Friday, September 3, 2010

The Iraqi Economic Stimulus

In my last post, I discussed the end of Operation Iraqi Freedom. I discussed the cost in blood, but also what was gained from the Liberation of Iraq, especially the victory it represents in the War on Terrorism. The purpose of this post is to discuss the cost and benefits of the war in terms of treasure.

According to the non-partisan Congressional Budget Office, the total cost to the federal government of Operation Iraqi Freedom was $700 billion – not the $3 trillion estimated several years ago by critics of the war.

When critics of the Liberation of Iraq discuss the fiscal cost of the war, they only count the expenditure side of the ledger, without mentioning the receipt side, just as they count the lives lost from the war and not the lives saved and the freedom secured. These critics contradict themselves by claiming the war was based upon economic motives, but also arguing that the war was economically costly while dismissing any economic benefit gained from it. They cannot have it both ways.

Although wars are not economically efficient (e.g. creating bombs to explode), they are somewhat stimulative of economic growth – to the extent that spending by government, which must tax or borrow the money, is stimulative at all. World War II famously pulled the economy of the United States out of the Great Depression, for example.

Some people think that all of the money for the Liberation of Iraq was spent “over there,” but much of it was spent in the United States. The materiel was mostly purchased here, for example. More soldiers served in the armed forces, all of whom received combat pay. Much of that extra pay was sent home. In addition, there were thousands of American civilians contracted by the Defense Department working in Iraq, earning money to bring back to the U.S. Meanwhile, private American enterprises won contracts for Iraqi reconstruction projects. The increased spending in the U.S. helped offset the cost of the war to the economy, as well as to the federal treasury, as economic activity generates tax revenue.

When calculating the cost of Operation Iraqi Freedom, its expenses must be offset with the change in mission for U.S. troops. The cost of maintaining tens of thousands of troops in Saudi Arabia, other Arab Persian Gulf states and Turkey in order to defend Iraq’s neighbors against Iraqi aggression and to patrol the no-fly zones over both northern and southern Iraq was made no longer necessary by the Liberation of Iraq.

Operation Iraqi Freedom also benefited the American economy directly in a number of ways. The overthrow of the Baathist regime allowed the U.S. to lift the embargo on Iraqi oil. Libya’s resultant renunciation of terrorism and destruction of its weapons of mass destruction also allowed the U.S. to begin importing Libyan oil. The increase of supply from Iraqi and Libyan oil to the U.S. market undoubtedly prevented increases in the price of oil beyond its sharp rise in 2005. That rise matched the rate of inflation, after a long period of below-inflation prices, but the important point is that the price did not rise beyond what would be expected because of inflation. This lack of even higher inflation was not only beneficial for consumers, but allowed the Federal Reserve to keep interest rates at record-low levels in order to stimulate economic growth. Lower interest rates are good for borrowers (not only those who buy homes or cars, but also businesses large and small), which increases economic growth, as well as for the federal government, the largest borrower of all, and state governments. The lower interest rates are credited with contributing to the aversion of a depression in 2008. Americans also earned contracts to refurbish Iraq’s oil infrastructure. Additionally, with the lifting of the trade embargoes on Iraq and Libya are now markets for the importation of all U.S. goods while Americans can enjoy the fruits of Iraq’s Fertile Crescent, the Cradle of Civilization (e.g. Iraq is the world’s largest exporter of dates).

Finally, the prevention of major terrorist attacks in the U.S. since September 11, 2001 allowed the American economy to recover from that trillion-dollar blow and to prosper for several years until the Panic of 2008. Americans enjoyed robust economic growth with low unemployment, low inflation and low interest rates from 2002-2008 in the security that allowed commerce to take place freely. The overthrow of the terrorist-sponsoring regime of Saddam Hussein, the capture of his weapons of mass destruction, the defeat of al-Qaeda and other militant Muslim jihadis in Iraq and Libya’s resultant renunciation of terrorism all contributed incalculably to the prevention of terrorist attacks on Americans abroad and perhaps even domestically.

Just as it is impossible to know with certainty whether more American lives were saved than lost from the Liberation of Iraq, it is impossible to know the net effect of the war economically and fiscally to the U.S. The point is to note both what was lost and what was gained. The prevention of any loss of American freedom because of terrorists and other militant Muslims can, however, be observed and appreciated, thanks to the soldiers who participated in Operation Iraq Freedom.


Anonymous said...

Yet nother great commentary, Will. Kudos.

Another area where critics contradict themselves is by claiming the war was based upon motives for oil profit. Any one with even a 5th grade level understanding of basic economics principles knows about supply and demand. Prior to the war, Iraq was, if I recall correctly, one of the top 5 oil producing nations. How does increasing the supply help profits? Wouldn't flooding the market with all that supply from a newly democratic and market-oriented state create an excess supply and thus bad for prices and profits? Plus, a large portion of the oil revenue was designated to stay in Iraq to rebuild the county, not ship out to executives in Houston.


The Definitive Word said...

Thank you, KM. You are right: As you know, when Kuwait was liberated, the critics insisted the war was wrong because it was based on economic reasons (for "cheap oil"), a charge they repeated after the Liberation of Iraq when the price of oil remained low; once oil prices rose in 2005 to reflect inflation, the same critics then insisted that the war must have been fought in order to increase the price of oil. These critics do not understand economics, as you observe, but their cynical motivation was to ignore Iraq's aggression and terrorism in order to attempt to make ad hominem arguments against American leaders who were defending U.S. interests by suggesting that any economic benefit taints the motivation, as if one can have only one motive at a time and as if a desire for a peace bonus of prosperity is a bad thing. Finally, I note that if the U.S. were motivated soley by a desire for cheap oil, all it had to do was lift the embargoes on Iraq and Libya in the first place.