The
economics of the US administration's obsession with war against Iraq may
result not only from the desire to control Iraq's vast oil reserves, but
also from the need to combat deflation.
Few analysts today would argue with the proposition that the world
economy is weak and getting weaker in terms of immediate growth
prospects. The US economy, which was the engine of growth for the rest
of the world economy for most of the past decade, continues to falter,
despite the tax cuts as well as expenditure increases related to the
so-called "war on terrorism". The European Union economies remain
largely sluggish, while Japan's downward spiral appears to be unabated.
So systematic is the downslide in the major capitalist economies, that
there is now serious discussion in the international financial press
over whether the global economy is entering an era of deflation of a
kind not seen since the Great Depression. In fact it is true that the
risk of falling prices is now greater than at any time since the 1930s.
World trade prices in most important primary and even manufactured
commodities have been low and are still falling. (The only exception is
the price of oil, which varies daily with expectations of the likelihood
of imminent war.)
In the United States, deflation in goods prices has been evident since
April of this year. But even services – which have traditionally been
seen as immune to the problem of deflation since the prices of most
services tend to be downward sticky – have shown much weaker price
increases, which have not been sufficient to counteract the overall
deflationary trend. Similar tendencies are evident for Europe, while of
course in Japan deflation has been raging for several years now with no
signs of recovery.
The facile perception that falling prices are "good for consumers", is
still being voiced by some official policy spokesmen. But more and more
economists, even those untouched by the insights of Kalecki and Keynes,
recognise the basic problem with deflation in capitalism: that it
reflects a slump in effective demand, substantial underutilisation of
existing capacity, unemployment of labour and also depressed
expectations that adversely affect investment decisions.
Deflation indicates downward pressure on profit rates, forcing firms to
continually try to cut costs if they are selling in a market where
prices are falling. This in turn has negative multiplier effects on the
rest of the economy, pushing it into a downward spiral. As early as
1933, the economist Irving Fisher had pointed out the paradox that when
individual firms attempt to reduce their debt burdens by cutting costs,
this can unleash a vicious cycle of falling incomes and asset prices,
and therefore rising real debt burdens!
In addition, falling prices tend to play havoc with financial markets as
well, with banks and other financial institutions facing growing
problems of liquidity and even solvency as their investments fail to
make good as anticipated. The World Depression from 1929 onwards had its
origin in output imbalances and falling prices, but it was most
dramatically expressed in the bank failures and stock market crashes
that made it public knowledge.
There are signs that a similar (if not so extreme) process of sluggish
real economic growth accompanied by major problems in the financial
sector, is already under way in Europe's largest economy. Germany. The
major German banks are on the threshold of financial crisis. In terms of
share values in dollar terms, German banks in the past year have
performed worse than those of any country except Argentina and Brazil.
Central bankers in the rest of Europe are becoming concerned about the
state of German banks and the risks their weakness poses to the whole
financial system.
Even the US economy is not immune to such pressures, especially as
investors' expectations are already depressed and consumer confidence
seems to be brittle and easily shaken, adversely affecting sales and
therefore profits.
In such a relatively worrying economic context, some observers have
found it strange that the Bush administration is using up so much of its
time, energy and machismo in fighting its most recently created bogey,
Saddam Hussein, and not addressing itself to the problems in the US
economy which have international ramifications. But it could well be
that the very moves towards war against Iraq are in fact the US
government's way of trying to deal with the economic problem as well.
Consider what history tells us. Wars have been – and remain – a classic
way of diverting public attention from domestic problems and issues that
governments are unable or unwilling to address effectively. But also,
wars have typically been seen as powerful positive stimuli for economies
that are suffering from unutilised capacity and unemployment. They
create employment, increase aggregate demand because of enhanced public
expenditure, and have positive multiplier effects. More recently,
defence expenditure has been seen as playing a key role in productivity
increases because of its impact on new technologies and their wider
application.
With such experience to learn from, perhaps George Bush (or his
advisors) would not be mistaken to believe that a dose of war,
especially a war fought conveniently far away from the United States'
borders and involving the latest technology with the minimum of US human
involvement, would be a positive economic stimulus that could guide the
economy out of the recession and divert the threat of deflation.
But history may be an imperfect teacher in the current context. The
economic realities of today are more complex and less susceptible to
easy manipulation of the sort that allowed earlier wars to be so
economically effective. To start with, the type of war that the Bush
administration is clearly anticipating is one that will involve the
minimum of use of troops, and therefore will certainly create less
direct employment.
Secondly, the giant military-industrial complexes that power the US
economy and form an important part of George Bush's constituency, no
longer have need for actual wars to keep them going and make them highly
profitable; sufficient levels of public expenditure in these areas is
adequate. This might explain why the Pentagon's bosses apparently have
little enthusiasm for this planned war, with all its uncertainties.
Finally, then the immediate economic effect of such a war would depend
upon how it impacts upon expectations. Of course, if the US is able to
defeat the Saddam Hussein regime in a relatively short time, install a
client regime in its place and thereby acquire effective control over
Iraq's oil reserves, this would clearly make investors happy. It would
not matter then how much damage the war would wreak upon the Iraqi
economy or how much devastation and slaughter would be inflected on its
people. If expectations turn buoyant in such a context, then the US
economy, and with it the international capitalist system might well
experience a recovery of sorts, however short-lived.
But if the war turns out to be longer and messier than anticipated, if
it creates widespread unrest and possible instability in other parts of
the Middle East, if it involves snapping of trade routes or wide
fluctuations in financial markets, then the outcome in terms of
expectations is much less predictable and more likely to be negative.
Such a war may then contribute to the wider economic downslide, rather
than prevent, much in the same way that the First World War indirectly
contributed to the forces that eventually culminated in the Great
Depression.
Ironically, the two World Wars also provide some idea of how the
closures of wars can change the world economy. The First World War ended
in triumphalism and revenge expressed in the Versailles treaty, imposing
penalties upon losers and effectively denying the world economy the
possibility of growth for the next two decades. The end of the Second
World War, by contrast, saw the Marshall Plan and US involvement in
reconstruction and rebuilding of the economies of defeated countries,
which played an important role in the subsequent growth of the world
economy over two decades.
To judge by its vituperative language over Iraq, and its callous
attitude in Afghanistan after that recent war, the model for the current
US administration seems to be Versailles. This attitude of vengeance,
bereft of any concern about the havoc being wrecked by globalisation on
the poor all over of the world, may more than any thing else cause more
serious instability and lack of growth for international capitalism in
the near future.
