From FT yesterday:
Crisis cushioned
By Daniel Dombey
Published: February 19 2008 02:00 | Last updated: February 19 2008 02:00
George W. Bush yesterday suggested that the war in Iraq could help the US economy, arguing that war spending had contributed to demand and cushioned the blow of the subprime mortgage crisis, writes Daniel Dombey in Washington .
The president rejected the idea that the war was an economic burden. “I think actually the spending in the war might help with jobs . . because we’re buying equipment, and people are working.”
While I cannot deny the point that, ceteris paribus, if we removed $120 billion or so spending per year [1], [2], aggregate demand would be lower, it does seem to me that there might be better ways of spending that amount of resources, say investing in infrastructure [pdf] (including checking bridges), regulating food safety, etc. In addition, there might be types of spending that would have larger multiplier effects. (Interesting nonrobust results in Blanchard and Perotti (2002)).
So perhaps I should take away the adjective “accidental”, and replace it with “serendipitous”?
Let’s just hope that Richard Bruce Cheney does not walk into GWB’s office one day and assert, “George, I have an idea for a new ‘stimulus package.'”
Also given the fact that this spending will eventually have to be paid back _with interests_, even if it has a temporary positive effect, it will all come crashing down on our older selves and our children.
Let’s hope no advisor to Hillary/Obama walks into that President’s office to assert that all of the actions following 9/11 could be dismantled to free up cash for because after all, these things – like TSA – are obviously not needed since there hasn’t been an attack on U.S. territory since 9/11.
Max: I think most reasonable people believe the benefit/cost ratio for things like port security exceed one. But spending $120 billion per year in Iraq has diverted resources from stabilizing Afghanistan, securing chemical plants, and so forth. So the real issue centers on, as I’ve said before, opportunity cost [1], [2].
Port Security? And then, bridge, overpass, rail, refinery, nuclear power plant, Mall, school, Govt Building, public building, hospital, until we secure each and every US citizen in and out of the US. From an economic stand point we w/could convert our economy to a single product – safety from Jihadist attacks for each US citizen.
Face one fact. We are a target rich environment because of our freedoms. Three policies are in discussion to protect that target rich environment. 1) Go on the offensive. 2) Rely on defensive measures. And 3) the reality, do some of both.
Option 1) can happen if we are attacked again and many thousands of Americans are killed. It will not be pretty in some parts of the world.
Option 2) is just too costly and an impossibility to achieve optimum results. Results that preclude the “attacked again and many thousands of Americans are killed.”
Option 3) has now a history of nearly seven years and the results are measurable. We have not been “attacked again and many thousands of Americans are killed.”
Since this is an economics blog I would recommend option 3) is the most reasonable policy, economically, politically, and militarily.
Gripe about its costs if you will, but which option is the least costly and shows a (maybe the best) return on investment?
Menzie, if it’s not clear I was responding to your 0922PM comment.
As to the original article, I find it intriguing that you discuss the economics of a policy, the offensive in Iraq, which has one goal. Then use an argument:
which completely ignores and replaces the goal of the original policy with a completely different set. Altering the goals is certainly not “ceteris paribus.”
Granted the discussion is about one facet of the economics of the policy, but for me the whole argument used is too far for me to reach. Of course, YMMV.
I think most reasonable people believe the benefit/cost ratio for things like port security exceed one.
Well, many reasonable people who are both in the various branches of the government and who are consultants on security and the like. Yet at the same time our experience with airport security (certainly a “thing like port security”) makes me strongly doubtful that the benefit/cost ratio really exceeds one. The link you gave do not particularly convince me of the benefit/cost ratio for port security, since the CBO study only mentions benefit (potential costs avoided) but doesn’t study costs, both in obvious costs and in the less obvious costs of making shipping less efficient.
In any case, surely it’s too simplistic to say that the benefit/cost ratio exceeds one without conceding that the marginal benefit declines as we spend more, and that at some point we would be spending too much. Seeing the various bipartisan consensus in Congress that we need more airport security does not make me think that Congress is likely to stop at the appropriate level of security. This seems especially likely to me considering that various politicians and others who oppose war seem likely to support high defensive security measures as a way to seem tough and defend themselves politically.
The link on food safety is not convincing either. Despite protestations, you break it down to dollars and cents, and then throw in “sentiment.” This despite the actual CDC data showing a decrease in outbreaks, including in the more intensive FoodNet study of ten sites. It seems to me that once you start saying that the government should react to perceptions of danger rather than reality for political reasons, you’re treading on the same dangerous grounds as the people you criticize.
