War's mixed impact on a reviving economy

Adding in the $87 billion for Iraq and Afghanistan recently requested by President Bush, America's spending for defense will exceed that of all other nations combined.

It's a sign that the United States may be the most dominant single military power on the globe since the Roman Empire.

It's also a sign that Pax Americana is a costly affair, with major impact on the economy as well as on the world's political landscape.

Wars, in general, can stimulate economic growth or weigh down a nation with burdensome costs. This one could do both.

Most economists would say the US is now only partially in a "wartime economy." Defense costs are rising, but as a share of the US economy they are below levels seen in the cold war.

But war's imprint remains significant. In this year's April-June quarter, when the economy grew at a 3.1 percent annual rate, defense spending accounted for about one full percentage point of that gain, estimates economist Cynthia Latta of Global Insight in Lexington, Mass. It could provide about the same boost in the current quarter, as a US recovery gathers momentum.

The impacts range from the bigger paychecks that service-men and women earn during wartime to outlays for basic supplies like body armor and tank treads.

In all, the $87 billion Mr. Bush seeks would push 2004 defense spending to about $470 billion - a sum that, adjusted for inflation, nearly matches the peak level of military spending during the cold war.

But since 1980, the economy has grown hugely. Thus, military outlays in 2004 will not match the 7 percent of gross domestic product they reached in 1986 during the Reagan buildup. Next year, defense spending will likely run well above 4 percent of GDP, up from 3.7 percent in 2001.

By comparison, the Stockholm International Peace Research Institute (SIPRI) calculates that China spends 2.3 percent of its GDP on defense, Britain and France 2.5 percent, and Russia 3.8 percent.

"The economics of our defense budget are mind blowing," says Winslow Wheeler, an expert at the Center for Defense Information, a Washington think tank.

The American public seems to agree.

With war costs rising above $1 billion per week, about 7 of 10 respondents in a new Newsweek poll worry that the costs of the war will increase the deficit and hurt the economy.

The cost, which is likely to exceed $100 billion next year, doesn't yet approach the estimated $2.9 trillion cost (in today's dollars) of World War II or the $336 billion of the Korean War or the $494 billion of the Vietnam War. But clearly few Americans were expecting a tab of this magnitude.

A major war can send an economy into economic overdrive. That was certainly the case in World War II, which helped the US climb out of the Great Depression. Vietnam expenditures, combined with the War on Poverty and a generous monetary policy, brought a decade of high inflation. The Reagan buildup helped drag the economy out of a serious recession.

But spending on this war is not always the most efficient economic stimulant.

The current military spending, some economists say, is not proving as useful as other ways of boosting the economy. Targeted government spending on job creation and maintenance - such as helping states and municipalities financially - would do more, they maintain.

One reason the wartime spending is modest in its economic impact: As much as half will be spent abroad, figures David Wyss, chief economist of Standard & Poor's in New York. It will go for salaries, food, equipment, fuel, and other goods in Afghanistan or Iraq,

Corporate builders of major weapons programs are not expected to benefit much from the new spending. Some helicopters, tanks, and armored carriers were lost in the Iraq war, but no airplanes or warships. Most of the surge of spending goes to operations and maintenance, including improvements to the quality of life for troops.

The US has called a conference in Madrid in October to seek contributions from other nations to manning the occupation or paying some of its costs. But analysts don't expect the offerings to be large.

"Our allies are taking the attitude, 'You broke it, you pay for it,'" says Michael Donovan, a strategic analyst at the Center for Defense Information.

Given what promises to be a rising price tag, Mr. Donovan finds it "bewildering" that the White House will not give up sufficient authority for the occupation to the United Nations to win more help.

Some analysts, including critics of the war, lament the extra defense spending because it adds to the budget deficit and leaves less money for other programs.

Sachs warns that the ballooning budget deficit will eventually raise interest rates, including those on house mortgages and car loans.

"A waste of a phenomenal amount of money," says Jeffrey Sachs, director of the Earth Institute at Columbia University in New York. "It should have been spent for something useful to Americans.".

To supporters of the war, the money is serving a purpose useful to Americans - attacking the roots of terrorism.

But as Vietnam proved, spending does not necessarily translate into success. And that war ultimately helped undermine public confidence in the economy.

After conclusion of the cold war, there was a decade of "peace dividends," that is, defense spending cuts that allowed for more efficient uses of the money.

That trend, for now, has ended. In 2002, the world spent an estimated $794 billion on the military, the Stockholm group calculates. Of this total, the US spent $335.7 billion, or 43 percent of the total. The Bush Administration early this year asked for $379.9 billion for defense.

In spring Bush sought another $62.4 billion for military and intelligence operations in Iraq and the fight against terrorism. Now he is asking Congress for another $66 billion for defense.