Osama bin Laden dead, but no 'peace dividend'

Osama bin Laden death cheered many Americans, but not US markets or economists. Osama bin Laden death will have little effect on business or military spending.

Mazhar Ali Khan/AP/File
In this 1998 file photo, Osama bin Laden speaks to journalists in Khost, Afghanistan. News of Osama bin Laden death initially buoyed the US stock market, but it fell back as traders assessed it would have little impact on the economy or government spending.

The death of Osama bin Laden, while a tremendous boost to American morale, will have little economic or fiscal impact in the United States the way that the fall of communism had 22 years earlier.

Back then, there was a peace dividend. On Monday, however, US officials were careful to emphasize that the battle against Al Qaeda and other terrorist groups would not diminish, and the stock market shrugged off news of Mr. bin Laden's death.

After an initial surge on Wall Street Monday morning, stocks fell back. The Dow Jones Industrial Average closed down 3 points. Other indexes also closed lower. If anything, traders appeared worried about a terrorist backlash after Sunday's covert operation by elite US troops in Pakistan, which killed bin Laden.

The VIX, an index of market volatility traded on the CBOE Futures Exchange, jumped more than 8 percent Monday, as traders anticipated more turbulence. Other measures of volatility also moved higher.

Otherwise, traders seemed to take the death of bin Laden in stride.

IN PICTURES: Reaction to bin Laden's demise

"When I first heard it, I thought there would be a big boost from this," says Sean Snaith, an economist at the University of Central Florida in Orlando. But "it's not a panacea for the country. Oil prices are not coming down. If you still don't have a job, this isn't going to change things for the better."

For the insurance industry, the potential disruption to Al Qaeda looked like a washout.

“I don’t think this is a big market factor," Warren Buffett, CEO of Berkshire Hathaway (which has big insurance interests) told Fox Business Network. "The American people feel wonderful today. [But] the big factor in insurance will be the number of [natural] catastrophes we’ve had this year."

The impact on government spending will also be muted.

"In the near term, this does not change spending at all," says Todd Harrison, a senior fellow at the nonpartisan Center for Strategic and Budgetary Assessments in Washington. "We still have to dismantle, disrupt Al Qaeda. And we still have a country to put back together in Afghanistan."

This year's budgeted amount for military operations in Afghanistan and Pakistan is $115 billion, he says. Next year's budget request is $107 billion.

Similar budget cuts would have to be made for years to match the $188 billion plunge in US military spending (in today's dollars) that occurred between 1985 and 1998, Mr. Harrison says. That decline, called the "peace dividend" because of the fall of communist regimes in Eastern Europe, actually began in 1986 and was prompted in large part by concerns about the growing US deficit.

The death of bin Laden could in the medium term call into question America's involvement in Afghanistan, but even if the US were to pull out, the impact on overall defense spending would be minimal.

The peacetime cost of the Department of Defense is larger today than it was at its fiscal year 1985 peak, Harrison says.

IN PICTURES: Reaction to bin Laden's demise

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