Economic Impact of the War

Economic Impact of the War in Iraq

Because the war in Iraq continues, determining the effect of the war on the United States economy is somewhat difficult. In addition, there are several complicating factors, such as the war in Afghanistan, domestic unease with the President that is not solely linked to war-time issues, and the fact that the U.S. is still struggling to recover financially and emotionally from a devastating terrorist attack, which make it difficult to isolate the war's impact on the economy. Even more complicating is the fact that the United States has a history of economic stimulation during wars, which makes it easy for people to falsely attribute unrelated economic upswings to wartime activity. Therefore, any examination of the impact of the war in Iraq on the United States economy must be somewhat uncertain.

In January of 2003, just after the war in Iraq began, journalist John Byczkowski recognized the inherent complexities of this issue. First, he addressed the fact that the U.S. was in a recession at the time of the war. (Byczkowski). Byczkowski then interviewed a business owner, in manufacturing, and shared his belief that the war might encourage an economic recovery in the manufacturing sector. (Byczkowski). However, Byczkowski was not as confident as the man that he interviewed. While Byczkowski agreed that "a wartime increase in government spending could prop up an economy mired in a tepid, jobless recovery," he also cautioned that war spending was relatively insignificant compared to the overall deficit and that a prolonged war in Iraq could "drive up oil prices and interest rates...sending the economy into recession." (Byczkowski)

Furthermore, Byczkowski pointed to some significant differences between the war in Iraq and previous wars that might keep Iraq from having a stimulating effect on the American economy. First, he pointed out that military spending was much higher in previous wars than in the Iraq war. (Byczkowski). Therefore, the full employment enjoyed during World War I, World War II, the Korean war, and the Vietnam War, would probably not be duplicated unless the Federal government was willing to commit the same percentage of resources to wartime spending. Instead, as of 2003, many economists believed that it would be better to compare the economic effect of the war in Iraq to the experience of the Gulf War of 1990, which led to a temporary increase in oil prices and a temporary decrease in consumer spending. (Byczkowski). However, there are significant differences between the Gulf War and the war in Iraq, primarily in duration and chances of success, which make this comparison dubious, at best.

In fact, some economists have made it clear that they believe that traditional economic indicators like consumer spending and oil prices will only reveal a portion of the war's impact on the economy. First, Nordhaus points out that the United States government has typically underestimated the costs of war. (Nordhaus, 1-2). Furthermore, he points out that the economic costs of war can often be felt long after the conclusion of the war. For example, American success in the Iraqi war would give the United States de facto control over Iraq's natural resources. Because Iraq is a very oil-rich country, and has oil reserves that are estimated to be large enough to satisfy American oil import needs for the next century, the positive long-term economic impact of a victorious war could offset any short-term costs. (Nordhaus, 3-4).

Furthermore, Nordhaus makes it clear that the costs of war are not simply those costs that can be attributed directly to the war, such as increased budget expenditures for military weaponry, but also those costs that the nation incurs as a result of the war. (Nordhaus, 14). Furthermore, Nordhaus points out that many of the direct costs of the war should not be attributed to the war. (Nordhaus, 14). For example, a standing army must be paid, housed, and fed whether or not it is deployed on active duty. "Only additional costs such as the cost of transport, the combat pay, and the replacement cost of the munitions should be counted in the cost of the war." (Nordhaus, 14).

Using the criteria established by Nordhaus, Byczkowski, and others, it becomes increasingly clear that calculating the economic impact of the war in Iraq is impossible at this date. For example, the resolution of the war remains uncertain. While the United States declared victory after a relatively short period of engagement, the number of American and Iraqi casualties continues to climb. Furthermore, although the United States considers itself victorious and has taken steps to ensure self-government for Iraqis, the extent of U.S. control of Iraqi oil reserves and the economic benefits of reconstruction in Iraq for major U.S. firms is still unknown.