The Myth of War Prosperity

War has many costs, both human and economic, that must be carefully considered now that an invasion of Iraq appears imminent.  The greatest cost of war, of course, is the cost in human lives.  We all hope and pray that no Americans are killed or injured in Iraq.  But the economic costs of war must also be considered. 

There is a commonly-held myth that war creates prosperity.  Many believe that World War II ended the Great Depression.  Unemployment went down because hundreds of thousands of men were drafted, and factories at home busied themselves with war production.  This provided the illusion of a bustling wartime economy.  But in truth the economy shrank and GDP plummeted.  The hidden costs were enormous, because so much human energy and human capital was expended fighting the war rather than doing productive, specialized work back home. 

Bastiat’s broken window fallacy applies to our current dilemma in the Middle East.  The situation in Iraq is the broken pane of glass, and “fixing” it will appear to benefit the economy in the short run.  Certain industries will certainly benefit.  But the hidden opportunity costs will again be enormous.  The hidden costs will be the loss of economic activity that would have occurred if the money spent waging war had instead been spent at home.

Inflation is certain during wartime, as the Treasury prints more money to fund military expenses.  Our dollar will become weaker against other currencies because of the uncertainty caused by turmoil in the Middle East.  Control of Iraqi oil wells, which is often cited as an economic windfall from the war, is not guaranteed and might not happen quickly.  Oil prices almost certainly will skyrocket and will remain inflated after the war, especially given the deteriorating buying power of our own dollars.

We should expect the financial markets to react badly to an invasion of Iraq.  Although military victory should be swift, prolonged urban fighting in Baghdad or other cities would cause investor confidence to plunge.  This lack of confidence in the U.S. economy will make trade more difficult and cause our trade deficit to rise.

Furthermore, taxes or deficits necessarily rise when the nation’s productivity falls because of war.  Estimates of war spending range from $100 billion to $200 billion, a figure that does not include tens of billions needed for nation-building in Afghanistan and Iraq.  As with past wars, a huge surge in spending will happen as tax revenues are falling dramatically.  This spending can be sustained only by printing more money, borrowing from foreign nations, or raising taxes- all of which harm the economy.

The greatest economic cost of war, however, comes from the expansion in the size and scope of government.  Government always grows during wars and other crises.  As economist Murray Rothbard noted, government uses crises to “Engineer the great leaps forward,” in the size of the state.  When the crisis ends, government never returns to its former size.  As government expands, individual liberty necessarily shrinks.  True prosperity cannot exist without individual liberty and its corollaries of limited government, property rights, and free markets.  Ultimately, war leaves us with less freedom at home.  The sad irony is that while our soldiers have fought for the freedom of Europe, Korea, Vietnam, Kuwait, and Iraq, the government uses war to steadily diminish freedom here at home.  While we fight a war in Iraq, we must also fight to maintain and restore individual liberty in America.