Stiglitz on McCain: If He Doesn't Understand the Economy, He Doesn't Understand Security

In the following interview, Nobel laureate Joe Stiglitz talks about how the economy has replaced Iraq as the central issue in the presidential campaign, but how the two are closely related.

Stiglitz was awarded the Nobel Prize for Economics in 2001. He is the author, with Linda Bilmes, of The Three Trillion Dollar War: The True Cost of The Iraq Conflict, just published in the U.S. Stiglitz spoke with me for my Global Viewpoint on Monday.

Nathan Gardels: The American economy, teetering toward recession or worse, has replaced the war in Iraq as the key issue in the presidential campaign. What is the link between U.S. economic woes and the war in Iraq?

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.

Until very recently, we haven't sharply felt these three factors depressing the economy because the Federal Reserve Bank responded with the attitude that they must keep the economy going no matter how much President Bush spends on the Iraq war. Seeing a weak economy, they kept interest rates low, flooded the economy with liquidity and looked the other way when bad home-lending practices were shoveling money out the door. Regulation was lax. The spigot was wide open. More than $1.5 trillion was taken out of houses in mortgage equity withdrawals alone over the past five years! That is a huge amount of money to be spent.

At the same time, the U.S. savings rates plummeted to zero. So everything that was being spent, from rebuilding Iraq to redecorating the home, was on borrowed money. All the problems were papered over by borrowing. The bubble ultimately burst when the ratio of housing prices to income -- that is, what people whose incomes are falling could afford -- was no longer sustainable.

Now that we can see beyond the bubble, the economic weakness caused by the Iraq war will be fully exposed. And we'll pay for it in spades -- you might say, with interest.

Gardels: One of the bizarre occurrences of globalization is that the Chinese, who opposed the Iraq war at the U.N., have ended up as a major financier of that war by purchasing U.S. Treasury bonds with the huge dollar reserves they've earned from their trade surplus with the U.S. So, a consumer democracy with no savings borrows from a market-Leninist state to combat terrorism and hold free elections in the first Shiite government in an Arab state in 800 years!
How will we sort it all out?

Stiglitz: And the American people haven't a clue about what they are supporting, which undermines democracy at home as well.

The ironies don't stop there. This is the first American war since the Revolutionary War that has been financed from abroad. At the beginning of every other war, there was real public discourse about which costs should be put on future generations and which should be paid today -- in taxes. This is the first war where we have (BEGIN ITALICS) lowered taxes (END ITALICS) as we went to war.

The Iraq war has not only been financed by foreigners, but it is also the most privatized war in American history. And the results are egregious. For example, a security contractor -- I'm not talking about sophisticated engineers here -- makes well over $1,000 a day, often more than $400,000 a year. A person in the U.S. Army gets paid a fraction of that amount -- about $40,000 annually -- for performing the same tasks. Everybody knows any workplace where one person makes 10 times what the other one does for doing the same job is a recipe for discontent. So, in order to attract soldiers, the U.S. Army has increased sign-up bonuses. We're competing with ourselves! And that raises costs all around.

But that is not the end of the absurdity. On top of that, the U.S. taxpayer is paying disability and death insurance for the contractor, but then the insurance policies exempt paying in the circumstances of "hostilities." Who are we buying insurance for? The taxpayer, then, is essentially paying the insurance companies for nothing. Talk about a sweet deal!

Gardels: What is the big picture in terms of America's economic reckoning with the Iraq war?

Stiglitz: The big picture is that, by our most conservative estimates, this war has cost an almost unimaginable $3 trillion. A more realistic estimate, however, is closer to $5 trillion once you include all the downstream "off budget costs" of long-term veteran benefits and treatment, the costs of restoring the now depleted military to its pre-war strength, the considerable costs of actually withdrawing from Iraq and repositioning forces elsewhere in the region.

Then there are the micro costs. For example, if a solider gets killed, his family gets a $500,000 lifetime payment. That is not included in the public budget when the costs of the war are considered.

These costs are real and are not going away. You can't continue to sweep them under the rug. Like your credit card bill, the costs only grow greater if you ignore them.

Finally, anybody who says we ought to stay in Iraq for even another four years, no less the next 100 years, as John McCain has suggested, has to honestly tell the American people how they are going to pay the $12 billion-a-month bill. Where are we going to come up with another $1.2 trillion? And is that going to make America more secure?

Let's get out sooner rather than later. Above all, let's stop fantasizing. It's those fantasies that got us in trouble.

Gardels: In your view, is this economic mess a result of the neo-con fantasy or a conscious cover-up by the Bush administration to hide the costs from the American public?
Stiglitz: Both. It was a neo-con fantasy that we'd be greeted with garlands. We'd only be responsible for cleaning up the rose petals. Iraqi oil would pay for everything else.

