Day 31 War is good business?

War is good business?

On 11th of January 2015, over forty worlds political leaders joined the march on Paris to pay tribute to victims of French terrorist attack. Which, recalled me about the Sydney hostage crisis last year. The world is getting more dangerous everyday, and our daily life is under threat. Nevertheless, let us draw our sights back to the origin of hatred spreading around the world, the U.S. anti-terrorism wars in Iraq and Afghanistan. ‘The war is good business.” does this myth applicable for these wars?

To declare war to another country has never been an easy decision, since it involves so many political and economic measures. Obviously, the world’s top economic entity will not acting unless the extra benefit exceed the extra cost initialized for staring the war. Let us begin on the benefit side. In my opinion, there are three basic factors comprise the gain for U.S.. First and probably the most important one is the political benefits. After the 911 attack, Americans were eager to seek avenge on terrorism, the people’s will has never been such cohesive. Politics is the activity that minimize people’s discontent towards the government by providing public benefit in exchange.  In addition with the extra international influence enhancement obtained by representing America's military power, these combines into the political gain sector. Another benefit for U.S. Is the stimulation over GDP, and thereby, the employment ratio.

As we know, the economy's output is equal to its aggregate expenditure, and the government spending is a large fraction of it. The increment of military expense will promote the economy growth. There are relative employment positions provided during the war period as well. At last, is the demand of rural oil resources in Iraq, because Iraq was considered as the world’s fifth-largest proven oil reserves. In other words, this is a war over the scarce natural resources. Although the benefits for these wars are straight-forward, the costs, are also enormous. In this article, we focus on the economy part. The huge amount of expenses brings a reality problem in front of the federal government, where is the source of money? Ordinarily, war is financed by raising taxes, but not in this case. The Iraq and Afghanistan war were fully supported by government borrowings. Since the government budget is consisted of tax collected less the government spending, the tremendous amount of government debt leads to a huge gap of the budget deficit. When a government is experiencing a budget deficit, the national saving level decline. The fund supplied in the financial market is based on the national saving.As a consequence, the supply of saving’s reduction will higher the real interest rate. There are three problems associated with this particular high interest rate. The firm will less likely to borrow funds for purchasing new capital goods, and these will harm the economy’s future productivity. The durable goods market such as cars and houses, will undergo a slack season, due to people usually borrow money to make these purchases. The households are going to save more, that is a withdrawal form the economy pie and will reduce the consumer’s expenditure. These dramatically hurt the economy's output, hence the economic growth. Furthermore, the military expenditure will create high inflation rate, because the inflation is determined by the national output and aggregate demand. The U.S. potential output is held constant, but the military requires more resources, hence the overall price had been raised. Corresponding to the inflation, the reserve bank will imply a higher interest rate. So this vicious cycle will cause the overall economic growth to slow down. Supported by the U.S. statistics, the three trillion war expenditure increases the inflation rate by 0.9 percentage points than ordinary times. A detail table by the Global Insight and calculation of Dean Baker has shown the impact.

In conclusion, the Iraq and Afghanistan war was definitely a bad business for America. However, it did drag the U.S. government out from their current economic turmoil in 2007. In the long-run consideration, the military spending sacrificed the future resources to create economical well-fare, and will slow down the American economic growth for the next twenty years. Moreover, these wars created the hatred cycle around the world, so in my opinion, it is the war we should not fight in the first place.

reference:

The Economic Impact of the Iraq War and Higher Military Spending
Dean Baker May 2007