Is the Iraq War Retarding Recovery?

by Liberty and Power

I have a question for the economists and economic historians at Liberty and Power and elsewhere.

L and P Blogger, Robert Higgs has argued persuasively the World War II failed to bring prosperity or even bring genuine recovery from the depression . Back in the 1950s and 1960s, Thomas Cochran and others provided evidence that the Civil War retarded economic growth. To what extent is the the Iraq war responsible for the sluggish recovery?

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Jonathan Dresner - 8/12/2004

Sorry, I'm not that old-fashioned a liberal: there is virtue and satisfaction in work, particularly productive work.

And there is an immense amount of work that can and should be done: we could put a million people to work right now working on school repairs and maintenance (not to mention necessary upgrades and construction) and keep them working for years before they caught up. We could put tens of thousands to work on real security issues: port inspectors, security screeners, not to mention the infrastructure upgrades necessary to make secure transportation and travel possible without massive bottleneck problems. These are things the government was supposed to be doing, anyway.

Wage controls are an interesting point, by the way. I'll have to think about that.

M.D. Fulwiler - 8/11/2004

Hmmm, someone defending having the government pay people to dig holes and fill them up...but then, why not just skip the useless "work" part and give people some sort of a guaranteed income?

Actually, people who had jobs during the Great Depression generally saw an increase in their standard of living. Deflation combined with government intervention that kept wages artificially high was a boon for the 75-80% who had work. Perhaps that is the key to FDR's amazing electoral success, not his popular welfare and make work programs.

David T. Beito - 8/11/2004

I am a non economist but I believe that Higgs stresses other issues besides the peculiar waste of military employment (though that is part of his thesis). One was the opening up of lower wage jobs by shifting people from the relief rolls to the musters at Anzio, etc. The other was a general fall in real wages caused by such factors as wage controls and no strike pledges. Real wages had remained stubbornly high during the 1930s, in contrast to previous depressions. The fall in real wages enabled employers to hire more workers.

Jonathan Dresner - 8/11/2004

Given the centrality of 'consumer confidence' to our ongoing corporate values (including loan floats) that might not actually be a bad thing, if people felt like it would give them some security for a while.

M.D. Fulwiler - 8/11/2004

Well, you could have have "full employment" by having the government pay everyone to dig holes and then fill them in.

Jonathan Dresner - 8/10/2004

You might be right; I'll get to that.

I have a bit of a problem with the Higgs article, first: it assumes that the 'corrections' are relevant only under the command economy structure of wartime. But some, I think, would argue that many of his corrections (excluding military expenditures as productive, for example) should be applied to subsequent economic activity as well. So, for example, the growth of military spending and procurement (particularly for weapons systems never, thank god, used) should be discounted from post-war data, though it occupies a greater share of the US economy than in any other major industrial power (except USSR, of course, and China, perhaps; I don't have the figures on hand). This would lessen the distinction between the corrected wartime and post-war figures which Higgs notes.

It would also make your question easier to answer in the affirmative, I think. If he is correct that military expenditures are, effectively, maintenance waste, then it is likely that choosing to spend that way is indeed reducing the share of the economy which is indeed productive. That argument is weakened by arguments I've seen on this blog before, which is that government spending is, by definition, so generally unproductive that the distinction between the war-related expenditures and general government spending is largely lost; since taxes have not yet been raised, the drag on the economy would be minimal.

Interestingly, of course, one of the greatest benefits of the WWII economy that Higgs notes was full employment (well beyond the levels now considered 'full employment' by economists), but the administration reluctance to actually expand the size of the active military, but instead rely on National Guard (there's a drain on the productive economy) has made it impossible to make any gains in that regard.