Monday, March 10, 2008

Opinion versus Fact

Fire of Liberty

I have no doubt that a lot of the anti-war crowd, members of Congress and the Democrats running for president(At least their staff) will be flocking to their local bookstore or heading over to Amazon to pick up a copy of Joseph Stiglitz's most recent book "The Three Trillion Dollar War," in an effort to hit President Bush, Senator McCain and supporters over the head with an argument that their support of the War in Iraq is costing the US government and the American people a tremendous amount of tax dollars that could be spent at home. While these candidates and their advisers might think that the work of this Noble Prize economist will be a great trump card for the ever expanding primary and an eventual national campaign against McCain, I suggest that they take a good look at Amity Shlaes most recent column before they head too far down this road of argument. Here's a look:

`Vast and Huge' Cost

Non-budgetary and interest costs are an important part of the Stiglitz calculation. The authors worry about the deficit. The conflict's costs, they say, ``are certain to be vast and huge and will continue for generations.''

The rebuttal to this argument starts with oil. Professor Steven J. Davis of the University of Chicago Graduate School of Business challenges as ``unwarranted'' their argument that even $5-$10 of the per barrel increase is because of the war.

The 2003 drop in oil production by Iraq accounted for less than 1 percent of world production. Overall, world oil output went up from 2002 to 2006.

The authors' description of the war's cost as ``vast'' or ``huge,'' conjures images of unprecedented financial sacrifice. But by the standard method of calculating costs of wars, defense spending as a share of gross domestic product, Iraq's price is improbably modest.

Back in 1986, the year before Ronald Reagan threw out his ``tear down this wall'' challenge to Mikhail Gorbachev, defense spending was 6.2 percent of the U.S. economy, according to the Congressional Budget Office. In 1968, the year of the Tet Offensive in Vietnam, it was 9.5 percent.

`Peace Dividend'

In 2005, 2006, and 2007, defense spending was about 4 percent of GDP -- as low as during the early 1990s, when the U.S. was enjoying the ``peace dividend'' after the Soviet Union's collapse.

As for the budget deficit, it is likely to range between 2 percent and 3 percent of GDP this year, a humdrum level nothing like the heroic 30 percent deficit Washington ran as it prepared for D-Day.

Yet it is the Stiglitz-Bilmes ``what-would-have-been'' argument that will prove most contentious. Back in 2006, Davis and two colleagues made their own counterfactual case, seeking to analyze the costs of the theoretical alternative to war against Iraq: containment of Saddam.

Davis found that the costs of containment in Iraq would have been big. In certain situations, they even would have been ``in the same ballpark as the likely costs of the Iraq intervention.''

Good News

In a phone request for an update of his paper this week, Davis said sending additional U.S. troops last year, the ``surge,'' increased costs enough to make the war yet more expensive -- but not by trillions of dollars.

And where in the ``Three Trillion'' calculus does the new good news fit in, such as the International Monetary Fund's prediction that Iraq's GDP will increase by 7 percent this year?

The message of this book is that the war can be blamed for America's failure to reform domestically. If this is true, then Washington would have used the period of 1991 to 2001 to rewrite Social Security and Medicare. It didn't.

I'd say Schlaes has done a good job in putting lots of holes in Stiglitz's whole argument by looking at the data and reaffirming Senator Daniel Patrick Moynihan's quip that "Everyone is entitled to his own opinion, but not his own facts."

No comments: