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Tilting at Windmills

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April 30, 2007
By: Kevin Drum

THE ECONOMIC CONSEQUENCES OF THE PEACE....Niall Ferguson thinks Wall Street isn't taking the Iraq War seriously enough:

It took a long time for American investors to acknowledge that there might be an economic as well as a strategic downside to failure in Vietnam. The Dow hit 1051.70 on Jan. 11, 1973. By Dec. 6, 1974, it had fallen by nearly half.

[....]

If McCain is right and the Middle East does blow up some time after an American exit from Iraq, oil could end up at $100 a barrel. Then what? Well, how about higher inflation, a dollar slide and a stock market sell-off?

We're supposed to stay in Iraq because it's helping prop up the stock market? That's some seriously warped thinking. And what makes it even weirder is the part I left out, in which Ferguson admits that Vietnam had little or nothing to do with the 1973-74 stock market selloff. This gets him points for honesty, I guess, but for some reason it still didn't stop him from charging ahead with his fears that leaving Iraq might bring the American economy to its knees.

In any case, I suspect Ferguson has it exactly backwards. Spare pumping capacity is so low right now that any serious disruption in oil supply could indeed send prices skyrocketing — and unfortunately, there are plenty of possible disruption scenarios. But while some of these scenarios are either unrelated to Iraq or related to our departure, even more of them, I think, are related to our staying. For some reason, though, hawks always forget about those kinds of scenarios.

Perhaps the question Ferguson should have asked himself is this: If LBJ had exited Vietnam in 1968, after four years of fruitless escalation, how would the American economy have done in the 70s? Probably better, and certainly no worse. What lesson does this hold for four years of fruitless escalation in Iraq?

Kevin Drum 11:53 AM Permalink | Trackbacks | Comments (42)

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The Iraq war is one reason the stock market IS doing well.

Look at security stocks.

Look at firms that are involved with reconstruction.

Weapons-related stocks?

Now why on earth would we walk away from a goldmine?

This is the most profitablypitiful war anyone has ever fought, perpetual. (TGWOT).

We seem to forget that building a sustainable economy (like solar panels and windmills) could also be immensely profitable.

The Guns R Us folks are happy these days.

Posted by: Tom Nicholson on April 30, 2007 at 12:29 PM | PERMALINK

We're supposed to stay in Iraq because it's helping prop up the stock market? That's some seriously warped thinking.

I think your dismissal of the idea is premature Kevin. Keynesian economics tells us the best way to spur economic growth is to spend more money and cutting spending hurts economic growth. By cutting money to the War in Iraq, you're cutting spending and therefore hurting economic growth which means there will be a much higher unemployment. That is good reason to think Niall Ferguson is right.

Posted by: Al on April 30, 2007 at 12:32 PM | PERMALINK

Tom Nicholson is on to something. We spend more on weapons than the rest of the world combined. The military industrial complex is a powerful economic engine. Why do you think we still have a "Star Wars" program or why we are replacing our F15s with the F22 Raptor even though the F15s are still the world's best combat aircraft and have never been defeated in a fight. A prudent government would forgo the F22 and replace the F15 with unmanned aircraft. Jobs baby, jobs. Many of our weapons purchases are nothing more than jobs programs.

Posted by: Ron Byers on April 30, 2007 at 12:36 PM | PERMALINK

The American economy would indeed take a blow if there was a middle east blow up that made oil scarcer and more expensive. That is a medium term danger.

The short term hazard is Nigeria, where that could happen at any minute. I fully expect much of Nigeria's oil to be unavailable within a year. Nigerian output is now reduced by 25% because of this issue.

Frankly, go for it, Nigeria. I don't give a hoot what happens to Wall STreet, or MNC's. They obviously don't care about Americans.

Posted by: dissent on April 30, 2007 at 12:39 PM | PERMALINK

Ferguson has it exactly backwards

Fergie thinks if we leave Iraq and make friendly with Iran that will cause the price of oil to go up. What a fucking idiot. He is right about the coming stagflation probably, but that is because we invaded Iraq and borrowed too much money, not because we will be leaving it.

Posted by: Brojo on April 30, 2007 at 12:39 PM | PERMALINK

Ferguson, like Bush, is in the position of an investor who's sunk a large amount of money into a stock that has lost 90% of its value, but who hopes for a miracle and refuses to sell, despite the likelihood that the company will go completely bust and never return a cent to investors. As long as he doesn't sell, he hasn't lost.

Posted by: Joe Buck on April 30, 2007 at 12:43 PM | PERMALINK

Do you really not understand the warhawk mentality, or are you being coy?

