Krugman: War hits US economy, stalls recovery

This is from wiredispatch. What Krugman says may be true but if the war were to wind down quickly this would mean a downturn in spending in the military-industrial complex which could itself contribute to a slowdown. However, perhaps military spending would be kept up anyway. Obama promises a large military for example. Some economists think that war spending is a type of military Keynesianism that actually is intended to stimulate the economy. Perhaps that is correct but it also has the effects that Krugman notes.

War hits US economy, stalls recovery -Nobel winner


Daniel Trotta
Reuters North American News Service

Mar 02, 2008 09:14 EST

NEW YORK (Reuters) - The Iraq war has contributed to the U.S. economic slowdown and is impeding an economic recovery, Nobel-winning economist Joseph Stiglitz says.



Meanwhile, the U.S. government is severely underestimating the cost of the war, Stiglitz and co-author Linda Bilmes write in their book, "The Three Trillion Dollar War" (W.W. Norton), due to be published Monday.

The nearly 5-year-old war, once billed as virtually paying for itself through increased Iraqi oil exports, has cost the U.S. Treasury $845 billion directly.

"It used to be thought that wars are good for the economy. No economist really believes that anymore," Stiglitz said in an interview.

Stiglitz and Bilmes argue the true costs are at least $3 trillion under what they call an ultraconservative estimate, and could surpass the cost of World War Two, which they put at $5 trillion after adjusting for inflation.

The direct costs exclude interest on the debt raised to fund the war, health care costs for veterans coming home, and replacing the destroyed hardware and degraded operational capacity caused by the war.

In addition, there are costs not accounted for in the budget such as rising oil prices and social and macroeconomic costs, which the book details.

To illustrate how the money could be spent elsewhere, Bilmes cited the annual U.S. budget for autism research -- $108 million -- which is spent every four hours in Iraq. A trillion dollars could have hired 15 million additional public school teachers for a year or provided 43 million students with four-year scholarships to public universities, the book says.

Stiglitz and Bilmes say they were excessively conservative in calculating the $3 trillion figure, overcompensating for their bias in having opposed the war.

'FLOODING THE ECONOMY'

Asked if the war has contributed to the U.S. slowdown, Stiglitz said, "Very much so."

"To offset that depressing effect, the Fed has flooded the economy with liquidity and the regulators looked the other way when very imprudent lending was going up," Stiglitz said. "We were living on borrowed money and borrowed time and eventually a day of reckoning had to come, and it has now come."

The war has also altered how the United States has reacted to its current economic troubles, he said.

"When America's financial institutions had a problem, they had to turn to the sovereign wealth funds in the Middle East for recapitalization, for the bailout," he said.

"The reason was obvious. The war had led to high oil prices. The war had meant that America had to borrow more money. There weren't sources of liquid funds in the United States. The sources of the liquid funds were in the Middle East," he said.

Bilmes, a former assistant secretary and chief financial officer of the U.S. Customs Department, said the war also limited options for the $168 billion stimulus package signed into law by President Bush Feb. 13.

"We really had very little wiggle room in order to pass this because of the fact that we're spending $16 billion a month on Iraq and Afghanistan," Bilmes said. "Actually the country could have used a larger fiscal stimulus but there is (no) cash to accommodate it."

The authors said they were surprised by the hidden costs their research found, citing, for example, what they called the underreporting of casualty figures by the Pentagon.

The official Pentagon figure of nearly 30,000 wounded in action fails to account for an addition 40,000 service members who have required medical attention for noncombat injuries or illness, Bilmes said. She based her conclusion on official Defense Department data from a restricted Web site. (Editing by Philip Barbara)

Source: Reuters North American News Service

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