Feb. 10, 2003. 01:00 AM
war is no good for economy
SPECIAL TO THE STAR INVESTING
NEW YORK—It is axiom that war is good for the economy. Governments spend on military research and development projects. Companies make money producing weapons and other peripherals. And people spend because they're working more to produce all the stuff the country needs to fight and win the battle.
Well, that's the way it used to be.
Despite some sentiment in Canada, the United States and elsewhere that the economy, the stock market and everything else will pick up if war with Iraq finally gets underway, military spending has actually become a smaller and smaller part of the economy, producing fewer and fewer economic gains, economists say.
As a result, the huge projects the U.S. government spent billions of dollars on in the past to develop massive amounts of armaments, nuclear bombs, jet propulsion capabilities, communications systems, homeland defence systems and other high-tech wizardry no longer give the economy the oomph they used to.
While there have been tremendous advances in technology that now allow U.S. and other forces to fly unmanned planes and allow bombs to zero in to a target as small as a toilet, the pace of technological development and the level of spending that goes with it have actually been in decline for many years, experts say.
"Defence spending simply does not have the same kind of impact on the economy that it used to," says Warren Bailey, an economics professor with Cornell University in Ithaca, N.Y. "Certainly 50 years ago there was a notable impact on the global economy, but the fact that we can today produce a smart bomb that can pick off a donkey in an Iraqi field doesn't have the same kind of economic impact that producing nuclear weapons did."
The notion that war is good for the economy dates back to World War I, when European munitions makers were accused by some theorists of pushing the continent into battle just to boost their own output and make money.
World War II was in fact the biggest boon of all time to the North American economy, as factories in both the U.S. and Canada ramped up production of armaments and other goods in the wake of the `30s depression.
But after World War II, the amount of spending on military began to shrink. In 1960, for instance, defence spending accounted for roughly 8 per cent of total economic output in the United States, according to U.S. Congressional Budget Office figures. By contrast, current outlays for defence by the U.S. government are now less than half of that — even with the recent increase in military spending on the war in Afghanistan.
"Nowadays, military projects don't have the powerful commercial spin-offs they used to," says Bailey. "On the contrary, the Pentagon seems to struggle keeping up with all the advances in computing and communications that are constantly being created and updated by regular companies in the private sector."
To be sure, there are plenty of areas of the economy that benefit considerably when it comes to battle.
Aircraft manufacturer Boeing, for one, is reportedly rushing to fill orders from the Pentagon for a new stock of smart bombs and other weapons that were used extensively by the U.S. military in Afghanistan. Boeing makes the satellite guidance systems that guide missiles accurately to their intended targets, among other things.
Northrop Grumman Corp. is another firm that stands to benefit. It produces an unmanned spy plane called the Global Hawk, used extensively by the U.S. military. According to published reports, the Pentagon has asked the company to ramp up production again.
There are other parts of the economy that also outperform in a war environment. Oil company stocks have already shot up as companies such as Exxon-Mobil, Shell and others have reported solid gains in their earnings — all related to the steady increase in crude oil prices that has occurred since the threat of war with Iraq reared its head.
And other companies that produce the high-tech gear that various levels of the military use in battle will undoubtedly reap the benefit of a U.S. military spending budget that is expected to grow to $484 billion (U.S.) by 2009, according to CBO figures.
The Bush administration is currently asking for a 4.2 per cent increase in military spending, bringing the budget up to $380 billion through fiscal 2004.
But much of what the government is currently spending money on is building up troops in the Gulf region and keeping them there — not on handing out fat military contracts to U.S. companies.
According to Economy.com, a research service that tracks statistics on the global economy, the military build-up for a potential war with Iraq has so far added roughly one-tenth of one percentage point to total U.S. economic growth, or about $10 billion to the $10-trillion-plus economy.
While that is a substantial amount in dollar terms, it is a very small contribution to the total economy. By contrast, U.S. defence spending during World War II tacked on almost 40 per cent to the U.S. economy's growth, according to Bailey.
Indeed, the impact on the United States and other economies such as Canada will be minimal, economists say. That's because the negative effect on consumer and business confidence will likely offset any increase that military spending adds to the already lacklustre economy, says Craig Wright, chief economist of RBC Financial Group in Toronto.
"If there is a good time for war, it is not now — at least in an economic sense," he says. "Whether you look at businesses, consumers or investors, confidence is vulnerable. Any bad news as the war moves ahead could derail growth."
Of course, some of the money spent on fancy weapons and other high-tech gadgets may eventually help specific commercial industries, and in turn, the economy — spending on new kinds of enhanced communications systems that could vastly improve the quality and speed of wireless voice and data communications.
And there is other, anecdotal evidence of military spending on other projects, such as producing more fuel efficient tanks and vehicles or producing newer and better planes that can fly over targets and launch an attack unmanned.
Even so, that still won't do much to help the North American economy, economists say.
"Suppose we took $100 out of everyone's pocket, and suppose we used it to build a huge bomb that we dropped on Iraq. What have we done? We've essentially taken a huge amount of the country's GDP and blown it up," says Bailey.
"There are some people who think that defence expenditure is the best thing ever, and there are people who think it's wasteful. The bottom line is that not all military spending is good for the economy."
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