It works like this. If withdrawal might hurt the U.S. economy, then you must be a hard-headed realist and stay the course in Iraq. But if staying might hurt the U.S. economy, then you must be willing to make that sacrifice in the name of bringing peace, security and democracy to the Iraqi people.

Now replace the phrase "the U.S. economy" with the sacred cow of your choosing, rinse, lather and repeat . . . .

Posted by: David Bailey on April 30, 2007 at 12:57 PM | PERMALINK

There is only one solution that will save our economy. Massive and unrelenting investment in alternative fuels of all types. As long as we are shipping our treasure to the middle east we are screwed. I know the Israel lobby won't like my assessment. I also know the Saudis will be pissed. Finally, I know the "economic realists" think my suggestion is impossible (and short term it might be), but in the long term getting off the oil teat is the only solution. Everything else is wishful thinking.

Posted by: Ron Byers on April 30, 2007 at 12:57 PM | PERMALINK

Ferguson is a total, utter and complete tool. That's really all that needs to be said in response to any of his voluminous output of nonsense.

Posted by: Steve LaBonne on April 30, 2007 at 12:57 PM | PERMALINK

We're supposed to stay in Iraq because it's helping prop up the stock market? That's some seriously warped thinking.

Not that I disagree, but this surprises you? The Iraq War has always been run so that it benefits the few -- Halliburton, the Republican Party, oil companies, etc. -- while the many bear the costs.

Posted by: Gregory on April 30, 2007 at 1:02 PM | PERMALINK

Jobs baby, jobs. Many of our weapons purchases are nothing more than jobs programs. Posted by: Ron Byers on April 30, 2007 at 12:36 PM

Profits baby, profits. The number of jobs we're talking about is probably no more than a few percent of the total employment.

But the profit margins on this stuff is probably amazing.

Posted by: Dr. Morpheus on April 30, 2007 at 1:02 PM | PERMALINK

I don't think that victory in Vietnam would have had any consequences on our domestic economy, positive or negative. The US borrowed too much, and an oil embargo is not exactly negotiable.
Ferguson is right, though, that we will probably see a rerun of the 70's inflation/recession nightmare.

Posted by: Lux on April 30, 2007 at 1:07 PM | PERMALINK

Dr. Morpheus, You are right, but that isn't how the programs are sold to Congress.

Posted by: Ron Byers on April 30, 2007 at 1:08 PM | PERMALINK

"Keynesian economics tells us the best way to spur economic growth is to spend more money and cutting spending hurts economic growth. By cutting money to the War in Iraq, you're cutting spending and therefore hurting economic growth which means there will be a much higher unemployment. That is good reason to think Niall Ferguson is right.
Posted by: Al on April 30, 2007 at 12:32 PM | PERMALINK"

Keynesian economics only tell us to have deficit government spending if the people as a whole have a positive savings rate. Americans have a negative savings rate (dipping into previous years' savings instead of building up more savings), which Keynesians tell you has to be coupled with a government surplus in order to spur growth in that scenario.

It should also be mentioned that if we ended the war in 1968, the Bretton Woods system would have been in better health instead of seeing the system of fixed exchange rates collapse.

Posted by: Reality Man on April 30, 2007 at 1:09 PM | PERMALINK

KKevin, C'mon, OF COURSE the U.S. economy would have been better in the 70s without the drag of Vietnam. Remember inflation? Stagflation? The seemingly-now-permanent stagation of the American middle class, commencing in 1973 (by consistently broad agreement across the political spectrum)?

In his latest book, Ferguson actually compares "Hoovervilles" of the Great Depression to . . . Auschwitz! Hold that thought anytime you read him. So I didn't much bother with reading his latest drivel, as if the economy is "soaring." This just in, Niall: The U.S. borrowed a billion dollars today (mostly from China), just like yesterday, just like tomorrow. Guess who pays? And who is going to pay for the trillion dollar war? My children and my grandchildren. And didn't WWII do wonders for the British economy? Just like the Soviet Union?

The banana-republicization of the United States at work. Supported by the likes of Niall Ferguson. Thanks.

Posted by: MaxGowan on April 30, 2007 at 1:12 PM | PERMALINK

I think your dismissal of the idea is premature Kevin. Keynesian economics tells us the best way to spur economic growth is to spend more money and cutting spending hurts economic growth. By cutting money to the War in Iraq, you're cutting spending and therefore hurting economic growth which means there will be a much higher unemployment. That is good reason to think Niall Ferguson is right.

Even accepting your facetious foray into Keynsianism, there's nothing in classical Keynesian economics that says the money has to be spent on something as pointless and horrific as war.

