Description
explanation of of impact of war on fuel prices and global economy.
1
Table of Contents
Introduction ..................................................................................................................................... 3 Recent Effects of War ..................................................................................................................... 3 Cost of Iraq War.............................................................................................................................. 4 Effect of the Iraq War on the World ............................................................................................... 5 Human Costs ............................................................................................................................... 5 Disabling International Law ....................................................................................................... 5 Undermining the United Nations ................................................................................................ 5 Enforcing Coalitions ................................................................................................................... 6 Cost to the Global Economy ....................................................................................................... 6 Undermining Global Security ..................................................................................................... 6 Global Environmental Costs ....................................................................................................... 6 Human Rights ............................................................................................................................. 6 The Impact of Higher Military Spending on the World Economy ................................................. 7 Effect of Oil Prices on the global economy .................................................................................... 9
2
Introduction
The Impact of wars on fuel prices and global economy is one of the interesting studies conducted by economists the world over. War has been one of the constant features of human history. The frequency of wars has increased as time progressed, with the past century alone witnessing more than a hundred skirmishes. Along with the increase in the number of wars, the gory and bloody nature of the war has terrified humanity and made the world a more insecure place to live in. Economists have often tried to assess the cost of war in economic and monetary terms, from the defense expenditure of a nation to the cost of walls wreaked in a city that has been attacked. Any representation of a country’s economic growth will show that wars, strife and other similar unrests have been major points of change in the growth of an economy. We can argue that armed struggle is often a cause of a paradigm shift in the way an economy runs or is run. Assessing an economy before, during and after a war is a very good mechanism to study various types of policies applied in an economy and the various approaches to running an economy. The major wars in the 20th century were the two world wars. These wars did in fact witness an amazing economic and technological growth in many countries, especially the USA and to an extent Germany and the erstwhile USSR. But a huge volume of examples to argue on the other side can also be presented. Iraq and Afghanistan are present day examples which are staring at our face. History offers many more similar examples of countries whose economies have been ruined by war.
Recent Effects of War
The recent Iraq-Afghanistan War was more expensive than the Vietnam War. Here is what America's wars have cost in 2008 dollars along with the percent of GDP, as provided by the Congressional Research Service:
War American Revolution War of 1812 Civil War Civil War, Confederacy World War I World War II Korean War Vietnam War Gulf War Iraq war Afghanistan/Global war on terror Post 9/11 domestic security Americas cost of War $1.8 billion $1.2 billion $45.2 billion $15.2 billion $253 billion $4.1 trillion $320 billion $686 billion $96 billion $648 billion $171 billion $33 billion Percent of GDP N.A. 2.2 percent 11.3 percent N.A. 13.6 percent 35.8 percent 4.2 percent 2.3 percent 0.3 percent 1 percent 0.3 percent 0.1 percent
3
Cost of Iraq War
The Iraq War has cost Americans well over $1 trillion. According to a study by the Democratic Staff of Congress' Joint Economic Committee, entitled "The Hidden Costs of the Iraq War," "The economic costs to the United States of the wars in Iraq and Afghanistan so far total approximately $1.5 trillion... That amount is nearly double the $804 billion the White House has spent or requested to wage these wars through 2008." The report also calculates that the wars in Iraq and Afghanistan have already cost the typical family of four more than $20,000. As the report notes, "The full economic costs of the war to the American taxpayers and the overall U.S. economy go well beyond even the immense federal budget costs already reported." Unlike previous assessments, these estimates look at the conflicts; "'hidden costs'-- including higher oil prices, the expense of treating wounded veterans and interest payments on the money borrowed to pay for the wars." Staying the course in Iraq could cost an additional $2 trillion. While the war in Iraq has already incurred a tremendous cost on American taxpayers and the American economy, staying the course in Iraq is a choice that would have huge additional costs. It is estimated that staying the course in Iraq could cost an additional $2 trillion in total economic costs, including interest payments for war-related debt payments. War in Iraq comes at significant cost to US economy. The Center for Economic and Policy Research estimated that the impact of funding the war on the U.S. economy occurs "at the loss of 500,000 jobs after ten years of war spending, and crimping overall economic output by $60 billion a year." Dean Baker, co-director at Center for Economic and Policy Research explained that funding the war in Iraq is "draining resources away from productive sectors of the economy. 4
It will be more of a drag over time." Gus Faucher at Moody's explains that while interest rates are low, "they would be even lower were it now for the war." Faucher concludes that paying for the war is "going to have an impact on long-term growth, especially if this continues." Additionally, the war is diverting billions from more "productive investment(s) by American businesses in the United States." The war is also creating disruptions to the economy by pulling Guard and Reservists out of their jobs at an estimated cost of $1 to $2 billion. War in Iraq has contributed to rising gas prices. David Kirsch, a former State Department energy analyst who now manages oil market intelligence for PFC Energy consultants in Washington, "Without this disaster, oil prices would be much lower today." The Dallas Morning News writes that, "The crippling of Iraq's oil production since the start of the war amounts to one of the biggest disruptions in world oil supplies since World War II, according to statistics compiled by the U.S. Department of Energy." A study by the Democratic Staff of Congress' Joint Economic Committee estimates that declining Iraqi production "has likely raised oil prices in the U.S. by between $4 and $5 a barrel.” War in Iraq is financed by debt thus America is facing huge future interest costs. Reuters reported that the "wars in Iraq and Afghanistan could cost taxpayers a total of $2.4 trillion by 2017 when counting the huge interest costs because combat is being financed with borrowed money, according to a study released on Wednesday." The Congressional Budget Office "estimated that interest costs alone from 2001-2017 could total more than $700 billion."
