, you could add three million to five million barrels [per day] of production to world supply," he said. But what if Saddam does in Iraq what he did in Kuwait, and orders the destruction of Iraq's oil wells? After all, his track record as a menace is the alleged reason for needing "regime change" in the first place. And as "Nightline" recently reported, Iraq is currently only able to produce 1.7 million barrels per day, and would require billions of dollars and several years of work in order to improve the decrepit condition of Iraqi equipment.
In another interview, this time in the Wall Street Journal, Larry Lindsey said that the enormous and largely unknown costs of this war would not, in his opinion, be enough to spark inflation or push the country into recession. Which only begs the question: what does he think has been going on for the past few years? Mr. Lindsey believes that regime change would remove a "huge drag on global economic growth for a foreseeable time."
And continuing, he said: "It's hard for me to see how we have sustained economic growth in a world where terrorists are running around." If Saddam Hussein was such a drag on global economic growth, how did the global technology and speculation boom occur? And weren't al Qaida and other terrorists "running around" during the boom of the '90s? Perhaps Mr. Lindsay is suggesting that terrorism arose as a response to the global slowdown, and the only way to end terrorism is to have a nice big war to achieve prosperity.
In the same Telegraph story, Secretary of the Treasury Paul O'Neill seconded Lindsey's claims. "Whatever it is that's finally decided to be done, we will succeed and we can afford it," he said in a speech that dismissed criticism that a war could sink the U.S. economy.
This is a little worrisome. Estimates of the cost to conquer Iraq range from $100 billion to $200 billion--which are your tax dollars at work! As usual when it comes to the cost projections of politicians, this figure is practically guaranteed to be billions--perhaps even hundreds of billions--of dollars off. This would be on top of the cost to taxpayers of the "War on Terror," estimated by the government's Office of Management and Budget to already total more than $100 billion. The Bush administration has spent an estimated $30 billion on the miscellaneous military campaigns in Afghanistan and elsewhere, $35 billion on "homeland security," $21 billion in bailouts and subsidies to New York City, $8 billion bailing out the airlines, $5 billion for victim compensation, and around $3 billion on "other."
The Pentagon estimates that it will cost $13 billion alone just to transport the 370,000-man U.S. army of conquest and occupation from its garrisons around the world to the Arabian peninsula, and $9 billion a month to conquer Iraq. Now suppose that the Iraqi army decides to resist--perhaps not to save Saddam, but to defend their homeland against a foreign imperial invader. It will likely retreat into the cities. As a New York Times article reported, "[senior administration] officials said that any attack would begin with a lengthy air campaign led by B-2 bombers armed with 2,000-pound satellite-guided bombs to knock out Iraqi command and control headquarters and air defenses."
Remember, these "Iraqi command and control headquarters and air defenses" are in urban areas, where the people and the government apparatus are, since Iraq is mostly empty land anyway. The U.S. military is planning to drop hundreds or thousands of 2,000-pound bombs on densely populated cities around the clock for "3 to 4 weeks."
Plus, there are still the unknown billions in winks and nods to France, Russia, China, Turkey, and other governments in bribes to gain their surrender to George W. Bush's wars. And in congressional testimony, former national security adviser Sandy Berger testified that rebuilding Iraq will cost between $50 billion and $150 billion, which is, again, practically guaranteed to be off by billions. It's unlikely that these estimates could be too high. Politicians are betting on having at the very least these amounts to play with. Again, your tax dollars at work.
The destruction caused by the war and the costs to rebuild Iraq must be added to the estimated costs of the war. So now it could be $150 billion or as high as $350 billion! These fantastic sums can only come from four sources: foreign cost-sharing, taxation, federal borrowing, or inflating the currency, which is a form of stealth taxation. The former two are unlikely, since the world largely opposes Bush's Iraqi adventure, and the son will not forget the mistake of the father and raise taxes.
Deficits have returned without ever actually leaving, and increasing the national debt to conquer a foreign country will be hard to justify. That leaves inflation. Constant inflation, which has produced the bust and prolonged its effects for nearly two years now, will likely finance the war and ruin the economy even further. But we might see George W. Bush demoted from his position within the pantheon of successful "war presidents" and become, along with LBJ and Nixon, synonymous with inflation, stagnation, and rising domestic opposition.
Whether or not war as economic tonic is the motive, the excuses for this conclusion are wrong. The mainstream view is that the Great Depression was caused by a decade-long collapse in consumer spending, and the lesson drawn from this ever since is that if consumers aren't willing to spend for some unknown reason, the state must tax, borrow, spend, and inflate in order to spend on their behalf. That opinion is based on the wrong interpretation that the welfare-warfare-state planning of Roosevelt's New Deal "saved" capitalism from itself, and the Second World War, with its systems of controls, rationing, and superpatriotism, ended the Depression. The actual solution to the Great Depression would've been, not foreign intervention and world war, but rather, the ending of the New Deal's domestic "war" on the economy.
Keynesians, such as Paul Krugman today, who hold that World War II had "positive economic effects," predicted at the time that the Depression would return after the war ended if the fascist economy of war socialism was allowed to end. Although they advocated massive public works programs, if they really wished to continue the "prosperity" of the war years, the Keynesian approach logically requires perpetual war. But it's doubtful even Keynesians would claim that perpetual warfare, where production is sent to the battlefield to be consumed and destroyed, raises the standard of living and quality of life for those who labor in the factories and munitions plants and suffer deprivations, rationing, and inflation.
