GDP Growth and the War

GDP GROWTH AND THE WAR….A few days ago I wrote a post suggesting that if you removed the $40 billion cost of the Iraq war from the second quarter GDP numbers, GDP growth would have been only $16 billion, an annual rate of .67%. Bill Sjostrom took me to task for treating the problem too simplistically, and I’ve been meaning to post a correction ever since.

It took me this long because I was hoping to find a reasonable estimate somewhere of just how big an effect the war really did have on GDP, but I couldn’t find one. The best I can do, then, is to say that while the additional spending on the war almost certainly had a noticable impact on GDP, the entire $40 billion didn’t go straight to the bottom line (so to speak).

I think this is still a point worth making, because the war spending was a one-off expenditure and without it the GDP numbers would not have looked as good as they did. However, the effect was certainly not as spectacular as I suggested.

UPDATE: Jeez, I really should have clicked on the links in Bill’s post, specifically this Business Week column by Robert Barro from 2001. Barro estimates that war spending has historically increased GDP at about a 60-70% rate (i.e., $1 of war spending increases GDP by 60 to 70 cents), and if that estimate holds this time then it means the war increased second quarter GDP by about $24 billion. Without the war, therefore, GDP growth would have been about 1.4%. That’s better than .67%, but it’s still mighty anemic.

This is still just a quick back of the envelope calculation, of course, but even so it’s reason enough not to get too excited by that 2.4% growth number. There will probably be some followon spending in the third quarter as we restock armories, but it’s still basically a one-off. After all, we can’t have a new war every quarter, can we?

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