Effect of the Iraq War on the World
Human Costs
While Americans make up the vast majority of military and contractor personnel in Iraq, other U.S.-allied "coalition" troops have suffered 135 war casualties in Iraq. In addition, the focus on Iraq has diverted international resources and attention away from humanitarian crises such as in Sudan.
Disabling International Law
The unilateral U.S. decision to go to war in Iraq violated the United Nations Charter, setting a dangerous precedent for other countries to seize any opportunity to respond militarily to claimed threats, whether real or contrived, that must be "pre-empted." The U.S. military has also violated the Geneva Convention, making it more likely that in the future, other nations will ignore these protections in their treatment of civilian populations and detainees.
Undermining the United Nations
At every turn, the Bush Administration has attacked the legitimacy and credibility of the UN, undermining the institution's capacity to act in the future as the centerpiece of global disarmament and conflict resolution. The efforts of the Bush administration to gain UN acceptance of an Iraqi government that was not elected but rather installed by occupying forces undermines the entire notion of national sovereignty as the basis for the UN Charter. It was on 5
this basis that Secretary General Annan referred specifically to the vantage point of the UN Charter in his September 2004 finding that the war was illegal.
Enforcing Coalitions
Faced with opposition in the UN Security Council, the U.S. government attempted to create the illusion of multilateral support for the war by pressuring other governments to join a so-called "Coalition of the Willing." This not only circumvented UN authority, but also undermined democracy in many coalition countries, where public opposition to the war was as high as 90 percent. As of the middle of September, only 29 members of the "Coalition of the Willing" had forces in Iraq, in addition to the United States. These countries, combined with United States, make up less than 14 percent of the world's population.
Cost to the Global Economy
The $151.1 billion spent by the U.S. government on the war could have cut world hunger in half and covered HIV/AIDS medicine, childhood immunization and clean water and sanitation needs of the developing world for more than two years. As a factor in the oil price hike, the war has created concerns of a return to the "stagflation" of the 1970s. Already, the world's major airlines are expecting an increase in costs of $1 billion or more per month.
Undermining Global Security
The U.S.-led war and occupation have galvanized international terrorist organizations, placing people not only in Iraq but around the world at greater risk of attack. The State Department's annual report on international terrorism reported that in 2003 there was the highest level of terror-related incidents deemed "significant" than at any time since the U.S. began issuing these figures.
Global Environmental Costs
U.S.-fired depleted uranium weapons have contributed to pollution of Iraq's land and water, with inevitable spillover effects in other countries. The heavily polluted Tigris River, for example, flows through Iraq, Iran and Kuwait.
Human Rights
The Justice Department memo assuring the White House that torture was legal stands in stark violation of the International Convention Against Torture (of which the United States is a signatory). This combined with the widely publicized mistreatment of Iraqi prisoners by U.S. military and intelligence officials gave new license for torture and mistreatment by governments around the world.
6
The Impact of Higher Military Spending on the World Economy
Global Insight modeled the impact of an increase in annual military spending equal to 1.0 percent of GDP beginning in 2007 and continuing over its 20-year forecast period. The forecast assumes that there is no offsetting increase in taxes in order to isolate the impact of the increase in defense spending on the economy. All other assumptions are exactly the same as in Global Insight baseline model. Table given below shows the key differences in projections, at five year intervals, between the baseline model and the simulation assuming higher levels of defense spending.
