NEW YORK -- One of the hoariest myths in America is that wars, awful as they are, at least rev up the economy and create jobs. I'll argue with that idea in a moment. But before I do, let me note that war with Iraq hasn't even lived up to its myth. From the moment it hovered into view, it has been destroying jobs.
Iraq's invasion of Kuwait drove up oil prices, which swiftly increased the price of gasoline and heating oil. That left consumers with less money to spend on other goods. Fear of war, in addition to the pocketbook pinch, helped set off a crash in consumer confidence in the fourth quarter of 1990. In response, corporations hastened to lay off workers -- all of which made the recession worse.
Ultimately, inflation clocked in at 6.1 percent for 1990 -- overrunning wage increases and inflicting the largest real loss in consumer purchasing power since 1981. Had Saddam Hussein stayed home, the fourth quarter undoubtedly would not have been so bad. If the economy's precipitate slide now starts to ease, as most economists expect, we will not have the war to thank.
Quite to the contrary. Any good news depends almost entirely on the hope that the hot war won't last more than a few weeks. Business will be revived not by war but by the anticipation of war's end.
The true source of any "wartime boom" is heavy government spending supported by large new supplies of money pumped into the economy. If the government took the same actions with regard to, say, fixing bridges and reconstructing inner cities, it would create a "bridge and city boom."
"It wasn't World War II that brought us out of the Depression," says Jerry Jordan, chief economist at First Interstate Bancorp in Los Angeles. "It was the central bank deciding to take its foot off the brake.Before 1937, the economy was rebounding from the depths of 1933. Then the central bank raised bank reserve requirements sharply, which lowered the amount of money available to lend and slammed the economy back down. Just before the war, business was starting to go back up again."
What ended the Depression, then, was the change of central-bank policy with regard to feeding money into the economy. The Korean and Vietnam wars also were accompanied by a liberal fiscal and monetary hand. Not so the current war -- yet.
Assuming that the conflict doesn't last long, defense production won't gear up. You won't see a lot of extra spending on hardware such as planes and tanks, or on the workers needed to build them. War spending did add $2.7 billion to last year's budget and perhaps $12 billion to $15 billion so far to this year's, according to congressional sources. But most of that money is being consumed by daily operations -- things like fuel, food and extra military pay.
Barry Blechman, president of Defense Forecasts in Washington, D.C., says that new war-related procurement contracts are chiefly for munitions and soft goods: desert camouflage, netting, freeze-dried foods,antidotes to chemical weapons and the like. "The major defense contractors are laying off workers and will continue to do so," he says.
Any tanks lost in a ground assault probably won't be replaced, consistent with Congress' interest in shrinking America's military machine. That's all to the good. Government spending on the civilian sector does the economy far more good than spending on defense. Planes, tanks and bullets are ultimately destroyed. Bridges, roads and schools remain, and add to America's long-term productivity.
What's more, wartime booms eventually end in busts, when wartime inflation is wiped out. A long war with Iraq would divert money back to the Pentagon and start the defense factories humming again. But even then, you couldn't count on an economic boom. More likely, federal spending on the civilian economy would be reduced -- so jobs would simply be shuffled from the civilian sector into defense.
With the federal deficit so big, this country can't afford guns and butter anymore. It's one or the other -- which makes it doubly important that this war be short.