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Did the Iraq war cause 
economy to falter?
Economist: War expenses brought easy credit, 
eventual pullback in banking, housing

By TIM SCHILKE - GM Today Staff

March 12, 2008

As the war in Iraq continues in the Middle East, the economy is hitting a rough patch here at home. In fact, the cost of the war and the economic impact of the credit squeeze are the two most commonly addressed topics in this column space. But are these two events related to each other? A Nobel Prize-winning economist from Columbia business school linked them last week, in a presentation to the Chatham House think tank in London.

Professor Joseph E. Stiglitz said that the Iraq war "caused the slowdown in the United States," estimating the actual total cost of the war to date at $3.3 trillion. This estimate far exceeds the budgeted cost of $500 billion, because Stiglitz is including the indirect medical and welfare costs of returning soldiers. "Three trillion is a very conservative number," Stiglitz said. "The true costs are likely to be much larger than that." Donald Rumsfeld, defense secretary in 2003, originally estimated the total cost of the war would total between $50 billion and $60 billion, just 10 percent of the current direct budgeted cost to date, and probably less than 2 percent of the actual cost based on Stiglitz’s analysis.

Stiglitz, the author of multiple books on globalization, also concluded that the unexpectedly large ongoing war expense forced the central bank to flood the economy with easy credit to temporarily absorb the economic impact. This policy led to the overextension of credit and subsequent pullback currently under way in the banking and housing industries. "The regulators were looking the other way and money was being lent to anybody this side of a life-support system," Stiglitz said.

With the five-year anniversary of the initial invasion coming in mid-March, the war in Iraq is now the second longest military action (behind only Vietnam), and the second most expensive. Only World War II cost more money to wage. With this perspective, it is not difficult to imagine that the cost of war, both directly recognized and unrecognized, could have a complex impact on the American economy.

We already understood that the slowing economy was caused by tightening lending standards, combined with poor visibility into the hidden risk embedded in mortgage-backed securities. Now, economists may be concluding that our current situation is far more complicated.

Here in Waukesha, home values are dropping, and new home construction is collapsing - housing starts in southeastern Wisconsin fell 19 percent in 2007. These conditions are occurring as a direct result of the tightening credit in the banking industry. The tightening credit causes the loss of jobs and homes, resulting in a downturn for many local businesses. Just last week, Signature Lighting in Waukesha announced that the store will be closing after 30 years in business, due to the home construction market collapse. Did the cost of the Iraq war put Signature Lighting out of business? In retrospect, it seems plausible.

The direct cost of the Iraq war for Waukesha County, based on Waukesha’s portion of the $500 billion in total approved budget, is $804 million to date. By itself, that’s enough money to provide health care for every child in the entire county, and send each of them to college for four years. The $804 million also represents a $720 million excess over Rumsfeld’s original 2003 estimate. The total direct taxpayer cost for the state of Wisconsin to date is a staggering $8.3 billion.

But if Stiglitz is correct in his analysis, the real economic impact on Waukesha may extend far beyond the direct expenses to taxpayers. Start with $804 million in direct tax dollars, and add the underestimated costs of necessary health care and social programs for veterans, in addition to a massive nationwide credit problem made worse by the over-extension of easy credit during the early years of the war.

Actions really do have consequences, even when those actions occur halfway around the world. As a result of the extreme complexity buried within our economic system, the reasoned opinion of a Nobel Prize-winning economist is sometimes required to remind us about the obvious impact of those consequences.

With this information in hand, the continuation of the War in Iraq transitions from a geopolitical debate to an economic debate - a critical portion of the discussion which is long overdue. It’s time to ignore the political rhetoric and listen to the economic experts, before we find ourselves repeating the 1930s in the name of spreading freedom.

(Tim Schilke is the author of "Growing up Red" and lives in Grafton. His column runs Wednesdays in The Freeman.)


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