Earlier this month the New York Times reported: “It is not easy to draw a straight line from the slumping economy to the war in Iraq and a trade deal with Colombia, but Democrats are trying to connect those dots.” The Democrats star witness in linking the economy to Iraq is economist Joseph Stiglitz, who has a new book out titled “The Three Trillion Dollar War” (never mind that Stiglitz has already upped his claim to $5 trillion). While liberals have poll numbers that show some voters are buying his claims, Stieglitz’s economist colleagues are not.
Iraq and the price of oil
Brookings Institution Scholar and Bill Clinton’s Council of Economic Advisers chair Martin Neal Bailey recently wrote in the New York Times: “I am no fan of the war in Iraq, but it simply has not been a major contributor to the financial crisis and the impending recession.” Bailey goes on to explain that “the high price of oil is largely the result of strong demand, notably from China and India, pressing against a limited supply.” Bailey continues: “Absent the war, Iraqi oil production under Saddam Hussein might have been somewhat higher, but not by enough to affect the American economy” since “Iraqi oil production has been very volatile and has experienced a downward trend since the late 1970s, despite its vast potential.”
Also disproving Stiglitz assertions, Council on Foreign Relations senior fellow Amity Shlaes notes that “the 2003 drop in oil production by Iraq accounted for less than 1 percent of world production” and that “overall, world oil output went up from 2002 to 2006.” Also unadressed by Stiglitz: why prices for almost commodities (like gold, silver, and copper) have risen along with oil. These parallel price rises show that economic growth in India and China is the real culprit behind the high price of gas in the United States.
Iraq and mortgage defaults
Bailey also makes it clear that not only is there no link between the recent rise in mortgage defaults and Iraq, if anything, the war should have tempered the situation: “Back home, our economic fumbles can be primarily tied to the mortgage mess and the big slump in residential construction. Some borrowers lied on their mortgage applications; some originators misrepresented the terms of the loans; financial institutions were making so much money they underestimated the risks they were taking. … Is government borrowing to blame? Chronic budget deficits are harmful because they increase interest rates, crowd out domestic investment and increase the trade deficit. So, in principle, budget deficits should actually have curbed the housing boom, not fueled it.”
But liberal claims to care about the deficit’s effect on the economy directly conflict with their own current policy perscriptions: Congress just passed a deficit spending stimulus package and the whole point of Stiglitz testimony is to lay the groundwork for a second round of deficit domestic spending.
Iraq and economic growth
Left out of Stiglitz’s analysis is why it took so long for the war to effect the economy. Larry Kudlow notes: “And by the way, despite the current slowdown, during the five years of the Iraq war the U.S. economy has performed remarkably well. Real GDP has increased by 16 percent, or 3 percent annually. The unemployment rate has hovered below a historically low 5 percent for quite some time. Nearly 10 million jobs have been created. Household net worth has increased by $20 trillion. Industrial production has expanded by 13.5 percent. Even home prices, despite the current correction, have increased by 20 percent.”
And this does not even include growth in Iraq’s economy. Shlaes writes: “And where in the “Three Trillion” calculus does the new good news fit in, such as the International Monetary Fund’s prediction that Iraq’s GDP will increase by 7 percent this year?”
Leaving Saddam in power
Finally, any good cost benefit analysis includes … benefits. Stiglitz never even attempts to calculate how much the U.S. saved by removing Saddam Hussein from power. Shlaes did track down economists who did, though, including UC Davis’ Professor Steven David estimates that the cost of continuing to contain Saddam would have been “in the same ballpark as the likely costs of the Iraq intervention.”