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Varjavand: Outdated view: War as way to boost the U.S. economy

RezVarjavis associate professor economics finance Graham School Management St. Xavier University Chicago.

Reza Varjavand is associate professor of economics and finance at the Graham School of Management at St. Xavier University in Chicago.

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Updated: February 21, 2013 6:39AM



On Nov. 1, two Iranian Su-25 fighter jets fired on an unmanned U.S. Air Force drone after it entered Iranian airspace in the Persian Gulf. The jets missed the drone, which returned to its base, but the incident triggered a formal warning by the United States to Iran through diplomatic channels.

Given the rising tensions with Iran, largely over its pursuit of a nuclear weapon, and the still-disappointing economic conditions in the United States, there might be some support for going to war with Iran — especially among some hard-line Republican politicians and a few economists who believe that war will jump-start our stalled economy.

While the U.S. may decide to take military action to deter Iran’s nuclear capability, an armed conflict with Iran is most unlikely in a war-weary U.S. — given that we ended the Iraq War 13 months ago and are moving up the timetable for withdrawing our troops from Afghanistan.

With that said, in a Sept. 5, 2010 article in The New York Times, renowned economist Paul Krugman stated that “From an economic point of view, World War II was, above all, a burst of deficit-financed government spending” (that he believes was responsible for a long-lasting economic boom). Krugman concluded that “the economic moral is clear — when the economy is deeply depressed, the usual rules don’t apply.”

Historically, the trend of U.S. economic performance reveals persistent ups and downs that are clearly more intense before and after major wars. Most notably, severe upside fluctuations occurred right after World War II. Such historical evidence has led many economists, such as Krugman, to voice their support for war as a remedy for the country’s economic slump.

However, the resilient current downturn, the outgrowth of the Great Recession of 2007, is not on par with the pre-WWII Great Depression in terms of causation, intensity, duration and consequences. Unemployment was 25 percent at the height of the Great Depression while it was less than 9 percent during our latest recession.

Many economists believe that, unlike the Great Depression, the Great Recession was not basically triggered by a lack of spending, but rather by the tremendous loss of hastily created wealth via the stock market crashing, years of reckless mortgage lending and risky asset-backed securities that were created and sold to investors worldwide.

The Great Depression was primarily caused by historically high tariffs on imports through the enactment of the federal Smoot-Hawley Tariff Act in 1930 and the tight monetary policy of the Federal Reserve. Eventually, massive investment in public works projects was needed, which was beyond the will and ability of the private sector, and was instrumental in moving the economy out of the Great Depression and into a healthy recovery phase that lasted for more than three decades.

Additionally, the nature of business fluctuations has changed over the past 50 years — thanks to more prudent fiscal and monetary policies that were lacking prior to the Great Depression and the installment of safety nets such as Social Security that automatically kicks in to counter the business cycles.

Also, the nature of war has changed. It is now more high-tech, less expensive and less labor intensive. A war no longer generates as much employment and economic activity at home.

In fact, war will likely be more helpful to those countries the U.S. attacks or invades rather than the U.S. itself. Therefore, it is illusory to rely on a war to generate the type of spending that typically spurs economic growth.

Some economic experts may claim that many people go back to work, thanks to jobs created as a result of war, but war does not resolve or alleviate unemployment. Today, either new real jobs must be created by the private sector or the structural bottlenecks in the labor market must be properly dealt with through well-designed government policies.

Job growth today requires the collaborative efforts of both government and the private sector and not an ineffective Band-aid-type solution that may be achieved through war.

Some may still credit World War II for pulling the U.S. economy out of the Great Depression, but the booming, post-war prosperity of 1947 to 1975 did not happen because of the war.

It resulted from prudent and meticulously crafted government policies, complemented by favorable institutional settings and a changing American culture in favor of mass production and mass consumption. Because of these factors, war-related spending soon spilled over to the production sector of the economy.

The key concern is whether economic progress can be fostered through military spending. From a historical standpoint, I don’t believe it can.

Reza Varjavand is associate professor of economics and finance at the Graham School of Management at St. Xavier University in Chicago.



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