Differences between High Military Spending Simulation and Baseline Forecast (Annual Rates)
5 years Real GDP (billions 2000$) GDP Deflator (percentage points) 10-Year Treasury Note Yield (percentage points) Nonresidential Fixed Investment Industrial Production Light Vehicle Sales (thousands) Residential Fixed Investment Housing Starts (thousands) Exist. House Sales (thousands) Exports Imports Current Account Balance (Billions 2000$) Payroll Employment (thousands) 80.8 0.6% 0.68 -1.0% 0.4% -192.2 -1.3% -17.9 -128.4 -1.9% 2.0% -90.2 177.3 10years -13.3 0.6% 0.94 -1.0% -0.5% -323.3 -3.6% -46.2 -247.9 -1.5% 1.5% -72.5 -464.0 15 years -11.3 0.7% 1.06 -1.1% -1.0% -472.0 -3.5% -38.4 -271.1 -1.8% 2.2% -83.8 -515.3 20 years -42.1 0.7% 1.10 -1.0% -1.8% -731.4 -3.5% -38.5 -286.5 -1.8% 2.7% -112.8 -668.1
The first row shows the impact on GDP. Interestingly, the initial impact of higher military spending on GDP is positive. In the short-run, the model predicts that increased military spending provides a boost to the economy. The spending increases demand, which leads to more employment and output. Payroll employment is projected to be 177,300 higher after five years than in the baseline case. (The increase in military spending began in late 2001, so 2007 can be th seen as comparable to the 6 year in these projections.) However, the negative impact on most other variables can already be seen by the fifth year. The GDP deflator is 0.6 percentage points higher in year 5 in the high military spending simulation than in the baseline case. The higher inflation rate helps to push up the long-term interest rate. The yield on a 10-year Treasury note is projected to be 0.68 percentage points higher after 5 years. Higher real interest rates have the expected effect on interest sensitive sectors of the economy. The projections show that after five years, non-residential fixed investment will be 1.0 percent 7
lower in the high military spending scenario, car and truck sales will be down by 192,200, and residential fixed investment will be 1.3 percent lower. The fall in residential investment corresponds to a drop in housing starts of 17,900 and a decline in existing home sales of 128,400. Higher real interest rates are also projected to lead to a higher dollar, which in turn makes U.S. exports less competitive and imports cheaper. Exports are projected to be 1.9 percent lower in the high military spending scenario and imports are projected to be 2.0 percent higher. The result is that the real (2000 dollars) current account deficit is projected to be $90.2 billion larger (in absolute value) in the high military spending scenario than in the baseline scenario. After ten years, the crowding out effect is projected to more than offset the demand stimulus to the economy. GDP is projected to be modestly lower ($13.3 billion) in the high military spending scenario than in the baseline scenario. Payroll employment is also projected to be lower, with the number of payroll jobs down by 464,000 compared with the baseline scenario. The difference in average annual inflation rates over the ten year period is 0.6 percentage points, with the gap in the yield on the 10-year Treasury note rising to 0.94 percentage points. After te006E years, industrial production is projected to be down by 0.5 percent compared with the baseline scenario. Car and truck sales are projected to be down by 323,300 after ten years. The projected rise in the real interest rate leads to a decline of 3.6 percent in residential fixed investment. This corresponds to a drop in housing starts of 46,200 and a decline in existing home sales of 247,900. Exports are projected to be 1.5 percent lower after ten years than in the baseline scenario and imports are projected to be 1.5 percent higher. The real current account deficit is projected to be $72.5 billion more in the high military spending scenario than in the baseline scenario. The decline in GDP projected for the twentieth year in the high military spending scenario is $42.1 billion. This corresponds to a projected loss of 668,100 jobs. Inflation is projected to be 0.7 percentage points higher in the high military spending scenario, with the interest rate on the 10-year Treasury note 1.1 percentage points higher than in the baseline scenario. The higher interest rate is associated with a reduction in industrial production of 1.8 percent compared with the baseline scenario. Car and truck sales are projected to be 731,400 in the high military spending scenario compared to the baseline scenario. Residential investment is projected to be 3.5 percent lower, which corresponds to 38,500 fewer housing starts and a reduction of 286,500 in the number of existing homes sold. Exports are projected to be 1.8 percent lower and imports 2.7 percent higher in the high military spending scenario in the twentieth year. This leads to a real current account deficit that is $112.8 billion higher for the year. The cumulative current account deficit over the twenty year period in the high military spending scenario is approximately $1.8 trillion higher than the baseline scenario.
