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Keynesian trillions

January 29, 2008

President Bush cannot yet claim that he has won the Iraq war. But his final State of the Union speech made clear that he intends not to lose it. As always, he will spend whatever it takes to secure Iraq and Afghanistan -- and his legacy.

While the president's speechwriters were tweaking his address Monday, the White House announced that Bush would ask for $70 billion more for the two wars this year. A Pentagon spokesman said combat operations were costing $12 billion a month, with $9.2 billion spent in Iraq. That's just for combat operations. Including replacing equipment that's being used up and providing medical care and disability benefits for the wounded, Iraq has already cost well over $1 trillion. Back in early 2006, when war spending was running about $5 billion a month, economists Joseph Stiglitz and Linda Bilmes were sharply criticized for a study that predicted the Iraq war would cost up to $2 trillion. Their sequel, to be released next month, is titled "The Three Trillion Dollar War."

The interesting question is why the U.S. economy, beneficiary since 9/11 of the largest military spending binge in history, now requires $150 billion more in the form of a short-term stimulus package. Why hasn't the $1 trillion in defense spending, in addition to the 2001 and 2003 tax cuts, been sufficient to keep the economic boom going?

Economists will cite the sub-prime mess, of course. And then there's the price of oil, which was $25 a barrel before the U.S. invasion of Iraq and briefly hit $100 this year. That has drained the U.S. economy and increased the price of waging war, a petroleum-intensive business. Similarly, much of the military's spending goes to food, clothing and other consumables here and abroad, potentially boosting inflation more than economic growth. Still, mountains of taxpayer dollars have been paid to U.S. citizens or businesses in salaries, contracts, supplies, weapons systems, healthcare and services. Does that mean the fundamentals of our economy are weaker than we thought, and a deeper slump might have occurred without all that spending?

Washington's promised $150-billion stimulus package is designed to shock and awe the U.S. economy in a mere three to four months, and spread the money much more broadly than military spending, which must trickle down if it trickles at all. The economist John Maynard Keynes taught us in the 1930s that money spent on guns -- or butter, or even digging ditches and filling them up again -- had the same stimulative effects on a slumping economy. We've developed a more nuanced view of government spending since then, but it's still worth asking: What would Keynes say about a $3-trillion war?

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