“Investing in infrastructure?” Perhaps. The PDF you link to does not make the case strongly enough, since while it presents studies suggesting benefits from infrastructure, it also presents other studies contradicting those. In any case, Tables A-2 and A-3 make it difficult to say that investing in infrastructure has been particularly ignored recently. It did decline a bit both as a percentage of total government spending and as a percentage of GDP under Clinton and spiked a bit in 2001 and 2002 under Bush before settling down at a level just over the average under Clinton. However, it doesn’t seem to argue to me that it’s been ignored.
Take heart, we only have another 11 months of our sentence to serve under this profoundly incompetent president. On the other hand, there is no evidence that any of the leading candidates in either party can or will in any material way improve the US’ strategic or economic status in the world. The entire country is conflicted on what to do about Iraq – stay or go, win or lose or even what it means either way. Regarding the economy, there is no evidence that if we weren’t financially killing ourselves in this mis-named (and mis-managed) War on Terror that we would in fact be “investing” in all these infrastructure needs. In point of fact, most Americans now expect the government to do all these things but without raising taxes and also not run a deficit. Maybe Bush represents us perfectly!
Isn’t this whole argument akin to Bastiat’s window breaking analogy – that we could create so many window repair jobs by breaking a few more?
Dumb, profoundly dumb.
Menzie, I am with you on the combination of offensive and defensive measures. One sub-point to going on the offensive would be to defang the major motivations behind the funding and support jihadis receive – be it through PR, non-imperialist foreign policy etc.
Finally, I just don’t get the “we haven’t been attacked in seven years – so it must be working” argument. Major jihadi attacks come rather infrequently. It was several years between the first and second WTC attacks. The argument really goes out the window the minute another attack is perpetrated.
SkepMod, don’t blame Menzie for my comment. I do agree with you on the PR campaign, a war effort we have been performing extremely badly.
Seven years without an attack here on US soil is a metrice, and number of attacks and where they have occurred is important in evaluating results of policies. Refer to my Option 1) for what I think is a potential result of another major attack on the US. Moreover, I think the next administration, Repub or Dem, will be tested. I pray for the US and the ME that they are not successful.
esb = funny
countries go to war for strategic reasons and sell it to their people with marketing campaigns. been that way the world over. even ww2.
iraq was a middle east muscle flex gone awry but getting better. hopefully it won’t contribute as much to gdp in the future as it does now.
The argument really goes out the window the minute another attack is perpetrated.
Yes, but…
There HAVE been attacks. London. Mardid. Bali.
They came close in Toronto. Very close.
But nothing here.
Too bad we can’t know to what extent wire taps, Guantanamo, etc. are responsible for the lack of terrorism here, vs. just stupid luck.
As usual, Menzie is much, much too pessimistic. There have been benefits to our invasion. We now know that Iraq has no nukes. Libya abandoned them because of the war. Iran supposedly abandoned their program, and it occured shortly after the invasion. Coincidence?
And Mr. Khan in Pakistan is no longer in the proliferation business.
The NoKos seem to be on the road to negotiating away their nuclear capability.
Point of fact, we have Iran surrounded.
These are all good things. Are they worth $120B per year? I think so. Menzie doesn’t. I don’t think that its an argument that will be solved with more data.
CoRev posted his comment over at Angrybear. AB readers have started critiquing his attempt to rationalize this costly war. Fair enough – but I should note that CoRev seems to have implied that Menzie’s analysis was conditioned by his being liberal and anti-war. I’m sorry but that was an insult to Menzie IMHO.
I should note that CoRev seems to have implied that Menzie’s analysis was conditioned by his being liberal and anti-war. I’m sorry but that was an insult to Menzie IMHO.
Is Menzie not an anti-war liberal? Is calling someone an anti-war liberal an insult?
Have there been no benefits to “this costly war”?
If we’re going to tally the costs, we better well put as much effort into articulating the benefits.
Menzie-
This simplistic formulation does not become true through repetition. Saddaam had expelled the weapons inspectors and was not complying with UN resolutions adopted in the wake of his forcible removal from Kuwait. He had demonstrated the use of such weapons in the past. He was counting on lack of will by the West. In the end he misjudged President Bush. The original resolution authorizing the war is at http://www.whitehouse.gov/news/releases/2002/10/20021002-2.html
buzzcut- we very nearly have saudi arabia surrounded and the trek from iraq to riyadh is a short one (about as short as you can get). this doesn’t go unnoticed by the regime there or aq. aq would love to take down the saudi regime but now know we can hit them immediately should they do so.
iraq has been a lot costlier than it needed to be but you are right to point out that we should look at both cost and benefit. too often the latter is ignored completely.
benefits= saudi’s must take reform more seriously and aq knows it can’t get the prized jewel.
oops: Spot-on (Iraq as middle-east muscle flex). We (the US) made Saddam but he got greedy and tried to grab Kuwait. The neocons thought Bush 1 should have sent the decisive message to other would-be troublemakers and so used 9/11 as pretense to do the job right. And there was also the small matter of needing to get combat troops out of Saudi.