8
Effect of Oil Prices on the global economy
Gasoline prices have a huge impact on the global economy. It has a large impact on the consumer spending but has a very small effect on the consumption of gasoline. The effects are felt in consumption of general items. Economists generally talk about the “price elasticity” of certain products and will often predict that a one percent increase in the price of a product will result in a, say, two percent increase consumption or “quantity demanded.” The idea of this declining consumption can be explained in terms of the traditional concepts of “supply” and “demand.”
Short term for gasoline, however, appears to be relatively “inelastic”—that is, when prices change, there is relatively little change in the quantity demanded. This is why, when the world supply of petroleum changes, very a very large change in price is usually needed to bring supply and demand into balance. Supply and demand chart under inelastic demand looks more like this:
The red curve represents consumer demand, staying constant during the higher and lower supply conditions. The top blue curve represents the quantity supplied at a given price when supply is 9
low. Because the supply is low, suppliers will want more to supply a given quantity than is the case for conditions of high supply (the lower blue curve) where a greater quantity can be had a given price. Note that because the demand is relatively inelastic, the percentage the market price increases (on the vertical axis) is much greater than the percentage by which the quantity supplied is reduced (on the horizontal axis). As indicated, a very large increase in price is needed to reduce quantity demanded a small amount. In the United States, in the short run, it appears relatively difficult to reduce gasoline consumption. It is possible to eliminate “driving vacations” from one’s plans. It is also possible to buy automobiles with a better gas mileage, but most people are not ready to trade in their cars in the short run. The strong economy during the late 1990s encouraged a lot of people to buy low gas mileage cars with which they are now stuck. 14% of respondents to a survey by the NPD Group reported plans to buy a more fuel efficient car in the coming year. Americans do not tend to resort much to car pooling or public transportation, at least in the short run, in response to gas prices. Although a study by the NPD Group found that 28% of consumers buy less gasoline than usual at the moment, it is less clear how much consumption is actually reduced and, by implication, 72% of consumers have not reduced their gasoline purchases. Research by Dr. Gerard Tellis at the University of Southern California suggests that, for many branded products, the price elasticity is approximately -2.0. This means that when prices increase by one percent, the quantity demanded for the respective branded product will tend to decline by twice as much—two percent. The elasticity is, however, much lower for the product category, as opposed to the branded product. For example, the price elasticity is much greater (more negative) for Snickers than for candy bars in general. Since there are few immediately available direct substitutes for gasoline, the elasticity tends to be low. Because it is difficult to reduce spending on gasoline, the effects of price increases are often shifted to other economic sectors. Some economists estimate that for every one cent increase in the price of gas, spending in other areas will decline by one billion dollars. This figure does not appear to be based on recent empirical data, but it is clear that gasoline prices significantly affect consumer spending. In 2007, Wal-Mart estimated that the then current higher gasoline prices take away $7.00 per week from an average family budget. Since then, this figure has certainly increased significantly. The problem is compounded by the so-called “Multiplier Effect,” whereby money is re-spent as it makes its way through the economy. (E.g., restaurant workers buy movie tickets and studios in turn hire actors and staff, who in turn spend their money, giving income to others who in turn spend. Because a large part of the cost of oil goes abroad, there is less opportunity for multiplication within the U.S. economy. It may be speculated that there is some price threshold at which, once it is reached, consumers will dramatically consumption. In the 1970s, U.S. cereal manufacturers were afraid to approach such a threshold, which had been predicted from market research at $2.00. Unlike today’s gasoline consumers, however, the 1970s cereal shoppers had a choice to switch to other brands that had not yet followed suit. Many places in California, however, this threshold has already 10
been reached without a strong apparent drop. Should prices reach $3.00, that may well be a significant shifting point, but there is no clear evidence to show this.
Effect of War on Global Oil Prices
A Different Perspective
According to the renowned economist Robert J. Barro is of the opinion that the war against terror will boost the economy. The reason being that the war being expansionary in nature will help the U.S. economy to recover from the economic slowdown in that period. The examples of World War 2, Vietnam War and the Korean War the peak military spending was between 60% to 70% of the GDP.
