War not responsible for economic downturn

Martin Neal Bailey:

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The economic case for linking the two is that war has reduced the global supply of oil and pushed its price over $100 a barrel, draining consumers’ pocketbooks and adding to inflation. Flush with cash, this argument goes, the oil-producing countries have driven down global interest rates and encouraged over-borrowing in the United States. Meanwhile, Washington has borrowed money to pay for the war, adding to the budget deficit and leaving it with few options to stimulate the economy. The Federal Reserve kept interest rates too low, and for too long, as a way of trying to encourage growth.

I am no fan of the war in Iraq, but it simply has not been a major contributor to the financial crisis and the impending recession. The high price of oil is largely the result of strong demand, notably from China and India, pressing against a limited supply. The global oil supply is growing more slowly than it could because of politics and policies in many places — Russia, Mexico, Nigeria and Venezuela as well as the Middle East. Fears that the turmoil in Iraq might spread have probably given a boost to oil prices, but nowhere near enough to account for the huge price surge.

Absent the war, Iraqi oil production under Saddam Hussein might have been somewhat higher, but not by enough to affect the American economy. Iraqi oil production has been very volatile and has experienced a downward trend since the late 1970s, despite its vast potential.

One sign that the war in Iraq is not the primary cause of the rise in oil prices is that metals and commodity prices across the board have risen sharply. Surging demand in Asia, coupled with supply that grows only slowly when prices increase, is the main story not only for oil, but for commodities broadly. The sinking value of the dollar has also played a role.

Back home, our economic fumbles can be primarily tied to the mortgage mess and the big slump in residential construction. Some borrowers lied on their mortgage applications; some originators misrepresented the terms of the loans; financial institutions were making so much money they underestimated the risks they were taking. Investment banks and hedge funds were borrowing at 30-day or even 1-day maturity to finance holdings of risky longer-term assets. The credit-rating agencies failed to assess real risks.

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I think he is right on the money. While he is no supporter of the war, he at least has enough integrity to point to the real causes of the economic stress. For many Democrats the economic downturn is just another excuse to lose and it doesn't take much for these guys. They have been scrambling for an excuse to lose for a couple of years now and will probably continue to do so.

Many in the anti war movement are desperate to turn the war into a debacle. They have been mischaracterizing it as such for several months now, but the characterization shows an ignorance of warfare and the facts. It is not surprising that they would mischaracterize the economic effects too.