God you're a dumbass.

Posted by: DrBB on April 30, 2007 at 1:12 PM | PERMALINK

Al siad, "Keynesian economics tells us the best way to spur economic growth is to spend more money and cutting spending hurts economic growth." Didn't Ronald Reagan try the same tactic to get us out of the late 70's recession. Much like today, he was spending all of our tax dollars on worthless military equipment that just gets blown up or that becomes obsolete in a few years. And now we're $7 trillion deeper in debt. Has anybody calculated the amount of tax we pay just in interest on this failed policy? If we're going into debt let's spend our money on something worthwhile.

Posted by: lamonte on April 30, 2007 at 1:18 PM | PERMALINK

Vietnam has so many parallels with Iraq and the future economic blowback from massive unfunded spending is just one of many chickens waiting to come home to roost.

In round numbers, there's about a trillion imaginary dollars that have been conjured out of thin air to finance this fiasco. That's one big chicken that's gonna be comin' home.

Remember that the current stock market (and a huge chunk of the US economy) has nothing to do with real wealth... the 'wealth created' exists in the imagination only. Someday (probably soon) reality may rear it's ugly head and the entire house of cards will come crashing down. It ain't gonna be pretty.

Posted by: Buford on April 30, 2007 at 1:20 PM | PERMALINK

Kevin asks: What lesson does this hold for four years of fruitless escalation in Iraq?

Yes, if our efforts in Iraq are indeed fruitless, then they can only do harm. But, we won't know whether they're fruitful or fruitless until our wew eventually succeed or fail.

Posted by: ex-liberal on April 30, 2007 at 1:24 PM | PERMALINK

She knows there's no success like failure
And that failure's no success at all.

Posted by: Robert Zimmerman on April 30, 2007 at 1:34 PM | PERMALINK

Perhaps the question Ferguson should have asked himself is this: If LBJ had exited Vietnam in 1968, after four years of fruitless escalation, how would the American economy have done in the 70s? Probably better, and certainly no worse. What lesson does this hold for four years of fruitless escalation in Iraq?

I vaguely remember the wage-price controls that Nixon put in place to try to control the inflation that the Vietnam war triggered. The federal government has been spending WAY too much the last two-three years or so. If they could have kept it under control we might not see inflation creeping up/interest rates as high and the housing market popping quite so badly. The war spending should have been financed with increased taxes instead. But I'm afraid we're past the point where this would do much good. The economy seems a lot like 1999 or even 1989. We're too late into the business cycle now.

Posted by: Doc at the Radar Station on April 30, 2007 at 1:53 PM | PERMALINK

We're in a lot worse shape now than in either 1989 or 1999. We were in surplus mode in '99, and our debt was much, much less in '89.

Nixon instituted wage-price controls in August, 1971, a year and a half before the Paris Peace Accords. And inflation then was far lower than it would be just two years later and for the bulk of the 70s.

Given the evisceration of the middle class, stagnation more than inflation is the real threat. I think. ". . . but there's a mighty judgment coming . . ." - Leonard Cohen, "Tower of Song"

Posted by: MaxGowan on April 30, 2007 at 1:59 PM | PERMALINK

It's just like his books. He's a talented narrativist and (on the Rothschild book, anyway) researcher--and boy does he work fast--but his broader, ideological arguments are usually either muddled or only weakly connected to the rest of the books.

Posted by: Jim M on April 30, 2007 at 2:01 PM | PERMALINK

What lesson does this hold for four years of fruitless escalation in Iraq?

None whatsoever. History is for homos. Next question, please.

Posted by: thersites on April 30, 2007 at 2:06 PM | PERMALINK

Quick fix to the entire oil/$100+ per barrel doo-da: minimum 25 mpg for ALL vehicles (trucks, SUVs, cars, etc). Do that and the need to import oil disappears (and carbon is reduced just by that act alone) - literally. From there you can tell the ME to go Cheney itself and good luck.

Posted by: Praedor Atrebates on April 30, 2007 at 2:07 PM | PERMALINK

American production of oil more or less peaked in 1957, save for Alaska; it's been downhill ever since. One hundred dollar a barrell oil is just around the corner; heck, we will at some point look on that as the proverbial good old days. Given the rest of the world's need (Esp. China, now the No. 2 importer; India, Japan, etc.), $150/barrell is not that far away, either. But we'll still need to import, because we don't have that much left as it is. As James Howard Kunsler notes, the rest of the oil in the world is (1) of lower quality; (2) harder to obtain; (3) in places where people hate us. Oh, but our economy is soaring!