The widely held Keynesian myth about the Depression and WWII provides a justification for the Nazis' attempted "New Deal" for Germany and for Europe. If Roosevelt was justified in conniving with Winston Churchill to overthrow American majority opinion resisting entrance into the war, to distract the public from the failures of the New Deal, to find work for millions of unemployed Americans, and to keep himself in power, why isn't Hitler equally justified in starting a war to find jobs--as war fodder--for all those unemployed Germans?
Keynesians should have to agree. It was Keynes himself, after all, who in his introduction to the German language edition of his General Theory, lauded the Nazi totalitarian regime as one where his crackpot theories would be more suitable than under good ole laissez-faire. As Ludwig von Mises stated the Nazi worldview in his book Omnipotent Government: "[The] Nazis ... fought for raw materials and fertile soil, and they promised their followers a life of wealth and luxury." Somehow, that warfare and pillage are destructive rather than productive, and that they kept humanity in squalor for millennia, didn't occur to Keynes and Hitler.
The cost of World War II was more than $300 billion in the dollar of the 1940s. In other words, in today's Greenspan tokens, something like $2.5 trillion was wasted on death and destruction by the United States alone with little improvement in the American standard of living to show for it. Through taxing, borrowing, and inflating, Roosevelt raised these gigantic funds, and after they were wasted on the battlefields of Europe and lay strewn along the floors of the Atlantic and Pacific oceans, Americans were much poorer then and are poorer today because of it.
Once the New Dealers' wartime controls expired, the economy began to recover, even as Truman launched the Korean War and the series of provocations with the Soviet Union that began the Cold War. Truman hated the idea that Americans would regain any lost freedoms and attempted to reimpose a wartime economy in order to prevent the repeal of all the New Deal/wartime controls over the people. The Cold War, by the way, is estimated by Robert Higgs, author of Crisis and Leviathan, to have directly cost American taxpayers alone $5 trillion dollars in squandered wealth.
What is war but Frederic Bastiat's broken-window fallacy writ large? Wars--and what is war except crime on a mass scale?--destroy rather than produce. The vandal that destroys a window causes not only the owner to bear the costs of replacing it, but costs those whom he planned on using that money to buy from. The same goes for wars. The warlords--of war and peace--destroyed so much, not only what existed, but all those new things that could have existed, if only individuals were left in peace. Ludwig von Mises wrote that war is the collapse of the division of labor and the application of reason, which he said were man's unique tools for his survival and the advancement of society.
The alleged economic benefits of war are most likely yet more examples of this administration's reported strategy of throwing every possible reason, excuse, story, and fear "against the wall to see what sticks." And these Keynesian economic rationales appear to be designed to garner public support, by hook or by crook, for the invasion and occupation of Iraq--what the hawks like to call a "liberation," rather than an old-fashioned imperial colonization.
At best, the puppet Iraqi parliament and president (likely Ahmed Chalabi, a man who is wanted for bank fraud in Jordan, and who hasn't stepped foot inside Iraq for 30 years!) will be able to rubberstamp decisions already made by the U.S. occupation. The rhetoric about Iraqi democracy already rings hollow. It was Rep. Tom Lantos, the ranking Democrat on the House Committee on International Affairs, after all, who recently said the goal of democratizing the region is "just a general 'road map.' " Once Saddam is gone, "we'll install a pro-Western dictator" who would rule for an "interim period" that "should last between five to six years."
A new Iraqi ground war is a certainty, regardless of the actions of other governments and the U.N. to insist on disarmament. We can be certain because of the widely publicized growing "anti-Americanism" among Saudi Arabians, and the need for the U.S. to weaken the leverage of the Saudi regime by securing other sources of oil. This explains the recent occupation and support for the Central Asian dictatorships that sit atop vast untapped oil reserves. And it explains the coming war with Iraq, which has the second largest proven oil reserves in the world. In order to ensure the reliable supply of oil and political subservience and to weaken Saudi oil dominance, Washington needs a new puppet regime to replace Saddam Hussein in its once and future Iraqi colony. The U.S. can't now embrace a man it has demonized for the past decade as "worse than Hitler" and a potential global menace, after all.
How the Iraqi people will react to American armies invading their cities, following a sustained aerial bombing campaign and an Afghanistan-like puppet regime, is still largely up in the air. Most likely at first, they will welcome the fall of Saddam, but it is unlikely they will ever forget or forgive what the U.N./U.S. sanctions have done to their lives, families, and children. After all, the Serbs have not changed their mind about the injustice of the U.S./NATO smearing of their culture and the destruction of their country, even though the war weakened the regime enough for the people to oust the Socialist Party and Milosevic.
But nevertheless, the Bush administration is planning to give the world a big, regional war that might start on January 20th, just like its predecessor, and that has two real aims: one, to secure oil, and two, to reconstruct the Arab world at gunpoint with compliant puppet regimes that are yet somehow "democratic." This reconstruction will prove impossible. We can expect an increase in guerrilla warfare, or what will be called terrorism. Armed with modern weapons and technology, who knows what could be coming. But one thing is certain: the attempted reconstruction of the Middle East by a hated foreign imperial invader will bring it. And this is the danger of George W. Bush's wars. They will not bring prosperity, but great insecurity.