War's mixed impact on a reviving economy

Adding in the $87 billion for Iraq and Afghanistan recently requested by President Bush, America's spending for defense will exceed that of all other nations combined.

It's a sign that the United States may be the most dominant single military power on the globe since the Roman Empire.

It's also a sign that Pax Americana is a costly affair, with major impact on the economy as well as on the world's political landscape.

Wars, in general, can stimulate economic growth or weigh down a nation with burdensome costs. This one could do both.

Most economists would say the US is now only partially in a "wartime economy." Defense costs are rising, but as a share of the US economy they are below levels seen in the cold war.

But war's imprint remains significant. In this year's April-June quarter, when the economy grew at a 3.1 percent annual rate, defense spending accounted for about one full percentage point of that gain, estimates economist Cynthia Latta of Global Insight in Lexington, Mass. It could provide about the same boost in the current quarter, as a US recovery gathers momentum.

The impacts range from the bigger paychecks that service-men and women earn during wartime to outlays for basic supplies like body armor and tank treads.

In all, the $87 billion Mr. Bush seeks would push 2004 defense spending to about $470 billion - a sum that, adjusted for inflation, nearly matches the peak level of military spending during the cold war.

But since 1980, the economy has grown hugely. Thus, military outlays in 2004 will not match the 7 percent of gross domestic product they reached in 1986 during the Reagan buildup. Next year, defense spending will likely run well above 4 percent of GDP, up from 3.7 percent in 2001.

By comparison, the Stockholm International Peace Research Institute (SIPRI) calculates that China spends 2.3 percent of its GDP on defense, Britain and France 2.5 percent, and Russia 3.8 percent.

"The economics of our defense budget are mind blowing," says Winslow Wheeler, an expert at the Center for Defense Information, a Washington think tank.

The American public seems to agree.

With war costs rising above $1 billion per week, about 7 of 10 respondents in a new Newsweek poll worry that the costs of the war will increase the deficit and hurt the economy.

The cost, which is likely to exceed $100 billion next year, doesn't yet approach the estimated $2.9 trillion cost (in today's dollars) of World War II or the $336 billion of the Korean War or the $494 billion of the Vietnam War. But clearly few Americans were expecting a tab of this magnitude.

A major war can send an economy into economic overdrive. That was certainly the case in World War II, which helped the US climb out of the Great Depression. Vietnam expenditures, combined with the War on Poverty and a generous monetary policy, brought a decade of high inflation. The Reagan buildup helped drag the economy out of a serious recession.

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