As for economic benefit, it seems to me that privately-held consulting, engineering, logistics, etc. firms are reaping the benefits. Sure, they have employees, but their partners are taking windfalls at the taxpayer’s expense.
“Is Menzie not an anti-war liberal? Is calling someone an anti-war liberal an insult?”
Let’s see. Paul Samuelson is a liberal. Does that mean Foundations of Economic Analysis is a liberal document? Jagdesh Bhagwati is a liberal. I guess conservatives should view his scholarly work as having a liberal bias.
Buzzcut – I don’t mean to be so hard on you as it seems CoRev doesn’t get my point either. But I bet most folks who did go to graduate school in economics would hope that when they sit down and write economic analysis that someone doesn’t look over their shoulder and say “aha – that’s a liberal for you” or “aha – a conservative wrote that”.
Pgl-
“but I should note that CoRev seems to have implied that Menzie’s analysis was conditioned by his being liberal and anti-war. I’m sorry but that was an insult to Menzie IMHO.”
I have reread CoRev’s posts and there is absolutely no factual basis for your remark.
But I bet most folks who did go to graduate school in economics would hope that when they sit down and write economic analysis that someone doesn’t look over their shoulder and say “aha – that’s a liberal for you” or “aha – a conservative wrote that”.
On some level, I agree. But then I think of Menzie sitting there in Madison, the bastion of liberalism (or, really, something even more leftwing, where this is celebrated), and I can’t help but think that his analysis is somehow affected by where he is.
The data is the data, but the story we tell using the data is most certainly influenced by who and what we are.
Menzie, of course, would be the first person to tell us how nice he is, and considering that he tolerates this level of character assasination on his own blog, he certainly IS nice. Feel free to leave some nasty comments on my blog, anytime!
Rich, I believe pgl was referring not to something CoRev posted here but instead to what appeared over at Angry Bear.
Menzie-
I guess that is helpful, but would you not agree that CoRev’s argument was substantive and not an ad hominem attack?
I, too, would infer that you are a liberal, and anti-war. Irrelevant in debate.
For those not familiar with Angry Bear, it has this in it’s banner:
so listing a fellow economist a liberal is no big surprise OVER THERE.
If Menzie takes offense then I truly apologize TO HIM, but pgl has a history of being a school yard bully at AB, and yesterday was taken to task by several over there including me.
Sorry it was carried over here, Menzie and James. Furthermore, I am sorry to have high jacked the thread.
Anonymous at February 21, 2008 10:15 AM – I don’t mean to be so hard on you as it seems CoRev doesn’t get my point either. But I bet most folks who did go to graduate school in economics would hope that when they sit down and write economic analysis that someone doesn’t look over their shoulder and say “aha – that’s a liberal for you” or “aha – a conservative wrote that”.
Well, that doesn’t hold true for some of the postings at a whole bunch of economic blogs. Guess they’re letting their hair down when they don’t write those fair and balance papers and articles. It doesn’t take long to determine some of their political bias and extensive political hatreds.
JDH – thanks. I think I said in my comment that I was referring to CoRev’s AB post. Rich left that out of his clipped quote. Alas, we are getting a lot of this behavior over at the AB comment box. I wish this nonsense would cease.
Rich – “Irrelevant in debate”. It is irrelevant, which is my point. If CoRev wanted to challenge Menzie’s analysis, fine. But then why say it was some liberal analysis.
Hi All: Apologies for the delay in commenting. I’ve spent the last several hours getting a car out of deep freeze and other traumas associated with lots of snow.
Various: I don’t think it’s worthwhile re-debating the question of whether we’re generating more people bent on harming the US than we’re eliminating. A certain NIE seemed to answer that question. So to me, it seems that our Iraqi adventure is not enhancing security. But even if it were, then one should ask whether there would be better uses for the marginal dollar (or marginal half trillion dollars thus far, give or take a bit).
