Macroeconomic Subject and How it Affects Term Paper

Pages: 5 (1649 words)  ·  Bibliography Sources: 6  ·  File: .docx  ·  Level: College Senior  ·  Topic: Economics

Macroeconomic Subject and How it Affects the Economy

An analysis of the impact of the Iraq war on the U.S. economy can be done through a cost-benefits investigation that will likely show what the potential costs and economic benefits of the action were.

On the costs side, other then the obvious budgetary costs of supporting an army in Iraq, as well as the costs of the military invasion itself, one will need to consider the potential negative impact on the U.S. economy, in terms of the contribution of the war to economic costs such as high deficits and higher oil prices. At the same time, opportunity costs will also need to be considered in this equation: by opportunity costs, we will understand the cost of lost economic opportunities because of the war in Iraq (the cost of a missed alternative).

In terms of benefits, the paper will only focus on the economic benefits and will try to evaluate the degree to which the war in Iraq may have had a positive impact on the economy through job creation, economic growth because of military spending etc. The conclusions will draw a balance between the two for an overall evaluation of the impact of the war in Iraq on the U.S. economy.

When referring to the costs of the war in Iraq, the best estimates come from Joseph Stiglitz, who put, in 2008, the estimate of the costs of the war in Iraq at $3 trillion

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. His subsequent estimate in September 2010 places the estimate at a much higher number, if taking into consideration additional opportunity costs, much higher than the initial estimate of the Bush administration of around $50 to $60 billion. Stiglitz evaluation is that such a high cost automatically translates into a negative impact on the U.S. economy.

TOPIC: Term Paper on Macroeconomic Subject and How it Affects the Assignment

In terms of the evident, direct costs, these are accounted for in terms of the Iraq appropriations that Congress has used to allocate funds for the war effort. The estimate of the expenses that the appropriations covered were roughly around $12 billion a month, but Stiglitz adds here costs that had been included in the defense budget, as well as additional future costs of helping veterans etc. In his appreciation, the total expenses covered directly by the federal government are up to $1.5 trillion.

The direct immediate impact of these total expenses on the American economy translated into higher and higher budget deficits, through the simple macroeconomic equation that increasing expenses with revenues that remain constant (this will be further analyzed in the paper) will eventually lead to a growth of the budgetary deficit. The statistics are quite clear in this field. At the end of Clinton's presidency, the U.S. had a budgetary surplus of $850 billion. By the end of the Bush presidency, it was already at $1 trillion

. Through the period from 2003 to 2008, the war in Iraq was, through its direct $1.5 trillion spent directly from the federal budget, a direct contributor to the large budgetary deficit. As a percentage of the U.S. GDP, the conclusion is similar.

To these direct costs that had an impact on the economy, indirect costs to the economy and the society would have had to be considered as well. Such costs include the fact that, in many of the families who had members in Iraq who were wounded, one of the family members had to give up his or her job in order to support and help care for the wounded. This potentially translated into a negative effect on the economy, if considered at an aggregate level.

In this category one can also include the impact that the Iraq war had on the increase of the oil price at global level. There is argument that the war contributed to an increased destabilization of the Middle East region, where most of the global oil reserves are. At the same time, the argument is also based on statistics: according to Bloomberg, the Iraq war was part of a series of ascending that marked the evolution of the oil price after the 9/11 attacks

At the same time, there are several voices, including Stiglitz's, that support the idea that the war in Iraq had, to some degree, a contribution to the financial crisis that has affected the entire world. The logic behind this argumentation is related to the fact that the war in Iraq needed to be supported and, because of that, cheap money was desirable. The need for cheap money brought along a series of fiscal and monetary policies that, in the end, proved to have a negative impact on the development of the economy and the financial sector. Appropriately, the response to the financial and economic crisis was, in part, hampered by the war effort in Iraq, notably because the funds that could have been used effectively at the start of the crisis were not longer available, having been invested in the war effort.

In the entire evaluation of costs, the most expensive and with the most negative overall, aggregate impact over the U.S. economy are the opportunity costs of the war in Iraq. The questions here are (1) if the Iraq military operation had not been undertaken, what potential projects could have been developed with that money and (2) what was the cost of not undertaking those. Stiglitz is again the relevant source identifying a series of potential opportunity costs.

From a military perspective, the most important opportunity cost would have been an increase spending in Afghanistan. Stiglitz's logic is that diverting at least part of the budget that was spent in Iraq towards the operations in Afghanistan would have helped keep the situation better under control there. The overall positive impact on the economy of an additional contribution in Afghanistan to the detriment of the contribution in Iraq, in Stiglitz's view, would have reduced future expenses for that war, notably those that financed the 2010 surge (according to the argument that a surge in 2003 would have cost less and had more impact).

Another opportunity cost is the internal ways that the funds that were allocated for the Iraq war could have been spent. This includes supporting projects in the emerging industries, completing infrastructure projects or taking the appropriate measures to avoid the economic crisis through a stimulus package that would have not affected the country's deficits, due to the existence of this significant volume of money. One can certainly argue that the opportunities that were missed in terms of the U.S. economies because of the Iraq war are considerable.

In terms of the benefits that the war brought (or could have brought), there are a couple of areas worth investigating. First of all, the common conception that a war effort could help trigger and support economic growth has been proven wrong. The idea behind this conception relied on the macroeconomic logic according to which the federal stimulation of an industry, be it the military industry, will create more and more jobs and, subsequently, will help economic growth. As a showed in his work, who used a 20-years projection for his analysis and model, this is only true on a short-term

. According to his model, economy grew, in terms of real GDP, with 80.8% in the first 5 years, only to decrease with 13.3% compared to the baseline on a 10-year period and up to 42.1% over a 20 years period. It seems that the particular applicability of the military industry is too limited to allow an aggregate effect of a governmental stimulation.

At the same time, another benefit that was probably taken into consideration was the potential advantages deriving from opening up a country and market the size of Iraq. During the last years of Saddam's reign, the country was only trading on subsistence levels and… [END OF PREVIEW] . . . READ MORE

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