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Jewish World Review Oct. 23, 2001 / 6 Mar-Cheshvan, 5762

Robert W. Tracinski

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The economics of war -- NATIONAL emergencies are notorious for giving free reign to bad economics. In the panic of a crisis, people grasp desperately for solutions. And thanks to generations of bad economics education, they are offered a wide range of economic errors to grasp at.

The most ominous error masquerading as an economic truth is the proposition that war stimulates the economy. This bizarre view was given prominence recently by Paul Krugman, who masquerades as an economist on the editorial pages of The New York Times. "Ghastly as it may seem," Krugman writes, the destruction of the World Trade Center "could even do some economic good. ... (T)he driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings."

There has to be something wrong about a theory in which Osama bin Laden is America's economic savior. So I called on my favorite economist, Richard Salsman, an economic forecaster based in Cambridge, Mass. Salsman pointed out that this argument is just a variation on the old "broken window fallacy."

Suppose, for example, that a young hoodlum hurls a brick through the window of a shop, and the owner has to call a glazier to repair it. The crowd who has gathered after the initial excitement observes the glazier at work and sees that he is paid $200. They conclude that the punk has done a service to society: he has caused an instant boost in employment and economic activity.

But what the crowd doesn't see is what the shopkeeper might have done with that same $200 dollars, the new investments he might have made, which might have moved his business forward -- if he had not been forced to replace what he already had. Before the punk came along, the shopkeeper had both a window and $200. Now he only has a window. Wealth has been destroyed, not created.

But most economists still give credence to the absurd theory of John Maynard Keynes, who preached that "pyramid-building, earthquakes, even wars may serve to increase wealth." As Salsman puts it, "Since Keynesians believe that a broken window can stimulate the economy, imagine how they must rejoice when literally thousands of them are broken." Hence Krugman's delusion that blowing up buildings is good for us. A related delusion is the idea that we can revive the economy with a massive "stimulus package" consisting of billions in new government spending. What short-sighted observers see is a flood of money pouring out of Washington. But what must come first, Salsman points out, is a flood of money squeezed from the nation's producers. Businesses already reeling from the economic downturn will have to cough up more taxes to pay for the government to "stimulate" them.

Worse, government stimulus spending goes, not to increased production, but to unemployment benefits and government-run projects. Salsman's response: "Taxing people who work, for the benefit of those who don't, stimulates sloth, not output." Similarly, taxing producers to pay for wasteful government projects stimulates government waste, not production.

All of these errors are part of a deeper economic myth. We have been told, following Sept. 11, that the best way to keep the economy going is to act as if nothing had happened, to keep spending money like a drunken sailor. But consumer spending uses up wealth. It is only productive activity -- harder work, more investment, increased productivity -- that creates new wealth. If we really want to stimulate the economy, says Salsman, we need to encourage production, not consumption. The best way to do that is to give the producers a break from the high taxes they currently pay. Cut tax rates -- not just for low-income earners, but for the wealthy and for corporations -- so that these people can keep more of their dwindling profits and invest more of it back into the economy.

But one kind of government spending can be good for the economy: military spending. Spending on bombs, planes and tanks does not itself stimulate growth -- but it does remove a barrier to economic growth. Military spending makes it safe to build skyscrapers again. The kind of war that's best for the economy, Salsman says, is "one that's executed swiftly, forcefully, and comprehensively." The worst, economically, is a timid, drawn-out conflict, "one that leaves terrorist governments intact, exposing the U.S. to even more damaging and frequent attacks in the future."

The bottom line: Fighting a war is not good for the economy -- but winning it, is.

Comment on JWR contributor Robert W. Tracinski's column by clicking here.

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