Wednesday, January 23, 2008

Iraq War and US Recession

On the front page of Reddit today, was this post

"I'm no economist, but some things are obvious: To stave off recession we can leave Iraq. We can stop the irresponsible government borrowing. We can reduce military aid to dictators like Musharraf. "
Reddit


This is an examination of the Economics behind the statement.

1. Would leaving Iraq avoid Recession?

No. The Iraq war has cost the US government alot of money. It is hard to precisely calculate because the cost has not been put in the defense budget but has been squeezed through as 'supplementary spending'

Although, the Iraq war has cost a lot of money it has not caused the housing crisis or the threat of recession. (I happen to believe it was wrong to invade Iraq) but I could never claim leaving Iraq would avoid a recession.

If the US government did reduce spending on the Iraq war effort, it would not boost the economy in the US. In fact it is argued that wars can be good for economies. It creates increased demand for military hardware, creating jobs. (If you like conspiracy theories, some suggest a motivation for the continuation of Vietnam war is that many defense companies were making a very nice profit out of building so many bombs and tanks e.t.c.) Leaving Iraq would do nothing to solve the economic ills of the US economy. (although there are many other good reasons for leaving)

2. Would stopping Irresponsible Government Borrowing avoid Recession?

No, It would make it worse.

Firstly the US Government borrowing is irresponsible. There is no good reason for the US to have a national debt of $9,000 bn (65% of GDP) Alot of the debt is a result of irresponsible tax cuts for the rich by Reagan and Bush. These tax cuts did nothing to boost the long term potential of the economy. They just made the government's fiscal situation worse.

However, reducing government borrowing at this particular point in time would make the recession worse. If the government cut spending and increased taxes, it would reduce demand in the economy and lead to a further slowdown in growth.

If the government didn't have such a large deficit, they would be able to pursue a more expansionary fiscal policy which might actually help to avoid recession.

3. Reducing military aid to dictators.

If foreign aid to foreign countries was stopped, the money could be injected into the US economy; this could have a minor benefit, but as a % of GDP, the aid is relatively insignificant and would not turn around the economy.

Conclusion

In the long term the US should try to reduce its budget deficit, the US should also look very carefully at why it is spending money abroad.

But, the main reason for the US recession is the state of the housing market, whilst house prices are falling and repossessions rising, the US will find it very difficult to avoid a recession.

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