Is Our $3 Trillion War Fueling a Recession?

Debate Heats Up About Whether Hidden Iraq Costs Are Damaging the Economy

As the war approaches its sixth year, and the fight over its future heats up during an election cycle, the economic costs are attracting more attention. For a war of this length, it's not unusual to begin tallying up total spending and pursuing whether money is being wasted.

But these questions have already been transformed into a contentious battle of words, escalated recently by a new book from the Nobel laureate economist Joseph Stiglitz, who charges that war costs have been hidden and may total a staggering $3 trillion. At the same time, the economy already appears on shaky ground, either heading into a recession or already there, prompting arguments over the extent of the war's contribution to the current slowdown.

"We're a rich country and we can afford to spend a lot of money in a lot of areas," said Steven Kosiak, director of budget studies at the Center for Strategic and Budgetary Assessments, a non-partisan research institute in Washington. "But at the same time we're talking about a large amount of money in budgetary terms being spent on the war. The costs at first didn't appear to be foremost in people's minds. But the further it gets from 9-11, the more people start having questions."

During a talk in London recently, Stiglitz upped the ante, citing war costs as as a hidden cause of the subprime housing meltdown now dragging down the economy. He charged that the Federal Reserve flooded the economy with cheap credit to cover up for the government's extensive spending on the war.

No one previously has linked war costs with the subprime mess, which has usually been attributed to lax lending standards, problems with rating agencies, Wall Street greed and other causes. Even among economists who oppose the war, Stiglitz' theory draws few supporters.

"Stiglitz is a very good economist," said Dean Baker, co-director of the Center for Economic and Policy Research. "But this one doesn't make any sense."

Interest rates plummetted in 2001, predating the war, Baker noted. They fell even lower in 2003, after the war started. "Furthermore, the housing bubble began in the mid-1990s as a spinoff from the tech bubble. It had already grown dangerously large by 2002...basically, nothing fits the Stiglitz story," he said in an email.

Like Stiglitz, however, some liberal advocacy groups including MoveOn.org, along with former Democratic presidential candidate John Edwards, are trying to tie war costs more closely to the economy's problems. While it's worthwhile to ask whether military dollars could be better spent elsewhere to stimulate the economy, it's overly simplistic to link the war's costs - Kosiak puts the current tab at $500 billion and counting - directly to a possible recession. That lets lenders and investors escape responsibility for their roles in the collapse of the $8 trillion housing bubble, which vastly overshadows the war in its economic impact, Baker said. "People say, 'Ok, we have economic problems because of the war,' and they misunderstand this," Baker said in an interview.

Expect the misunderstandings to continue. Determining the war's effects on the economy is like wading through the country's political divide, with many on the far left blaming a possible recession entirely on the war and those who support it contending it's a question that shouldn't even be asked. Between Stiglitz' book, the war's coming anniversary, the presidential election and the worsening credit crunch, arguments over the the war's cost to the the economy are likely to ratchet up even more.

"Economists are slightly arrogant when they think they can measure everything," said Irwin Stelzer, a conservative economist who supports the war. "This is really an existential battle over American values."

The battle began even before the war, when the Bush administration declined to discuss potential costs in the buildup to the invasion. In 2002, White House economic advisor Lawrence Lindsey pegged the costs as high as $100 billion to $200 billion; he was dismissed later that year. Former Defense Secretary Donald Rumsfeld in 2003 predicted total costs of just $50 billion.

The back and forth seemed to matter little. Early in the war, budget figures weren't the focus of public attention. Critics of the war risked being attacked as unpatriotic, and wading into the numbers question wasn't exactly encouraged. But in a mostly low-profile way, economists continued the debate. Yale's William Nordhaus came up with a high-end estimate of nearly $2 trillion in 2002 dollars. Scott Wallsten, a resident scholar at the American Enterprise Institute, and Steven Davis, a University of Chicago economist, also attempted to crunch the numbers. A small but growing number of economists found it perfectly appropriate to probe the economic impact of waging war. After all, a cost-benefit analysis routinely accompanies most public policy proposals.

That view isn't universally shared. Other economists, in particular those who support the war, say it's not useful to try to put a price on fighting terrorism and keeping the country safe.

"I don't want my six kids being killed by a terrorist as I put them in bed for the night," said Diana Furchtgott-Roth, a senior fellow at the Hudson Institute, a conservative think tank. "We're spending this money to make sure we're not attacked again. It is true that defense spending is talking a lot from our economy, but it's also ensuring our safety. Terrorists are out to get us and we need to do something about it. We can't just say we need to spend money on health insurance, education and national parks and close our eyes to it."

That kind of talk has both discouraged and obscured what some economists see as the bigger question: What role war spending plays in an economy.

In response to Stiglitz' $3 trillion estimate, White House spokesman Tony Fratto put it this way: "People like Joe Stiglitz lack the courage to consider the cost of doing nothing and the cost of failure."

That kind of talk has both discouraged and obscured what some economists see as the bigger question: What role war spending plays in an economy.

In general, war spending early on in a conflict stimulates the economy; jobs are created, defense contractors thrive. World War II usually is credited for pulling the U.S. out of the Great Depression. But if a war continues for many years, war costs can weaken an economy, and the dilemma becomes whether all the military spending is pulling resources away from other places that would benefit from the money.

During Vietnam, former President Lyndon B. Johnson expanded spending on domestic social programs like Medicare while fighting the war. A long period of stagflation in the 1970s followed, which usually was attributed to Johnson's guns and butter strategy. In hindsight, many economists now say inflationary problems stemmed from the oil shock of the early 1970s and from the inability at the time to manage monetary policy, not from the war and domestic spending, which helped contribute to low unemployment. As a sign of how contentious war spending debates can become, however, not all economists agree, and more than three decades after the war's end they're still arguing about it.

Most, however, say that war spending is especially key during a recession, to act as a stimulant. If the war ended tomorrow, "it would only add to the recessionary pressures we have in place," said Paul Davidson, an economist at the The New School in New York who has studied what happens to economies once the fighting ends.

That's not to say economists are pushing for the war to continue to avoid a recession. But they are pointing to the stimulant effect of war spending to prove that substantial public investment can benefit the economy, in a far more efficient way than military spending. "It's a tragedy we require a war to do these things," said Robert Pollin, co-director of the Political Economy Research Institute at UMass-Amherst.

In 2007, the U.S. could have generated one million new jobs, provided health coverage for all the uninsured, and invested in energy conservation and education by using all the money spent on the Iraq War and by rescinding the Bush tax cuts, Pollin concluded. With the economy in trouble and local and state governments facing smaller budgets and cutbacks in services, views like his are gaining in favor.

"I come from Minneapolis and I have relatives who cross that bridge that broke down last summer every day," said Greg Speeter, executive director of the National Priorities Project, a Northampton, Mass., nonprofit that analyzes federal data and features a real-time Iraq War costs counter on its website. "We should be spending money on things that save lives and don't give us a rotten reputation around the world."

On the other side, Stelzer, the economist, looks at it this way: "I put a very, very high premium on Iraq being eliminated as a source and a haven for terrorists."

While the debate continues, the housing slump is deepening, and oil prices keep hitting record highs. Unlike during Vietnam, the U.S. entered this war with an economy that wasn't in such great shape to begin with. If consumers begin to feel more pain from a recession soon, the fight over war costs and the economy will only find its way further into the long-running debate over Iraq.

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Economy, National Security