Posted by: MaxGowan on April 30, 2007 at 2:12 PM | PERMALINK

MaxGowan,

Yes, we're in a worse predicament this time around. It is like a Ritalin economy. The amount of stimulus/debt that is there and we're getting 1-2%GDP growth? Yawn. Hopefully when we go into recession it isn't so bad half the nation turns into a bunch of couch surfers withdrawing from methamphetamine.

Posted by: Doc at the Radar Station on April 30, 2007 at 2:14 PM | PERMALINK

"It took a long time for American investors to acknowledge that there might be an economic as well as a strategic downside to failure in Vietnam. The Dow hit 1051.70 on Jan. 11, 1973. By Dec. 6, 1974, it had fallen by nearly half."

Not to mention the human downside, but I don't Niall knows any of the Morlocks/Imperial Stormtroopers/Residue dying everyday.
He's sold his soul for a byline in The Atlantic.

Posted by: Steve Paradis on April 30, 2007 at 2:22 PM | PERMALINK

Doc - Amen. On the other hand, after 50 years of use, there are no proven side effects of Ritalin! I fear this next recession will take a toll on the middle class on a scale we have not seen in generations.

My family and friends who are in their late-70's to early-80s (e.g., lived through the Great Depression and WWII), believe we're in much worse shape than at any time in their own lives.

Posted by: MaxGowan on April 30, 2007 at 2:34 PM | PERMALINK

Good old boy Naill Ferguson: praising McCain while working for him.

Although I am one of those advising John McCain on foreign policy, I had nothing to do with the speech he made in the Senate a month ago, which spelt out with unflinching clarity the three likely consequences of a premature American exit...
This clown is as bad as George Will who famously praised Ronald Reagan after coaching him with a stolen briefing book.
nferguson@latimes.com
nfergus@fas.harvard.edu

Posted by: Mike on April 30, 2007 at 2:55 PM | PERMALINK

In "Colossus: The Rise and Fall of the American Empire" Ferguson predicted that invading Iraq would lead to a drop in oil prices...I think we all know how well that turned out.

Typical conservative intellectual...wrong about everything.

Posted by: A Hermit on April 30, 2007 at 3:54 PM | PERMALINK

If LBJ had pulled the USA out of Viet Nam in 1968...
Would the '73 Arab-Israeli war have happened? Would the oil embargo quadrouple the price of crude?

Posted by: OwnedByTwoCats on April 30, 2007 at 5:36 PM | PERMALINK

"Quick fix to the entire oil/$100+ per barrel doo-da: minimum 25 mpg for ALL vehicles (trucks, SUVs, cars, etc). Do that and the need to import oil disappears..."

WRONG. Not even close. You often hear statements like this from people who don't have any idea what they're talking about. The U.S. currently imports nearly 70% of the petroleum (crude oil & refined products) it uses, so we'd have to more than triple the fleet average fuel economy in order to continue to drive as many miles as we do.


"American production of oil more or less peaked in 1957, save for Alaska; it's been downhill ever since."

U.S. monthly oil production peaked in early 1971. The peak for an entire year was 1970. The U.S. became a net importer of petroleum long before that, even earlier than 1957, which was roughly when Hubbert made the first of his now-famous predictions.
Domestic oil production declined significantly by the early 1980s, when Alaskan oil production briefly reversed the decline, but did not exceed the 1970 peak.
The rest of what you said was essentially correct.

Posted by: Hubbert on April 30, 2007 at 5:50 PM | PERMALINK

Old Niall seems to feel left out of the Stupids Club at the LAT, that Jonah and Max have manned so admirably. So the stuff he writes just gets more and more out of touch with reality.

Posted by: craigie on April 30, 2007 at 6:23 PM | PERMALINK

What lesson does this hold for four years of fruitless escalation in Iraq?

The money that we spend on weaponry would be more economically productive if we spent it on fuel production and consumer electronics.

It's a fine idea to use a moderate amount of military power to protect the free market in oil, but there is no free market in oil, and we are spending more than a "moderate" amount by any reasonable measure, especially lives. We would be militarily AND commercially better off in 5 years if we slowed our production of aircraft carriers and put the money into synfuels. Then it would be China, not the U.S., that had to defend long, slow convoys of tankers, and thousands of miles of pipelines. And we would be a lot better off in 10 years.

Investors and oil companies are afraid that the price of oil might drop and wipe out the value of their investments in synfuels. But the U.S. population has very little to show for its investment in military power, whereas a small transfer of funds from weapons to synfuels would be beneficial to us all -- especially if it DID drive down the price of imported oil. Let's face it, Saudi Arabia gets all of its influence from the sale of oil, and they use it to no good purpose.