11
doc_284524361.docx
explanation of of impact of war on fuel prices and global economy.
1
Table of Contents
Introduction ..................................................................................................................................... 3 Recent Effects of War ..................................................................................................................... 3 Cost of Iraq War.............................................................................................................................. 4 Effect of the Iraq War on the World ............................................................................................... 5 Human Costs ............................................................................................................................... 5 Disabling International Law ....................................................................................................... 5 Undermining the United Nations ................................................................................................ 5 Enforcing Coalitions ................................................................................................................... 6 Cost to the Global Economy ....................................................................................................... 6 Undermining Global Security ..................................................................................................... 6 Global Environmental Costs ....................................................................................................... 6 Human Rights ............................................................................................................................. 6 The Impact of Higher Military Spending on the World Economy ................................................. 7 Effect of Oil Prices on the global economy .................................................................................... 9
2
Introduction
The Impact of wars on fuel prices and global economy is one of the interesting studies conducted by economists the world over. War has been one of the constant features of human history. The frequency of wars has increased as time progressed, with the past century alone witnessing more than a hundred skirmishes. Along with the increase in the number of wars, the gory and bloody nature of the war has terrified humanity and made the world a more insecure place to live in. Economists have often tried to assess the cost of war in economic and monetary terms, from the defense expenditure of a nation to the cost of walls wreaked in a city that has been attacked. Any representation of a country’s economic growth will show that wars, strife and other similar unrests have been major points of change in the growth of an economy. We can argue that armed struggle is often a cause of a paradigm shift in the way an economy runs or is run. Assessing an economy before, during and after a war is a very good mechanism to study various types of policies applied in an economy and the various approaches to running an economy. The major wars in the 20th century were the two world wars. These wars did in fact witness an amazing economic and technological growth in many countries, especially the USA and to an extent Germany and the erstwhile USSR. But a huge volume of examples to argue on the other side can also be presented. Iraq and Afghanistan are present day examples which are staring at our face. History offers many more similar examples of countries whose economies have been ruined by war.
Recent Effects of War
The recent Iraq-Afghanistan War was more expensive than the Vietnam War. Here is what America's wars have cost in 2008 dollars along with the percent of GDP, as provided by the Congressional Research Service:
War American Revolution War of 1812 Civil War Civil War, Confederacy World War I World War II Korean War Vietnam War Gulf War Iraq war Afghanistan/Global war on terror Post 9/11 domestic security Americas cost of War $1.8 billion $1.2 billion $45.2 billion $15.2 billion $253 billion $4.1 trillion $320 billion $686 billion $96 billion $648 billion $171 billion $33 billion Percent of GDP N.A. 2.2 percent 11.3 percent N.A. 13.6 percent 35.8 percent 4.2 percent 2.3 percent 0.3 percent 1 percent 0.3 percent 0.1 percent
3
Cost of Iraq War
The Iraq War has cost Americans well over $1 trillion. According to a study by the Democratic Staff of Congress' Joint Economic Committee, entitled "The Hidden Costs of the Iraq War," "The economic costs to the United States of the wars in Iraq and Afghanistan so far total approximately $1.5 trillion... That amount is nearly double the $804 billion the White House has spent or requested to wage these wars through 2008." The report also calculates that the wars in Iraq and Afghanistan have already cost the typical family of four more than $20,000. As the report notes, "The full economic costs of the war to the American taxpayers and the overall U.S. economy go well beyond even the immense federal budget costs already reported." Unlike previous assessments, these estimates look at the conflicts; "'hidden costs'-- including higher oil prices, the expense of treating wounded veterans and interest payments on the money borrowed to pay for the wars." Staying the course in Iraq could cost an additional $2 trillion. While the war in Iraq has already incurred a tremendous cost on American taxpayers and the American economy, staying the course in Iraq is a choice that would have huge additional costs. It is estimated that staying the course in Iraq could cost an additional $2 trillion in total economic costs, including interest payments for war-related debt payments. War in Iraq comes at significant cost to US economy. The Center for Economic and Policy Research estimated that the impact of funding the war on the U.S. economy occurs "at the loss of 500,000 jobs after ten years of war spending, and crimping overall economic output by $60 billion a year." Dean Baker, co-director at Center for Economic and Policy Research explained that funding the war in Iraq is "draining resources away from productive sectors of the economy. 4
It will be more of a drag over time." Gus Faucher at Moody's explains that while interest rates are low, "they would be even lower were it now for the war." Faucher concludes that paying for the war is "going to have an impact on long-term growth, especially if this continues." Additionally, the war is diverting billions from more "productive investment(s) by American businesses in the United States." The war is also creating disruptions to the economy by pulling Guard and Reservists out of their jobs at an estimated cost of $1 to $2 billion. War in Iraq has contributed to rising gas prices. David Kirsch, a former State Department energy analyst who now manages oil market intelligence for PFC Energy consultants in Washington, "Without this disaster, oil prices would be much lower today." The Dallas Morning News writes that, "The crippling of Iraq's oil production since the start of the war amounts to one of the biggest disruptions in world oil supplies since World War II, according to statistics compiled by the U.S. Department of Energy." A study by the Democratic Staff of Congress' Joint Economic Committee estimates that declining Iraqi production "has likely raised oil prices in the U.S. by between $4 and $5 a barrel.” War in Iraq is financed by debt thus America is facing huge future interest costs. Reuters reported that the "wars in Iraq and Afghanistan could cost taxpayers a total of $2.4 trillion by 2017 when counting the huge interest costs because combat is being financed with borrowed money, according to a study released on Wednesday." The Congressional Budget Office "estimated that interest costs alone from 2001-2017 could total more than $700 billion."
