Stiglitz and Bilmes: Recession will be longer because of war

The financial crisis that rocked the world in 2008 and still reverberates today was "due at least in part" to the Iraq war, which also made it more difficult for the government to react when economic problems happened, argue two prominent policy makers.

In an article in Sunday's Washington Post, former Clinton-era economic adviser Joseph Stiglitz and Harvard University public policy lecturer Linda J. Bilmes say that the Iraq war forced the US to take on more debt than it had to, and caused in part the rising oil prices that resulted in large amounts of money flowing out of the US economy.

To counter the effects of those trends, fiscal policy makers had to keep interest rates unnaturally low, causing the securities and real estate bubbles that burst at the start of the recession, the authors say.

The authors also amended their assessment from several years ago that the Iraq war's true cost is around $3 trillion, saying new information suggests that the cost goes "beyond" that estimate.

Stiglitz and Bilmes write:

Saying what might have been is always difficult, especially with something as complex as the global financial crisis, which had many contributing factors. Perhaps the crisis would have happened in any case. But almost surely, with more spending at home, and without the need for such low interest rates and such soft regulation to keep the economy going in its absence, the bubble would have been smaller, and the consequences of its breaking therefore less severe. To put it more bluntly: The war contributed indirectly to disastrous monetary policy and regulations.

The Iraq war didn't just contribute to the severity of the financial crisis, though; it also kept us from responding to it effectively. Increased indebtedness meant that the government had far less room to maneuver than it otherwise would have had. More specifically, worries about the (war-inflated) debt and deficit constrained the size of the stimulus, and they continue to hamper our ability to respond to the recession. With the unemployment rate remaining stubbornly high, the country needs a second stimulus. But mounting government debt means support for this is low. The result is that the recession will be longer, output lower, unemployment higher and deficits larger than they would have been absent the war.

Stiglitz and Bilmes estimate that about a quarter of the debt increase the US saw during the first five years of the war are attributable to the war -- about $900 billion of a $3.6 trillion rise in the debt. They also estimate that the war added about $10 to the cost of a barrel of oil, amounting to a cost of $250 billion to the US economy.

In articles in the Times of London and the Washington Post two years ago, Stiglitz and Bilmes estimated that the cost of the war, including the costs to the US economy, amounted to $3 trillion. At the time, the Pentagon questioned their assertion.

"It appears that our $3 trillion estimate (which accounted for both government expenses and the war's broader impact on the U.S. economy) was, if anything, too low," the authors state.

"Reimagining history is a perilous exercise. Nonetheless, it seems clear that without this war, not only would America's standing in the world be higher, our economy would be stronger," the authors conclude.