What War Economy?

Welcome, Wizbangers!

Please poke around and look at some of my other posts, especially the ones on global warming. And please leave comments, one way or the other. Pretty please hit the "News Commentary" label on the bottom. I've had some fun with CBS News, The New York Times, and the San Francisco Chronicle recently.

Major Mike

The editor of our local weekly newspaper, The Independent Coast Observer, like most Democrats finds a way to blame anything happening in the world that they term "bad" on President Bush. In a recent editorial titled "War Economy" he blamed "skyrocketing" interest rates and our slumping economy on the Iraq war. I wrote the following to try to give him a little Economics 101.

At 4 percent of GDP, defense spending is 1.5 percentage points of GDP below its 45-year historical average. It is less than half of the rate during the Vietnam War and only two-thirds of the rate prior to the collapse of the Soviet Union and the end of the Cold War.

Discretionary spending, the portion of the budget subject to annual review, has risen 152 percent since 1965. Mandatory spending, consisting mostly of Social Security, Medicare, and Medicaid, which run on autopilot, has risen 759 percent since 1965.

Mandatory spending as a percent of GDP has risen to twice the size of Defense spending. In absolute dollar terms, in 2007 entitlement or mandatory spending was $1.45 trillion, or $400 billion higher than the total for all discretionary spending (which includes defense).
The total inflation adjusted government spending burden on American households has grown over $21,000 per household or 129 percent since 1965. State and local spending per household has increased 156 percent, while federal spending has increased 115 percent.

Blaming the war for current problems exposes a gaping hole in economic knowledge. So called “skyrocketing” interest rates went from 5.85% for a 30-year fixed-rate mortgage in January 2003 to 6.07% in January 2008. The subprime mortgage boom since 1995 fueled prosperity and a surge in home ownership to record levels. However, when home value increases slowed in 2006, some mortgages based on the assumption that increases were perpetual went into default. The write-downs of mortgage portfolios removed liquidity from the market, not government borrowing.

To put the war costs in perspective, annual Medicare and Medicaid fraud costs about as much as the war, and are increasing rapidly along with the accelerating increases in these already insolvent programs.