One of Jimmy Carter's biggest mistakes was not selling the synfuels program as a security measure. One of Ronald Reagan's biggest mistakes was discontinuing the synfuels program. Our whole discussion would be different had the U.S. transferred $4B per year from Defense to Synfuels every year since 1980. We would have fewer aircraft carrier groups, perhaps, but they wouldn't be stuck in the Persian Gulf either.

Posted by: MatthewRmarler on April 30, 2007 at 6:39 PM | PERMALINK

Tom Nicholson: We seem to forget that building a sustainable economy (like solar panels and windmills) could also be immensely profitable.

On the whole, I think people have caught on. PV cell production doubles about every 3 years, and two huge plants are under construction in the former E. German town of Frankfurt an der Oder (not to be confused with Frankfurt a/m), and Portugal is building one, but the largest are two under constrution in N. California. Wind generated electricity and biofuels production double approximately annually. Even the military is subsidizing biofuels, and oil companies are investing in windfarms.


A collapse of mid-East oil production would be a short-term problem, but not an intermediate or long-term problem. It would hurt Japan, China and the EU worse than it hurt the U.S.

What the U.S. needs to tell the oil companies isn't that we are going to stop subsidizing them. What we need to tell them is that we are going to stop protecting their foreign investments. If they want protection by America, let them invest in America. Or let them pay the $200B per year that it's costing us.

Posted by: MatthewRmarler on April 30, 2007 at 6:50 PM | PERMALINK

If McCain is right and the Middle East does blow up some time after an American exit from Iraq, oil could end up at $100 a barrel. Then what? Well, how about higher inflation, a dollar slide and a stock market sell-off?

Ferguson has some effects backwards. Oil can not easily be redirected from Canada and Mexico to the EU from the US, so a decline in output from the ME hurts China, Japan, Korea and the EU more than it hurts the U.S. With huge reserves of coal and oil (in the Rocky Mountain shale) the U.S. could probably adjust more rapidly.

Posted by: MatthewRmarler on April 30, 2007 at 7:00 PM | PERMALINK

Actually, if we pull out of Iraq the flow of oil is likely to increase a little which would bring down the price of oil in the short term. Over the longer term, of course, rapidly increasing demand from China and India (as well as increasing consumption in the west) along with flat to falling production will result in rapidly increasing prices.

Posted by: JohnK on April 30, 2007 at 7:27 PM | PERMALINK

Corporate profits, foreign investment and the deterioration of the US dollar all helped Wall Street.

Posted by: consider wisely always on April 30, 2007 at 7:32 PM | PERMALINK

as long as we are worried about Wall Street, consider the companies that produce coal.

http://www.businessweek.com/magazine/content/07_19/b4033075.htm

Posted by: MatthewRmarler on April 30, 2007 at 7:54 PM | PERMALINK

Japan is living off of LNG, oil, and LPG right now and hates it. They're starting a bit of a move into biomass--they also know they don't want to get into a war with China over energy supplies.

Japan's one of the few countries that could actually use solar power satellites. I did some back-of-the-envelope calculations many years back and discovered that if they were able to launch using US rockets (and US launch costs), then sell energy back at Japanese prices, it actually would break even.

Posted by: grumpy realist on May 1, 2007 at 12:05 AM | PERMALINK

"But the U.S. population has very little to show for its investment in military power, whereas a small transfer of funds from weapons to synfuels would be beneficial to us all -- especially if it DID drive down the price of imported oil."
Posted by: MatthewRmarler on April 30, 2007 at 6:39 PM

The US consumes 25% of world oil output and our efficiency of use is pretty dismal. Europe and Japan are highly efficient users of oil already. I've lately thought about the *power* that we have as a consumer to influence the market price of oil tremendously by using LESS of it by increasing our efficiency rapidly. We (the US) could potentially create not necessarily an oil glut, but could stabilize world oil prices, and the world economy greatly by utilizing our untapped conservation/efficiency "wedge" on demand to flatten the coming (or current) peak oil effect by getting serious about CAFE, research, tax incentives, etc. It benefits not only ourselves, but developing countries (why aren't we out there developing alternative energy technology exports to the 3rd world!). It would be awesome if/when many people could have photovoltaics recharge an electric car for commuting. If the grid decides to fuck you-then you can counterfuck them by selling them overpriced electricity during peak hours. And the best most blessed thing-- no refinery "shortage" is going to cramp your gasoline supply.

Posted by: Doc at the Radar Station on May 1, 2007 at 12:14 AM | PERMALINK




 

 

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