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Volume CXXXII, Number 14 |
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Fighting the bull back
TIMOTHY J. RIEMER
COLUMNIST
As I heard many people claim that a war with Iraq is simply about its oil, I have also heard people say that a war with Iraq will help put the bull back into a very bearish economy. Historically speaking, wars have been beneficial for the U.S. economy. In the course of the four years that the U.S. was involved in World War II, the gross domestic product (GDP) rose 69.1%. During the Korean and Vietnam wars GDP grew by 10.5% and 9.7% respectively. However, the last quarrel the U.S. had with Iraq resulted in GDP shrinking by 1.3%.
Journalists for the Wall Street Journal have suggested that the decrease in a war's ability to boost the economy is the consequence of the waning ability of defense spending to help the economy. In other words, the U.S. economy has become so large since World War II that defense spending has slowly become a less significant portion of the total U.S. economy, and therefore the potency of defense spending in the economy has been watered down.
There is more to consider, however, than just defense spending when analyzing the relationship between war and the economy. Another factor that must be considered is the financial markets. Many analysts believe that the shadow of a war with Iraq is haunting the markets. Analysts have suggested that until the worries over a war with Iraq are gone, or a war with Iraq is over, the ordinary investor will not return to the markets. Investors do not want to lose more money in a jolt to the markets caused by a war with Iraq. The change in the markets due to a war with Iraq, however, might not be bad. Traditionally the markets have floundered preceding wars but they have rebounded strongly during the fighting.
Whether or not a war with Iraq will help to improve the status of the ever-weakening markets is unknown. Some analysts speculate that beyond the uncertainties that investors have surrounding a war with Iraq investors could be becoming disenchanted with the stock markets in general. Trading volumes have decreased along with even more money being pulled out of mutual funds. These signs are very troubling for our economy. If investors lose faith in the markets then it will be very hard for this economy to rebound. As I have said before, the weakest part of this economy has been business investment, and the best way to resolve this problem is by getting money to the companies through the markets.
In my opinion, a war with Iraq is unlikely to bring the bull back into the ring. The concerns over war with Iraq, however, are holding the markets back and are therefore preventing the economy from turning around. A war with Iraq is certainly not the answer to our economic prayers, but having the Iraq issue over and done with is crucial to an economic recovery. Letting the situation drag on will be disastrous to the economy and any plan to fix the economy.
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