War and Growth

WAR AND GROWTH….Matt Yglesias links approvingly to the revised GDP growth figures for Q2, but notes that part of the growth was due to a big increase in defense spending and wonders if this is sustainable. That’s a good question, and the answer is no.

In fact, it might be worse than it appears. I touched on this subject a few weeks ago, and I want to touch on it again with some back-of-the-envelope figures. Here’s what the official GDP figures look like:

  • Q1 GDP = $9,552 billion.

  • Q2 GDP: $9,625 billion.

  • That’s an increase of $73 billion, or .76%, or 3.1% per year.

But here’s the thing: we spent $40 billion on the Iraq war last quarter, and a best guess is that $24 billion of that showed up as increased GDP. In other words, aside from the one-time war expenditure, core GDP growth was only $49 billion.

If we use this $49 billion figure and assume that Q3 growth will be about the same as Q2, here’s what the revised “non-war” GDP trendline would look like:

  • Q1: $9,552 billion.

  • Q2: $9,601 billion.

  • Q3: $9,650 billion.

Basically, the war was just a blip, and one that didn’t really have any permanent effect on the rest of the economy. Thus, in Q3 we should expect to return to the baseline “non-war” trendline, which means a GDP figure of $9,650 billion.

Unfortunately, the official comparison will be to the artificially high Q2 figure of $9,625 billion. That produces a growth rate of .26%, or about 1.0% per year.

Now, this almost certainly overstates the problem, since war spending won’t stop instantly. What’s more, core GDP growth might be higher than it was in Q2, and the ever increasing federal deficit will provide some stimulus too. Still, given the statistical anomaly here, it seems as though next quarter’s growth figures could be more anemic than people are predicting.

Since I’m not an economist, I might be all wet about this. But even so I’m surprised this hasn’t gotten any attention at all. Shouldn’t something like this have an impact on GDP projections?

Would any real economists care to jump in and explain whether there’s anything to this?

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