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As Congress struggles to develop a stimulus package and U.S. troops are deployed in Afghanistan, the economy continues to sputter. Uncertainty, a lack of consumer confidence, and a jittery stock market have slowed economic growth. The September 11 attacks on New York and Washington, D.C. clearly exacerbated economic problems that already were starting to emerge. In fact, the National Bureau of Economic Research recently announced the recession began last March, ending a record ten-year economic expansion. Amidst the faltering economy and the military build-up in Afghanistan, the old chestnut "War is good for the economy" has re-appeared, suggesting that increased military spending will boost demand in the economy, putting people back to work while pumping up Wall Street. In reality, war is a costly undertaking that cannot be sustained without a strong economy. President Bush cannot ignore domestic economic policy as he pursues foreign threats to the United States.
The notion that war is good for the economy is often made in reference to World War II, when many claimed that the war pulled America out of the Great Depression. While the war did increase the amount of resources devoted to the military (both money and manpower), increased government spending came at the expense of everyday economic activities. Throughout the economy, consumers faced rationing, shortages, and price controls. Military success is not free; the nation sacrificed a great deal to support the war effort. War is a destructive act that extracts resources from the economy to support the military. While a war played out on foreign shores may make the idea of war building the economy more credible, attacks on American soil demonstrate the truly shattering costs of war. Estimates suggest that the costs of the Word Trade Center attack easily will surpass $100 billion. The uncertainty and economic disruption caused by the terrorist attacks in New York and Washington, D.C. cannot be rectified through military spending alone.
Henry Hazlitt’s "broken window fallacy" provides an eloquent demonstration of the costs of war. In his classic Economics in One Lesson, Hazlitt uses the simple example of someone breaking a window to disprove the notion that this is good for the economy. True, the broken window will provide a job for the repairman, who, in turn, purchases equipment from someone else in order to complete the job. Those who claim that war is good for the economy make similar claims about how the defense industry and military spending will create jobs.
However, these claims are just as fallacious as claims that a broken window creates jobs. In the case of the window, the argument completely overlooks the impact on the homeowner, who must now dip into savings or curtail spending in order to cover the costs of repair. The homeowner is worse off because resources have been diverted away from planned expenditures or savings simply to return the house to its previous condition. At best, the broken window created no new jobs or wealth, it simply switched the beneficiaries of the homeowner’s budgetary decisions. At worst, it means that the homeowner had to forgo investment decisions that would have helped to expand the economic pie rather than reapportion the existing slices.
War is simply the broken window elevated to the national level. Victory requires significant expenditures by the military. While this is important for winning the war, the private sector does feel the pinch. War increases the supply of military goods while depressing the availability of consumer goods. Investment is also redirected toward the war effort. In the wake of September 11th we have seen the stock market sort out investments, with growth in defense-related companies while others stumble. It is true that particular sectors of the economy may gain, but this cannot be said for the economy as a whole. With resources diverted from other uses, we may actually be poorer than we otherwise would be. There are gains to eliminating the uncertainty created by terrorism, but we must realize that this is a costly venture that drains our economy.
The looming costs of the battle against terrorism make domestic economic policies even more important. The president and Congress must move forward with an agenda that promotes economic growth. The increased uncertainty generated by war raises the cost of doing business while weakening consumer confidence. Companies must now invest more in security and consumers must be convinced of their job security and their family’s safety. Pro-growth economic policies can create the foundation for an economic recovery by providing the correct incentives for investors and entrepreneurs.
The alternative stimulus packages under debate in Washington provide a mix of policies, some good, some bad. Pork-barrel spending, big government programs, and "pump priming" policies will do little to put the economy back on an expansionary growth path. Much like repairing the broken window, these programs take resources from one group to be spent by others. Real economic growth requires policy changes that create incentives to produce. Tax cuts that can affect decisions to invest or save, consequently, are more important than more government spending or tax cuts aimed at increasing spending. Lowering marginal tax rates on personal income creates a powerful incentive, as would a reduction in the capital gains tax, and repeal of the punitive alternative minimum tax. Beyond tax policy, Washington could do much to eliminate regulatory barriers that have stifled investments in the critical high-tech and energy sectors.
We have the greatest military in the world in large part because we can afford it. Our vibrant private sector has generated the wealth and resources necessary to sustain our military. It has been the private sector and the ability of investors and entrepreneurs to create wealth that has allowed us to invest in security. Without that private sector, military might becomes unsustainable. The former Soviet Union is the most visible example of this, but history is strewn with the remains of armies that ultimately drained their nation’s resources while impoverishing the population. The United States is confronting a real threat to our prosperity. Our response is a function of our wealth, not the source of it. And our response requires addressing economic concerns here at home in addition to the president’s military agenda.