Sunday, December 22, 2013

Why the Economy Could Grow: the Peace Dividend

Contrary to the expectations of many economists and financial market professionals, the U.S. economy seems to be growing reasonably well.  In the third quarter of 2013, growth was 4.1%.  For a mature, industrial economy, a 4.1% rate is good.  The Cassandras among pundits warn that it can't last.  They could be right--but they also could be wrong.

When one looks at what would impel further growth, many of the usual suspects don't seem to be helping much.  Business investment is tepid.  Income growth in the aggregate is even more tepid.  Only the the top few percent have no fear of the Grinch this Christmas.  The federal government is reducing its spending growth--primarily due to sequestration, but even the new budget deal doesn't offer major spending increases.  U.S. exports have been an economic bright spot the last few years, but America isn't an export driven nation and exports can't turn the economy around by themselves.

What, then, could be producing the growth?  The Federal Reserve's accommodative policies no doubt play a role, although much of the case for reducing quantitative easing is that its marginal impact is diminishing, and very possibly evaporating.  The Fed hasn't done anything lately to produce a growth spurt.  Its primary role has been to keep a thumb in the dike until other forces cause the economy to perk up.

But one factor to bear in mind is that America may be starting to enjoy a peace dividend.  The end of major wars is almost always followed by a period of prosperity.  The Civil War was followed by the rapid growth of the Gilded Age.  World War I was followed by the Roaring Twenties.  World War II was followed by decades of prosperity.  And the conclusion of the Cold War in 1990 was followed by the prosperity of the 1990s.  Only the end of the Vietnam War wasn't followed by a growth spurt, and that might well be attributable to the oil price shocks administered by OPEC, which transferred a great deal of wealth to oil producers and away from the consumers who comprise two-thirds of the U.S. economy.

Even though America remains embroiled in seemingly never-ending conflict, we have a peace dividend in the offing.  The war in Iraq is over.  The war in Afghanistan is winding down.  Although U.S. military and security personnel continue to confront challenges in the Middle East, Africa, Asia and Latin America, none of them involve the expenditure of hundreds of billions of dollars, as did the recent Iraq and Afghan wars.  Large amounts of America's wealth that were being spent on weapons and fighting overseas can now be shelled out for double bacon cheeseburgers, big screen TVs, three-quarter ton pickup trucks, smart phones, Legos sets, kitchen re-modelings, really big cups of soda in New York City, vacuous tattoos, frisbees, pre-mixed cocktails, trips to Graceland, and doggie pedicures.  And a lot of other stuff as well.  Giving peace a chance could be the best federal economic policy of the times.  Even though there surely will be ups and downs in the economy in the coming years, the peace dividend offers a powerful reason to hope for the best.

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