< Go Back

Economics of the War

Economics of the War

    Over the past two days, with my posts and your comments, we concluded that voters can’t tell which candidate for president of the United States would be the better choice for growing the economy. I actually learned quite a bit through the comments.

    My favorite comment was from Tigerfan who said, “When McCain says he doesn’t understand economics, people seem to infer he must be an idiot. In fact economics (real economics, not the nonsense you get on talk shows and business hours) is very, very difficult and involves a great deal of complex math. They don’t hand out Nobel Prizes for knitting after all.”

    That summed it up nicely. Our real choice is between two candidates who don’t understand economics. And they both want to govern a country full of people who also don’t understand economics while thinking they do. That makes the old, senile guy the only person in this scenario that isn’t deluded or lying. He tells you up front that he doesn’t understand economics.

    This made me question my assumptions about the cost of the war in Iraq. Common wisdom is that Obama would pull American forces out of Iraq quicker than McCain prefers, thereby saving a few trillion dollars. But is that how you estimate the cost difference between the two candidate’s positions on Iraq?

    I think you have to do an “expected value” calculation. In other words, you would value a 50% chance of spending a hundred dollars as if it were fifty dollars. With so many unknowns, that is the only rational approach.

    So if, for example, you think the realities in Iraq are that Obama is only 20% likely to draw down troops faster than McCain, you have to value the potential savings as only 20% as large as they could be. That’s still a lot, but 200 billion isn’t a trillion.

    Second, you have to add an “insurance” value to McCain’s approach of keeping relatively more forces in the area for a relatively longer time. There is a non-zero chance that having a robust base in the area, and a war hawk as president, would prevent future terrorist threats to the homeland. That has to be worth something. For example, if you think McCain’s approach has a 1% chance of better protecting against an attack that would seriously damage the economy of the United States you would calculate the value of staying in Iraq at 1% of that potential destruction. That’s a lot.

    But you have to balance that theoretical benefit against the “making things worse” aspect of keeping military force in Iraq. Would a major long-term military presence just give the terrorists more reasons to attack the homeland? That depends if you think terrorists could hate the United States less as long as the U.S. supports Israel, which both Obama and McCain do. And of course the U.S. will probably never leave Afghanistan. So I think you have to assume the terrorists’ incentive to attack America is permanently pinned at the maximum level no matter what happens with bases in Iraq. From an economics basis, the “might hate us more” element probably has zero value.

    In addition, you have to consider the non-zero chance that a long-term American base in Iraq would support the fledgling wannabe democracy long enough (say fifty years) for a true democracy to emerge and become a model for other countries in the region. What is it worth to the United States to slowly “infect” nearby Iran and Syria with democracy? It seems like a lot.

    You also have to factor in the economic stimulus of all the war spending. As much as you might not like boosting the fortunes of defense-related companies, that’s a big part of the American economy. Cutting a dollar from the defense budget doesn’t mean you have an extra dollar to reduce the deficit. When you take that dollar out of the economy, it can’t get passed around to generate income taxes and sales taxes. Maybe you ultimately net ten cents in government savings by cutting defense by a dollar. I don’t know the real number, but it is far less than a dollar.

    The budget impact of the near term clearly favors Obama and his get-out-faster approach. The economics of the long term are unclear. McCain’s approach is more of an insurance model; pay now so maybe you don’t get in bigger trouble later.

    I wonder if McCain’s supporters have more insurance than Obama supporters. That would be an interesting poll. And I’ll bet McCain’s supporters own more stock in defense companies, which is in itself a form of insurance.

More Episodes