It was also a deliberate attempt to hide the costs from the American people. How else could you justify not providing the American troops with the equipment they need? How else could you justify not giving the Veterans (Benefits) Administration what they need to treat the disabilities of our heroic soldiers who have been both physically and psychologically maimed by this war? That can only be interpreted as a deliberate attempt to hide the real costs of war -- at the expense of weakening our armed forces, which have been debilitated. The Bush administration has put short-run political advantage ahead of the security of the country.

Gardels: The economic costs have now come back to undermine the whole post-9/11 security effort. When John McCain says he's not interested in and doesn't understand the economic aspect of things, and only knows about how to keep America safe, what does that say about his leadership capability?

Stiglitz: If he doesn't understand the economy, he doesn't understand security. If we had infinite resources, we might be able to have perfect security. But America, like every other country, has resource constraints. That means you need to be smart -- that is, economic -- about the money we spend. If you weaken the American economy, you won't be able to find the resources you need for security. The two cannot be separated.

Comments

[theyak]

Since when do we recoqnize McCain, who graduated 5th from the bottom of his class at the Naval Academy as a great mind for national security. The only part of his military career that anyone seems aware of is that he was shot down and held as a P.O.W. I'll take Wesley Clark over this joker any day of the week.

[mouselion]

Thanks for this -- important talking points out of this to our fellow citizens and Obama or Clinton to McCain:

> Staying in Iraq does not mean better security for America: it means a weakening of national security.

> If you believe the economy is the most important issue, then you need to realize the implications of the Iraq War on the economy.

> If security is the most important issue, then you need to realize the implications of the economy on our ability to keep ourselves safe.

> This is the most mis-managed war ever in the history of the U.S.

Also, interesting revelation about supporting the cause of a regime that has no intention on improving its human rights record, giving freedom to its citizens, much less having any semblance of a democracy (China) -- to attempt to create a democracy in a nation where at least a certain (influential) element wants no more freedom for its citizenry than China has (Iraq).

[NChooseK]

Nice post, Nathan, but the tag $3000000 war should be changed, because it's missing six zeros. A $3 million war would be a piece of cake; it's a $3 trillion war that's putting us in the poohouse.

If any moderator has admin authority to change that, it would be nice.

[Sundialsvc4]

The shrewdness with which the rest of the world community has pandered to these "I wanna rule the world" American tin-pots has been nothing less than breathtaking. "Can anyone possibly be so greedy and simultaneously so stupid, as to not see or to not care what is going on here?" Apparently, yes.

We had better start paying attention to just who is "that little man behind the curtain," because he's somewhere very nearby though perhaps not in this country. It takes a lot of patient work to engineer a criminal plan that can usurp all three supposedly­-cross-che­cked Branches of this Government at the same time, and to so completely and continuously control the media that a nation of more than 320 million people could be lead along like so many pigs with rings in their noses.

The world community has sized us up with a metaphor I have used here before: a soldier who's bristling with weapons and body =armor= from the waist up, and nothing but body =hair= from the waist down. This is someone who thinks himself so utterly invulnerable, is so utterly persuaded that he cannot be stopped, that "a single well-placed kick" is quite beyond his imagination. But it only takes one such kick.

And we? Riding the country down to economic privation and ruin, locked in a nation that is literally unable to construct its own =shoes= (we tried, recently), lead to our own perdition by leaders (in the White House, the Senate, the House, the Supreme Court, the Democrats AND the Republicans ... yeah, this thing is "big, real big") who "frankly, my dear, don't give a damn" about ... well, about this country. I guess they're "multi-national." They'll **** anyone.

But "perfect storms" like this eventually play-out to some very, very grim outcomes. Famine, anyone? Brother, can you spare a dime? And the criminals? Long gone, to the fortified compounds they are building (on YOUR nickel) in Dubai and elsewhere.

This IS your future... unless you love your country as much as the people who founded it once did. Unless you care to save it.

[oldpotsmuggler]

The only actual salvation available is to write a new set of basic ground rules. www.foavc.org has all of the details.

[Nutcase]

McCain has an excellent plan.

As the economy gets worse, the more people will be willing to join the military. A bigger military will make all of those other wars he has promised us no real problem.

Je pense, donc je suis populiste.

[springsm]

Well DUH! "Myfriends" McCain sounds as sharp as a flat board. So when is the mainstreammedia going to let us all in on this. Or will the ignorant and non curious never find out. They won't be able to do any creative thinking on this. Scarier every minute.

[JMEB]

Excellent point.

