Bad News, Good News

Yesterday, I was supposed to be on Street Signs with Erin Burnett to talk about the effect of the Iraq war on the state of the economy.  Sadly, they canceled me at the last minute.  Bummer.  Then when I got home, there it was, waiting, mocking, the Tivo recording of "my show."  I felt bad but… I had to watch.

Heh, they got Joe Stiglitz to replace me!  Well, anything less than a Nobel prize and I would have been insulted but I feel much better now!  Amusingly, Stiglitz and I are good substitutes on this issue.  In case you are wondering, we both think that at the present time the net effect of the Iraq war is (modestly) contractionary rather than stimulative due to higher oil prices, higher interest rates and less wealth.


You would've had more credibility on the issue, Alex. Our loss.

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"net effect of the Iraq war is (modestly) contractionary rather than stimulative"

I don't understand this. When would it ever be stimulative to engage hundreds of thousands of citizens in the act of moving billions of $ of munitions around the world to explode them there, while occasionally getting hurt or killed? In what scenario would that activity result in a growing economy, except in a broken window sort of way?

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True, Jason, but that doesn't mean we're better off for it. Kebko's point is that stimulating the economy via military expenditures is like breaking everyone's car windows. It will generate GDP (think of all the window-repair services that would see much more business) but it can't really be said to be making the economy better off.

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I wonder how excess borrowing for the war is impacting the Fed interest rate policy. Has it made lowering interest rates less effective? Has it helped to hold down inflation?

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Mario, I would expect that, like most government spending, it would be inflationary. The government doesn't spend money effectively, even the the most effective insitution, the military.

I would also expect that the impact of fed policy would be nil. The military spending would most likely increase the money supply, reducing the need for the fed to reduce rates.

Perhaps interest rates on government debt would be lower if we didn't have the war spending. The borrowing should increase our credit risk, causing people to demand higher interest from us. Apparently that hasn't happened, but maybe rates would have fallen otherwise.

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My point is that measuring effect on GDP may be an interesting exercise, but it is a pretty poor way to measure the real economic effects of the war. It does not not count the loss of lives, the cost of injuries, etc.

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Person, I'm tempted to say take it up with Joe Stiglitz! :) Of course, lots of things are going on but think about it this way; Without the war the deficit would be lower and more money would be available in the currently tight credit markets.

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I'd like to see stats on how much of the war chest was "misappropriated" (that's Ollie North-speak for looted, stolen, purloined).

Those funds can't be counted as "expansionary" unless you're talking specifically about the bank accounts of Cheney's vile friends.

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Sadly, they canceled me at the last minute

I can hear the other conversation now:

Sneaky CNBC Producer (CP): Dr. Stiglitz, we understand that you think the Iraq war is bad for the economy.

Joseph Stiglitz (JS): Yes.

CP: We're doing a segment where we need someone to tka ethat side of the argument, we already have someone on the other side. Are you interested?

JS: Gee, I don't know, I was planning on going out to eat for lunch, your segment would make me rush to eat. I think I'll pass.

CP: Ok, thanks anyway, I'll try another time.

Later, in a different phone conversation:

CP: Hello, Dr. Stiglitz?

JS: Yes, I was about to order lunch?

CP: Sorry to interrupt, just making a follow up courtesy call. We got an economist from GMU to cover your side of the debate.

JS (coughing, seemingly in pain): Hmmmmm, you know what, I'll take that spot after all if it is not too late.

CP (smiling ear to ear): Oh cool, I'll just bump him.

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Bernard, point taken and echoed.

I think the real question is "should any goverment spending be included in GDP".

Perhaps we should have a new metric that subtracts it out.

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