How Does Iraq Play Into the Economic Crisis?

Since September 11, the American imagination has been captured by the terrifying image of an American city struck by a terrorist WMD attack. It's a gripping scenario, but though the risk of such an event is certainly a reason to do our best to halt and reverse nuclear proliferation, it's always been a pretty outlandish concern. Nuclear weapons, it turns out, are really hard to build, even for states and for all the understandable anxiety nobody's ever created an effective biological weapon. A smallish band of terrorists operating on a shoestring budget doesn't have any plausible means of creating a mass casualty device. And though stolen Russian missiles became something of a 1990s movie cliché, in the real world, the Russians guard this stuff pretty carefully.

A more plausible, if less dramatic, means by which terrorists might bring the United States low was outlined by none other than Osama bin Laden himself in his November 2004 pre-election message. In that tape, bin Laden described a strategy of "bleeding America to the point of bankruptcy" by provoking us into undertaking costly military adventures. Mocking a certain panicky quality in American policymaking, bin Laden bragged that "all that we have to do is to send two Mujadedin to the farthest point East to raise a piece of cloth on which is written al-Qaeda in order to make the generals race there to cause America to suffer human economic and political losses without their achieving for it anything of note other than some benefits to their private companies."

Today, as a swirling financial panic pushes national security issues out of the headlines it's worth returning to bin Laden's warning.

It reminds us that the distinction between national security and economics is somewhat artificial. Not only is the modern economy global in scope (banks are failing in Europe, and much of the capital that fed the bubble in the United States came from Europe) but military strength is ultimately grounded in economics. American intervention proved decisive in both world wars due to the fact that our tremendous economic weight was able to trump our relative lack of military expertise. And though possessing an adequate military deterrent throughout the Cold War was clearly vital, at the end of the day the USSR possessed one, too. What made the difference, ultimately, was not American weaponry but the juxtaposition of American economic vibrancy and Soviet economic dysfunction.

But while the United States remains an extremely wealthy society by global or historical standards, in recent years that vibrancy (for reasons that, of course, can hardly all be laid at the feet of a clever al-Qaeda plot) has started to fade. Even before the current crisis, we appeared to be entering an economic downturn. The beginning of that downturn earlier this year marked the first time the U.S. economy had moved from peak (before the tech bubble burst) to peak (early 2008, when the housing downturn started to really hurt employment) without an increase in average household incomes.

At the same time, such gains as did occur during the Bush years were concentrated in the hands of the hyper-wealthy. But -- as conservatives used to enjoy bragging -- household consumption didn't see nearly the level of stagnation as we saw in the income column. Nor did consumption inequality increase nearly as rapidly as income inequality. This was fueled by a large expansion in credit (and debt) driven by innovative new financial products that, we can now see, were like sandcastles below the high-tide line -- nice while they lasted, but poised for catastrophe.

But the Bush administration's approach to national security hasn't helped. The sort of massive war spending we're undertaking in Iraq has a mildly stimulative effect in the short run because it provides incomes to some Americans. But for the long run, it's quite harmful. When the public sector spends money on new rail lines or on educating children, that spending increases the stock of physical or human capital available to the country and allows us to do more in the future. When the private sector spends money on new tractors or office buildings, much the same happens. But the outputs created by military spending can't be used to make additional new goods and services. Instead of being used to generate additional wealthy, much military equipment is simply destroyed as a result of use (in the case of bullets and explosives this is, of course, the whole point), and many of the soldiers fighting the war end up dead or maimed.

Some spending along these lines is, of course, necessary. But the invasion of Iraq manifestly was not and the $100 billion or so per year we've been spending on it has cost us dearly. And while not directly responsible for today's problems, it hasn't helped and has contributed to our underlying economic weakness. This is relevant not just to the past, but to the future. Ever since the combination of a troop "surge" and new counterinsurgency tactics succeeded in reducing the level of violence in Iraq, all sense of urgency about the issue has drained away from the conversation. But a simple absence of catastrophic direct consequences isn't enough to justify a hugely expensive initiative. Much of the American elite has been so busy crowing over the "success" of the surge, that nobody can explain exactly what we're accomplishing with our $10 billion a month in spending halfway around the world. Bin Laden would say we're "bleeding" ourselves and as economic problems mount it's worth wondering if he might not have a point.

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