On the surely tertiary subject of my political preferences, I am truly befuddled. On this debate, there have been conservatives and liberals on both side. On the topic of trade liberalization/integration, surely I would be categorized as being on the right hand of the distribution of Americans’ views on the subject. On the issue of debt and deficits, when did concern about deficit spending become a solely liberal concern? And for sure, in a day of high geographic mobility, you shouldn’t take a person’s place of residence as an indicator of political stance, especially when you have lots of additional information to condition on. Don’t ignore Bayes Rule!
As an aside, I agree living in Madison has affected my views — on snow — and little else.
PGL-
I see CoRev’s statement, but it seemed like a totally random point that did not enter into the rest of his argument. Put another way, its absence would have no effect on the rest of his post.
“For those not familiar with Angry Bear, it has this in it’s banner: Slightly left of center economic commentary on news, politics, and the economy. so listing a fellow economist a liberal is no big surprise OVER THERE.”
Given that the original Angrybear hasn’t blogged for a while (alas), let’s all be mindful that he encouraged comments from all political persuasions and his blog was graced with contributions from folks like Andrew Samwick from time to time. We have also endorsed commentary by Gary Becker, Robert Barro, Milton Friedman, Thomas Sragent, Glenn Hubbard, and Greg Mankiw – as well as many other economists who would call themselves conservatives.
To be fair to this blog – I have no clue whether James or Menzie are liberals or conservatives. And frankly, it does not matter as they posts are for the most part excellent pieces of analysis on their own.
Pardon me for my long tirade here – but sometimes we need to let economists be economists whether trying to figure out whether they are writing for Daily Kos or the Weekly Standard, niether of which I would blog at anyway.
Bush touting the “stimulus” package. Bush claiming was stimulate the economy. Please, don’t call Bush a supply sider.
Menzie, your phrase “Military Keynesianism” is sickeningly spot on!
Pardon me. It should have been Bush claiming wars stimulate the economy. I was so angry my hands were shaking.
Rich Berger said: “Saddaam had expelled the weapons inspectors.”
I thought I would point out that weapon inspectors were in Iraq working right up until the day before the invasion when it was George W. Bush who told them to leave. They were doing their job but the findings were not what Bush wanted to hear.
Here
You’ll note, Joseph, that they had only returned to Iraq in 2002 after a four year absence.
Ignore CoRev, he was just being sarcastic.
Remember, the 9-11 attacks only killed 3,000 – 7 yrs ago – no big deal. Drunk drivers kill around 17,000 every year. Not to mention the property damage. Obviously, we’re misallocating resources – TSA should be doing sobriety checks. Guantanamo should be used for incorrigible repeat offenders (water-board them too!)
Heck, the Chinese probably knock off at least 3,000 Americans every year with bad food and poisoned goods.
As an aside, I agree living in Madison has affected my views — on snow — and little else.
You never cease to amaze me with your ingorance of where you are.
Richard Ely? “The Wisconsin Model”? I would think that AN ECONOMIST in THE ECONOMICS DEPARTMENT would be familiar with this stuff.
Buzzcut: Departments change (Richard Ely passed from the scene in the 1940’s.) I suggest you peruse the Economics Department faculty profiles to get a feeling of current work. See also this brief historical synopsis.
Well speaking as an anti-war socialist, I feel rather left out.
Notwithstanding that I agree with the Menzie’s original point.
Hope it doesn’t get him any grief ;-}
We don’t want to leave out the anti-war socialists so I’ll share an inside story.
Pres. Bush II is a closet neo-marxist. Absolutely. As a young rebel he read Baran and Sweezy (1968) and concluded he had to save the US economy and the world by deliberately wasting wealth. Otherwise the US would sink into a crisis of over production.
George W. Bush yesterday suggested that the war in Iraq could help the US economy, arguing that war spending had contributed to demand and cushioned the blow of the subprime mortgage crisis, writes Daniel Dombey in Washington.
The president rejected the idea that the war was an economic burden. “I think actually the spending in the war might help with jobs . . because we’re buying equipment, and people are working.”
I just can’t tell if George Bush is doing an immitation of Paul Krugman or if Krugman is doing Bush. In this incident I guess they both wear clown makeup.
Paul Krugman:Paul Krugman:
The fact is that war is, in general, expansionary for the economy, at least in the short run. World War II, remember, ended the Great Depression. The $10 billion or so we’re spending each month in Iraq mainly goes to US-produced goods and services, which means that the war is actually supporting demand. Yes, there would be infinitely better ways to spend the money. But at a time when a shortfall of demand is the problem, the Iraq war nonetheless acts as a sort of WPA, supporting employment directly and indirectly.