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Stiglitz and Bilmes: 'Countries can ensure that the peacetime economy operates near or at full employment.'

How much have today’s wars weakened the economy?

COMMENTARY | November 15, 2009

Jobs programs of the 1930s cut deeply into Depression unemployment and World War II then put almost everybody to work, often at more than one job. Not so with today’s wars. Only the oil companies and military and security contractors have made real gains from the conflicts in Iraq and Afghanistan, says Harvard economist Linda Bilmes.

(Part of our series on "Reporting the Economic Collapse".)

By John Hanrahan

“The question is not whether the economy has been weakened by the [Iraq] war,” wrote economists Joseph E. Stiglitz and Linda J. Bilmes in their 2008 book, “The Three Trillion Dollar War. “The question is only by how much.”

Bilmes and Stiglitz, using what they termed a “realistic-moderate scenario,” determined that the losses to the economy for war spending, as of that writing, totaled “more than a trillion dollars.” They posited that “no serious economist [today] holds the view that war is good for the economy.”

But what about World War II? Didn’t it create thousands of jobs and help lift the nation out of the Great Depression?

Leading up to World War II, Stiglitz and Bilmes wrote, the decade-old depression had produced a problem of insufficient demand. “The economy’s potential supply – what it could produce, if everyone were fully employed – exceeded what people were willing to buy, and so the economy stagnated and unemployment was high.”

With the onset of the war there was a great demand for tanks and armaments, causing the economy to run “at full steam” with everyone who wanted a job able to get one – “and the war even demanded that those who could work two shifts do so.”

Yet, even before U.S. involvement in World War II began in December 1941 after Japan’s attack on Pearl Harbor, the depression-era unemployment rate had come down in 1941 to 9.9 percent from a high of 24.9 percent during President Roosevelt’s first year in office in 1933. This peacetime decline in unemployment came without the benefit of the wartime buildup, but with the benefit of ambitious New Deal programs. Then, the massive wartime buildup brought unemployment down to 1.9 percent in 1943 and as low as 1.2 percent in 1944.

Not so with today’s wars in Iraq and Afghanistan, Bilmes said in an interview with Nieman Watchdog.

“It’s difficult to compare World War II with the current wars, because back then you had more than 10 percent of the population serving in the military and others working in government war support activities, and another large number of people working in industries that were directly aiding the war effort,” Bilmes said. (During World War II, with a U.S. population of 132.5 million as of the 1940 census, some 16 million Americans served at one point or another in the military.) “The wars today have one percent of the population – military and contractors – serving in the wars and there’s not much of a multiplier effect in terms of the economy from the war spending.”

Bilmes noted that her co-author and Nobel economics laureate Stiglitz has made the point that only Exxon-Mobil and other oil companies, as well as a small number of defense and security contractors, have profited substantially from the Iraq and Afghanistan wars, with the contractors profiting primarily because of lax government oversight. Otherwise, these two wars have had no benefits for the economy. In fact, she said, “quite the opposite.”

For example, Bilmes said, the Iraq war “changed the supply curve of oil.” And this war-influenced change in the supply curve was one of the causes of “the extreme run-up in oil prices” during the Iraq war, which not only hit consumers hard, but was “a contributing factor to the near-collapse of the U.S. economy.”

The point is, she said, “You don’t need a war to create jobs.” From economist John Maynard Keynes, “we know that government spending will create jobs.” In their book, Bilmes and Stiglitz wrote that Keynes “taught us how, through lower interest rates and increased government spending, countries can ensure that the peacetime economy operates near or at full employment.”

But while non-defense government spending can create jobs and boost the economy, they wrote, “money spent on armaments is money poured down the drain: had it been spent on investment – whether on plants and equipment, infrastructure, research, health, or education – the economy’s productivity would have been increased and future output would have been greater.”

Stiglitz, a professor at Columbia University, received the Nobel prize in economics in 2001. Bilmes is a professor at Harvard’s Kennedy School of Government and is co-author of the recent book, “The People Factor: Strengthening America by Investing in Public Service.”

(Click here for a more extensive report on John Hanrahan’s interview with Linda Bilmes.)

Next in our series on "Reporting the Economic Collapse": An interview with Jeffrey Sachs on poverty, the economy and press coverage.

Posted by KMGuru
01/24/2010, 02:08 AM

War is an expense and sometimes necessary. Unnecessary wars drain resources at the time when the economy is tanking. It is a no brainer. Is there a cheaper way to deal with conflict? Perhaps, but do not ask the military about it. That is because the survival of the military department depends on the continuous conflict.

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