It's different this time. The nature of this conflict with terrorism presumably will prevent the economy from "being revived by the developments that fueled previous wartime booms, like surging orders for tanks and airplanes or demand for workers to replace those who go off to fight," according to Tuesday's New York Times.
It's always different this time. True, this is not a war of tanks and airplanes, but it will be a war of high-technology military equipment. This is not a war for Rosie the Riveter, but it is a war of Dot-Com Dan turned Security Man.
Spending is spending. Granted, not all spending is created equal. Money spent on bombs and missiles doesn't add to the capital stock or contribute to our well-being, except in as much it enhances our lives by ensuring their longevity.
After all, if wars were so beneficial, we wouldn't wait for an external enemy to attack. Instead we'd regularly bomb our cities so we could command resources to rebuild them.
For the purposes of gross domestic product, however, the government's war effort should be no different from that during previous wars. And there's already evidence from the dwindling budget surplus that spending has vaulted into high gear.
In August, the Congressional Budget Office projected a US$176 billion surplus for fiscal year 2002, which started Oct. 1. Eight months earlier in its January budget outlook -- before the Bush tax cut was enacted and at a time when the slowdown was expected to be short-lived -- the CBO projected a US$313 billion surplus for next year.
Two weeks ago, the CBO informed senators that the surplus was likely to be about US$50 billion, based on the performance of the economy and newly enacted spending measures in the wake of the Sept. 11 terrorist attack on the US. Many private-sector economists expect next year's budget to show a deficit, the first since 1997.
What's good about this war is that it will increase demand for things of which there is a surfeit: information technology.
"Spies need computers," says Henry Willmore, senior economist at Barclays Capital Group. So do the businesses that were quartered in and around the World Trade Center. (Industry analysts say this will be a drop in the bucket in terms of annual sales.) "You're already hearing about increased demand for face-recognition software," says Chris Low, chief economist at First Tennessee Capital Markets.
While the plunge in travel is making all the headlines, with nationwide layoffs announced by major hotel chains, just think what a bonanza the cleanup and rebuilding of lower Manhattan will be for the construction industry, a survivor of the economic slowdown. Anyone who is thinking of doing some minor renovations on his co-op will probably be on a waiting list for some time in 2005.
Then there's the small matter that wars tend to be inflationary, not deflationary.
"You show me a country that had a war that was deflationary," says Jim Bianco, president of Bianco Research in Barrington, Illinois. "The Gulf War, the Cold War, the Vietnam War, World War I and II -- wars cause an increase in inflation." Wars create shortages and a misallocation of resources, Bianco says. "The government is impeding on the free market's ability to allocate resources efficiently."
Right now there is no shortage of factory workers. In fact, 1.1 million manufacturing jobs have vanished into thin air since July of last year -- and that doesn't include temporary workers assigned to factories, which account for about half the temps in the US (The personnel supply services industry is included under services industries.) On the other hand, security is being beefed up everywhere: at airports, at businesses, on the streets. The stepped-up security registers as an increased cost of doing business, which companies aren't going to absorb given their ailing profits.
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