Next generation sticker shock

Americans should be wondering whether their current economic plight has anything to do with their defense spending, including the costs of the wars in Afghanistan and Iraq.  Did the wars make the economy more vulnerable to financial collapse in 2008?  Will winding the wars down help the economy, or are the war expenditures irrelevant?

Tony Cordesman at CSIS argues that defense expenditure overall is a relatively small part of the economy (5 per cent or less), even counting the war expenditures.  He and his collaborators argue that America’s debt problems are closely tied to domestic entitlements, especially health expenditures, not to historically low and falling defense budgets (relative to GNP).  The risk as they see it is that domestic entitlements will crimp defense spending, especially if measures are not taken soon to rein them in.

Nobel Prize winner Joseph Stiglitz and Harvard Professor Linda Bilmes figure it differently:  $3 trillion for Iraq even without macroeconomic costs and $7 trillion for the Iraq and Afghanistan wars together, counting not only government expenditures but also macroeconomic and interest costs, since both wars were financed without raising taxes, and the Iraq war boosted oil prices.  These are extraordinary numbers that are, if accurate, unquestionably contributing to a weakened economy.

That said, the costs of financing public debt are at historic lows, along with interest rates generally.  The real problem lies in the future, when interest rates rise to more normal levels and delayed expenditures (like health care for veterans and new equipment for the armed forces) hit the books.  Sticker shock yes, but mainly for the next generation.

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