Joseph Stiglitz: The war has led directly to the U.S. economic slowdown. First, before the U.S. went to war with Iraq, the price of oil was $25 a barrel. It’s now $100 a barrel.
While there are other factors involved in this price rise, the Iraq war is clearly a major factor. Already factoring in growing demand for energy from India and China, the futures markets projected before the war that oil would remain around $23 a barrel for at least a decade. It is the war and volatility it has caused, along with the falling dollar due to low interest rates and the huge trade deficit, that accounts for much of the difference.
That higher price means that the billions that would have been in the pockets of Americans to spend at home have been flowing out to Saudi Arabia and other oil exporters.
Second, money spent on Iraq doesn’t stimulate the economy at home. If you hire a Filipino contractor to work in Iraq, you don’t get the multiplier effect of someone building a road or a bridge in Missouri.
Third, this war, unlike any other war in American history, has been entirely financed by deficits. Deficits are a worry because, in the end, they crowd out investment and pile up debt that has to be paid in the future. That hurts productivity because little is left over either for public-sector investment in research, education and infrastructure or private-sector investment in machines and factories.