Effect of the Iraq War on the World
Human Costs
While Americans make up the vast majority of military and contractor personnel in Iraq, other U.S.-allied "coalition" troops have suffered 135 war casualties in Iraq. In addition, the focus on Iraq has diverted international resources and attention away from humanitarian crises such as in Sudan.
Disabling International Law
The unilateral U.S. decision to go to war in Iraq violated the United Nations Charter, setting a dangerous precedent for other countries to seize any opportunity to respond militarily to claimed threats, whether real or contrived, that must be "pre-empted." The U.S. military has also violated the Geneva Convention, making it more likely that in the future, other nations will ignore these protections in their treatment of civilian populations and detainees.
Undermining the United Nations
At every turn, the Bush Administration has attacked the legitimacy and credibility of the UN, undermining the institution's capacity to act in the future as the centerpiece of global disarmament and conflict resolution. The efforts of the Bush administration to gain UN acceptance of an Iraqi government that was not elected but rather installed by occupying forces undermines the entire notion of national sovereignty as the basis for the UN Charter. It was on 5
this basis that Secretary General Annan referred specifically to the vantage point of the UN Charter in his September 2004 finding that the war was illegal.
Enforcing Coalitions
Faced with opposition in the UN Security Council, the U.S. government attempted to create the illusion of multilateral support for the war by pressuring other governments to join a so-called "Coalition of the Willing." This not only circumvented UN authority, but also undermined democracy in many coalition countries, where public opposition to the war was as high as 90 percent. As of the middle of September, only 29 members of the "Coalition of the Willing" had forces in Iraq, in addition to the United States. These countries, combined with United States, make up less than 14 percent of the world's population.
Cost to the Global Economy
The $151.1 billion spent by the U.S. government on the war could have cut world hunger in half and covered HIV/AIDS medicine, childhood immunization and clean water and sanitation needs of the developing world for more than two years. As a factor in the oil price hike, the war has created concerns of a return to the "stagflation" of the 1970s. Already, the world's major airlines are expecting an increase in costs of $1 billion or more per month.
Undermining Global Security
The U.S.-led war and occupation have galvanized international terrorist organizations, placing people not only in Iraq but around the world at greater risk of attack. The State Department's annual report on international terrorism reported that in 2003 there was the highest level of terror-related incidents deemed "significant" than at any time since the U.S. began issuing these figures.
Global Environmental Costs
U.S.-fired depleted uranium weapons have contributed to pollution of Iraq's land and water, with inevitable spillover effects in other countries. The heavily polluted Tigris River, for example, flows through Iraq, Iran and Kuwait.
Human Rights
The Justice Department memo assuring the White House that torture was legal stands in stark violation of the International Convention Against Torture (of which the United States is a signatory). This combined with the widely publicized mistreatment of Iraqi prisoners by U.S. military and intelligence officials gave new license for torture and mistreatment by governments around the world.
6
The Impact of Higher Military Spending on the World Economy
Global Insight modeled the impact of an increase in annual military spending equal to 1.0 percent of GDP beginning in 2007 and continuing over its 20-year forecast period. The forecast assumes that there is no offsetting increase in taxes in order to isolate the impact of the increase in defense spending on the economy. All other assumptions are exactly the same as in Global Insight baseline model. Table given below shows the key differences in projections, at five year intervals, between the baseline model and the simulation assuming higher levels of defense spending.