However, the Republicans have been courting more and more stupid people, who are deep in debt themselves, and consistently vote against their own economic interest.

The fact that "we have no way to pay for Iraq" is a meaningless "liberal" phrase to them. Faith will guide them through the wilderness of impossibility.

[LeftRight]

yeah, and we don't want to pay more taxes, damnit!!!

[lboucher]

New elections in Michigan and Florida!!

[Rog49Thomas]

The issue is not what Mr. Siglitz knows or what Honest John knows.

It's what the average voter knows. And, if he knows about, if it affects his vote.

And that is the central problem we face.

Wear a flag lapel pin, repeat the mantra "support the troops", and advocate bombing other countries - that's all that is needed to convince our electorate you're strong on national security.

[kirksong]

Great interview! Mr. Stiglitz has a crystal clear view of cause and effect - something we Americans have forgotten. He is actually reporting the long term costs of our tragic adventure in Iraq and its direct impact on our economy and security. In our own lives, we know that if we cannot pay our way, we go down for the count. We hired a President who lives in a state of delusion - perhaps he is a mirror of our own delusional comatose state? I hope Americans are finally waking up from our slumber, and will choose intelligent leadership soon!!! The only thing that appears to awaken us is being pricked directly - loss of jobs, loss of health care, loss of equity in our homes, stock market losses, gasoline prices nearing $4.00 a gallon - and the beat goes on.

[MrJoyboy]

A country built on the twin pillars of slavery and genocide must eventually pay the karma piper.

[desmirl]

We have just endured 7 1/2 years of someone who doesn't understand the economy. And the Republicans want 8 more years? Housing crisis. Worthless dollar. Jobs going overseas. And people still want to vote Republican?

[PNAC]

Yes I am voting Ron Paul. Of all the original candidates only 2 were not members of the "Council on Foreign Relations", Kucinich and Paul. Paul is the only one calling for the immediate withdraw from Iraq. He understands the US is headed for a collapse like the Roman Empire and proposes the US withdraw from places like Korea and Japan.

I do not like many of his domestic policies but that is why we need a large Democratic majority in control of Congress to keep those policies in check. But as "commander in chief" he can end the war.
Unless the cost of empire is not brought under control, we are doomed.

Dan Rather interviewed a retired economist the other day and he said two interesting things:
No economist will predict a recession or else they will be fired. (he was fired twice for doing so)
This will be the worst recession since the 1930's

[Veri]

I am in Bulgaria right now. I have seen the USD drop against BGN three percent in the last week. At this rate, Bulgaria's leva be worth more than the dollar in, roughly, seven weeks. As for Poland, I arrived there in August. The Polish zloty (PLN) traded at 2.47 to the dollar. Six months later, the zloty is trading at around 2.33 to the dollar. Next year, Poland's zloty will be worth more than the dollar if the Republicans and Democrats continue economic mismanagement.

Both, the Republicans and Democrats, should be held criminally negligent for accounting fraud for allowing these budgets to pass. Through the bums out, then throw them in jail. After you remove their friends in the judiciary. The Party, Dems and Repubs, have installed their judiciary to cover their collective asses. We, the American Public, have been told to go shopping. This is The Party's message to us.

For all of those that believe in the fantasy that the Democrats will save us, keep living the lie. The Democrats are just as responsible for creating this disaster as the Republicans. After all, what two "parties" have alternately controlled the White House and Congress for the last forty years? Sure, Bill gave us a vibrant economy. Their, the seeds of the dot-com bubble were laid as The Federal Reserve pumped massive amounts of dollars into the system. On "Saint Bills" watch.

Given that we buy most of our consumer goods from overseas manufacturers, foreign manufacturers will raise prices to recover lost value in the dollar. These manufacturers spend money in their local currency, not ours. As the dollar declines precipitously, Wal-Mart costs more. How long before not even Wal-Mart can claim the title of "Low Cost King"?

How long before you are buying a loaf of bread for $5 or $10 dollars? This is what happens. Google "economy" "Weimar Republic".

Vote Republican or Democrat if you like Soup Kitchens and Breadlines!

[Gerald36]

Tuesday, March 04, 2008


Dear Mr. Gardels,


The only claim to fame McCain has is that he was captured by the enemy back in time! I still don’t know why he was made into a hero. It must’ve been one hell of a PR.
My question is how can he run for the presidency of the US if he was born in Panama? He was born on August 29, 1936 in Panama Canal Zone.


Jorge Larco

[DumbDad]

It was American territory at the time. Sorry, but McCain is our very own problem child.

[ResistanceisFutile]

Tells it all, doesn't it?

[Herrington]

Ah, finally. Economics is not hard, it is just hard to find and honest economist.