Paul Krugman and the WAR STIMULUS
by cgvcu, Tue Mar 25, 2008 at 01:34:01 PM EDT
"The war is indeed a grotesque waste of resources, which will place huge long-run burdens on the American public. But it's just wrong to blame the war for our current economic mess: in the short run, wartime spending actually stimulates the economy. Remember, the lowest unemployment rate America has experienced over the last half-century came at the height of the Vietnam War."
The war is likely not the sole source of all our economic ills ... but if it's effect is so stimulative, why the hell are we in such a fix?
We've paid for the war with debt and cut taxes to be stimulative. The taxes were supposed to stimulate the economy to a degree that tax revenues actually increase. But no credible economist believes this to be true and it hasn't happened. So, the deficit is fueled by both a shortfall in tax revenues to pay for traditional spending and borrowing to finance the war. A double stimulus -- and we are still slipping into a recession?
Oil prices go up with uncertainty. It's higher cost goes into about every good produced and delivered. Some postulate that interest rates are pressured up by increased deficit spending although historical data fails to produce clear support. But, uncertainty demands higher returns on investment -- i.e. higher interest rates. Higher interest rates triggered the rate resets that started the mortgage collapse. The mortgage market itself exploded in growth due to efforts to satisfy demand for high yield, quality debt (debt with less uncertainty) by "creatively" creating more of it. A lot is explained by an uncertain world and the war that helped make it more so.