Differences between High Military Spending Simulation and Baseline Forecast (Annual Rates)
5 years Real GDP (billions 2000$) GDP Deflator (percentage points) 10-Year Treasury Note Yield (percentage points) Nonresidential Fixed Investment Industrial Production Light Vehicle Sales (thousands) Residential Fixed Investment Housing Starts (thousands) Exist. House Sales (thousands) Exports Imports Current Account Balance (Billions 2000$) Payroll Employment (thousands) 80.8 0.6% 0.68 -1.0% 0.4% -192.2 -1.3% -17.9 -128.4 -1.9% 2.0% -90.2 177.3 10years -13.3 0.6% 0.94 -1.0% -0.5% -323.3 -3.6% -46.2 -247.9 -1.5% 1.5% -72.5 -464.0 15 years -11.3 0.7% 1.06 -1.1% -1.0% -472.0 -3.5% -38.4 -271.1 -1.8% 2.2% -83.8 -515.3 20 years -42.1 0.7% 1.10 -1.0% -1.8% -731.4 -3.5% -38.5 -286.5 -1.8% 2.7% -112.8 -668.1
The first row shows the impact on GDP. Interestingly, the initial impact of higher military spending on GDP is positive. In the short-run, the model predicts that increased military spending provides a boost to the economy. The spending increases demand, which leads to more employment and output. Payroll employment is projected to be 177,300 higher after five years than in the baseline case. (The increase in military spending began in late 2001, so 2007 can be th seen as comparable to the 6 year in these projections.) However, the negative impact on most other variables can already be seen by the fifth year. The GDP deflator is 0.6 percentage points higher in year 5 in the high military spending simulation than in the baseline case. The higher inflation rate helps to push up the long-term interest rate. The yield on a 10-year Treasury note is projected to be 0.68 percentage points higher after 5 years. Higher real interest rates have the expected effect on interest sensitive sectors of the economy. The projections show that after five years, non-residential fixed investment will be 1.0 percent 7
lower in the high military spending scenario, car and truck sales will be down by 192,200, and residential fixed investment will be 1.3 percent lower. The fall in residential investment corresponds to a drop in housing starts of 17,900 and a decline in existing home sales of 128,400. Higher real interest rates are also projected to lead to a higher dollar, which in turn makes U.S. exports less competitive and imports cheaper. Exports are projected to be 1.9 percent lower in the high military spending scenario and imports are projected to be 2.0 percent higher. The result is that the real (2000 dollars) current account deficit is projected to be $90.2 billion larger (in absolute value) in the high military spending scenario than in the baseline scenario. After ten years, the crowding out effect is projected to more than offset the demand stimulus to the economy. GDP is projected to be modestly lower ($13.3 billion) in the high military spending scenario than in the baseline scenario. Payroll employment is also projected to be lower, with the number of payroll jobs down by 464,000 compared with the baseline scenario. The difference in average annual inflation rates over the ten year period is 0.6 percentage points, with the gap in the yield on the 10-year Treasury note rising to 0.94 percentage points. After te006E years, industrial production is projected to be down by 0.5 percent compared with the baseline scenario. Car and truck sales are projected to be down by 323,300 after ten years. The projected rise in the real interest rate leads to a decline of 3.6 percent in residential fixed investment. This corresponds to a drop in housing starts of 46,200 and a decline in existing home sales of 247,900. Exports are projected to be 1.5 percent lower after ten years than in the baseline scenario and imports are projected to be 1.5 percent higher. The real current account deficit is projected to be $72.5 billion more in the high military spending scenario than in the baseline scenario. The decline in GDP projected for the twentieth year in the high military spending scenario is $42.1 billion. This corresponds to a projected loss of 668,100 jobs. Inflation is projected to be 0.7 percentage points higher in the high military spending scenario, with the interest rate on the 10-year Treasury note 1.1 percentage points higher than in the baseline scenario. The higher interest rate is associated with a reduction in industrial production of 1.8 percent compared with the baseline scenario. Car and truck sales are projected to be 731,400 in the high military spending scenario compared to the baseline scenario. Residential investment is projected to be 3.5 percent lower, which corresponds to 38,500 fewer housing starts and a reduction of 286,500 in the number of existing homes sold. Exports are projected to be 1.8 percent lower and imports 2.7 percent higher in the high military spending scenario in the twentieth year. This leads to a real current account deficit that is $112.8 billion higher for the year. The cumulative current account deficit over the twenty year period in the high military spending scenario is approximately $1.8 trillion higher than the baseline scenario.
