WAR IN IRAQ:
THE IMPLICATIONS OF WAR ON THE
US ECONOMY
Economic Concepts Final Project
MBAM 592.11
Fall 2004, Session A
Mike Bennett
Angela Copeland
Sarah Todnem
Professor David Smith
Monday, October 18, 2004
Table of Contents
I.
Introduction………………………………………………………3
II.
Short Term Effects of War……………………………………….4
III.
Long Term Effects of War……………………………………….6
IV.
Conclusions……………………………………………………….8
V.
Sources.......................................................................................10
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I. Introduction
The obvious justifications for going to war with Iraq are increasing national
security by decreasing the perceived terrorist threat and removing from power a dictator
guilty of many human rights violations. However, the not so obvious rationale for
invading Iraq may have a lot to do with gaining political leverage over the rich oil
deposits there.
However, there are many costs associated with war that need to be considered
when performing a cost-benefit analysis. Below is a table which shows the costs of wars
throughout U.S. History, shown in 2002 dollars. Also included is a table of the
component costs of the War in Iraq, depicting the increased cost of prolonged occupation
paired with the increased cost of the technology used in war.
War
Conflict Costs
(Billions)
Revolutionary War
Civil War
World War I
World War II
Vietnam
First Gulf War
$2.20
$62.00
$190.60
$2,896.30
$494.30
$76.10
Per Capita
Cost
$447
$1,686
$2,489
$20,388
$2,204
$306
Costs as
a % of
GDP
63
104
24
130
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Table 1: Historical Cost of War
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Currently, the U.S. Government spends $10 – 15M per hour for a bomber run, $1M for
each Tomahawk Missile launch, $3M per day for aircraft carrier deployment, and $21K
each to upgrade bombs to include satellite guidance.
II. Short-term Effects of the War
Many people feel that war will help the economy by boosting production and
creating more jobs. As we will see, going to war does provide many benefits to a
country, especially one in an economic downturn. However, these benefits are primarily
seen in the short run.
Going to war increases GDP in the short run. Governments increase spending in
order to provide the troops and equipment necessary for participating in a war. In the
past year, the US government has increased government spending by over 25%.
However, economic well-being is falsely inflated. The Government gets the funds to
provide for this spending by: raising taxes, decreasing spending in other areas, and
increasing its debt. The government has a budget constraint like everything else. The
figure below demonstrates that as the government increases military spending, there is
less money to fund social programs. (These programs help build important factors of
productivity such as physical and human capital). In a time of war, total government
spending increases, shifting the budget constraint outward. At the same time, the
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government is less willing to trade military for social spending, indicating that they shift
up along the curve.
Figure 1: Government Budget Constraint
The government currently estimates that a short-term war with Iraq will cost from
$60-90B, with a long-term estimate of $600B. However, economists generally see these
costs as too narrowly-defined and estimate that the real cost of the war will be $100200B, or $2,000B in the long-term. Therefore that is at least $100B that will be funneled
to military spending as opposed to social programs that would build human and physical
capital for future productivity.
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In the short term, unemployment is also positively affected. The increase in
government spending leads to an increase in production that will increase the number of
civilian jobs available in manufacturing and related sectors such defense contracting.
The war will also increase demand for soldiers, seamen, and airmen. The increased
demand for military personnel will create job openings in private sectors as they are
vacated by reservists being activated as well. Therefore, the unemployment rate will
drop as more jobs become available in both government and private sectors.
III. Long-term Effects of the War
From the short-term perspective, war seems to be a good thing for the economy.
However, in the long term, many of the benefits will cause economic problems.
As earlier noted, the government raises taxes, increases debt, and decreases spending in
other areas to generate the funds needed to go to war. Increasing taxes puts a strain on
consumers, causing them to spend less. This lack of spending is reflected as decreased
consumption in overall GDP. Increasing the debt of the government means that the
government goes into the private loan market and buys up a good portion of the loans.
This action causes inflation, decreasing the value of the American dollar. Thus people
are unable to spend as much as they once did. Also the lack of spending in other areas
leads to deficiencies in human and physical capital, causing productivity growth
slowdown.
Taking into account all these drawbacks to government spending on war, it is
estimated that GDP could be up to 2% below baseline for 2005 – 2009 because of the
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war. Conversely, many hope that an added economic benefit of the war will be increased
oil supply and increased stability in the Middle East. These goals are valid, but
ultimately, war will not bring about large-scale changes in the foreseeable future due to
outside forces such as OPEC and the larger political climate of the world.
Figure 2: Oil Production’s Effect of Supply and Demand
Figure 2 demonstrates that during the War in Iraq, the decreased oil supply creates
an increase in the price of oil. After the war, the hope is that the supply of oil will
increase, decreasing the cost of oil.
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War is not a long-term solution to unemployment. When the war is over, the
additional production caused by the large increase in government spending will cease
when the supplies used in the war have been replenished to pre-war levels. Additionally,
the raised taxes over time place pressure on the consumers, causing decreased
consumption. This decrease will also lead to production cuts and higher unemployment.
IV. Conclusions
The broken window fallacy describes a situation in which a vandal throws
a brick through a shop window. The owner then must spend money to replace
the window. In the end, the fallacy suggests that the vandal is a public
benefactor because he stimulated spending in the society, causing a trickledown effect that improves the economic well being of a society. What the
fallacy fails to account for is the fact that without the vandal, the shop keeper
would have had both his window and his money. He would have invested his
money elsewhere were the window not broken, while preserving the capital of
the window.
The broken window fallacy is an antic-dote that explains the economic
shortcomings of war. Going to war claiming that it will benefit the economy is
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much like throwing the brick, assuming that it will stimulate spending. The war
ties up funds that could be expended in a more productive fashion, while
destroying some of the existing capital of a society. Therefore, going to war
will not benefit the economy in the long run.
As we have seen, war does show some short-term benefits in GDP and
unemployment due to increased government purchases that stimulate
production. However, in the long-term, the government’s war spending takes
funds away from more productive spending, while also destroying important
physical and human capital. War may seem to benefit the economy, but these
benefits are extremely short lived and the overall effect is negative.
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V. Sources

“Calculating the consequences”, The Economist, November 28,2002.

McKibbin and Stoeckel, “The Economic Costs of a War in Iraq”, Brookings
Institution and Centre for International Economics, March 7, 2003.

Francis, David. “War’s certainty: a big price tag”, The Christian Science Monitor.

Thurow, Lester. “Economics of the War in Iraq”, Commonwealth Magazine,
April 2003.

“Bush’s War Economy”, The Progressive, December 2003.

Moffett, Mike. “Are Wars Good for the Economy?”, Economics.About.com
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