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Effect of Oil Prices on the global economy
Gasoline prices have a huge impact on the global economy. It has a large impact on the consumer spending but has a very small effect on the consumption of gasoline. The effects are felt in consumption of general items. Economists generally talk about the “price elasticity” of certain products and will often predict that a one percent increase in the price of a product will result in a, say, two percent increase consumption or “quantity demanded.” The idea of this declining consumption can be explained in terms of the traditional concepts of “supply” and “demand.”
Short term for gasoline, however, appears to be relatively “inelastic”—that is, when prices change, there is relatively little change in the quantity demanded. This is why, when the world supply of petroleum changes, very a very large change in price is usually needed to bring supply and demand into balance. Supply and demand chart under inelastic demand looks more like this:
The red curve represents consumer demand, staying constant during the higher and lower supply conditions. The top blue curve represents the quantity supplied at a given price when supply is 9
low. Because the supply is low, suppliers will want more to supply a given quantity than is the case for conditions of high supply (the lower blue curve) where a greater quantity can be had a given price. Note that because the demand is relatively inelastic, the percentage the market price increases (on the vertical axis) is much greater than the percentage by which the quantity supplied is reduced (on the horizontal axis). As indicated, a very large increase in price is needed to reduce quantity demanded a small amount. In the United States, in the short run, it appears relatively difficult to reduce gasoline consumption. It is possible to eliminate “driving vacations” from one’s plans. It is also possible to buy automobiles with a better gas mileage, but most people are not ready to trade in their cars in the short run. The strong economy during the late 1990s encouraged a lot of people to buy low gas mileage cars with which they are now stuck. 14% of respondents to a survey by the NPD Group reported plans to buy a more fuel efficient car in the coming year. Americans do not tend to resort much to car pooling or public transportation, at least in the short run, in response to gas prices. Although a study by the NPD Group found that 28% of consumers buy less gasoline than usual at the moment, it is less clear how much consumption is actually reduced and, by implication, 72% of consumers have not reduced their gasoline purchases. Research by Dr. Gerard Tellis at the University of Southern California suggests that, for many branded products, the price elasticity is approximately -2.0. This means that when prices increase by one percent, the quantity demanded for the respective branded product will tend to decline by twice as much—two percent. The elasticity is, however, much lower for the product category, as opposed to the branded product. For example, the price elasticity is much greater (more negative) for Snickers than for candy bars in general. Since there are few immediately available direct substitutes for gasoline, the elasticity tends to be low. Because it is difficult to reduce spending on gasoline, the effects of price increases are often shifted to other economic sectors. Some economists estimate that for every one cent increase in the price of gas, spending in other areas will decline by one billion dollars. This figure does not appear to be based on recent empirical data, but it is clear that gasoline prices significantly affect consumer spending. In 2007, Wal-Mart estimated that the then current higher gasoline prices take away $7.00 per week from an average family budget. Since then, this figure has certainly increased significantly. The problem is compounded by the so-called “Multiplier Effect,” whereby money is re-spent as it makes its way through the economy. (E.g., restaurant workers buy movie tickets and studios in turn hire actors and staff, who in turn spend their money, giving income to others who in turn spend. Because a large part of the cost of oil goes abroad, there is less opportunity for multiplication within the U.S. economy. It may be speculated that there is some price threshold at which, once it is reached, consumers will dramatically consumption. In the 1970s, U.S. cereal manufacturers were afraid to approach such a threshold, which had been predicted from market research at $2.00. Unlike today’s gasoline consumers, however, the 1970s cereal shoppers had a choice to switch to other brands that had not yet followed suit. Many places in California, however, this threshold has already 10
been reached without a strong apparent drop. Should prices reach $3.00, that may well be a significant shifting point, but there is no clear evidence to show this.
Effect of War on Global Oil Prices
A Different Perspective
According to the renowned economist Robert J. Barro is of the opinion that the war against terror will boost the economy. The reason being that the war being expansionary in nature will help the U.S. economy to recover from the economic slowdown in that period. The examples of World War 2, Vietnam War and the Korean War the peak military spending was between 60% to 70% of the GDP.
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