A lot or a little, part 2

by John Quiggin on March 2, 2008

Daniel’s post on Stiglitz and the cost of the Iraq war reminded me to get going on one I’ve had planned for some time, as a follow-up to this one where I pointed out that the $50 billion in aid given to Africa over the past fifty years or so is not, as is usually implied, a very large sum, but rather a pitifully small one, when considered in relation to the number of people involved, and the time over which the aggregate is taken.

What are the sums of money worth paying attention to in terms of economic magnitude. I’d say the relevant order of magnitude is around 1 per cent of national income[1], say from 0.5 per cent to 5 per cent. Smaller amounts are important if you’re directly concerned with the issue at hand, but are impossible detect amid the general background noise of fluctuations in income and expenditure. Anything larger than 5 per cent will force itself on our attention, whether we will it or not.

To get an idea of the amounts we’re talking about, US national income is currently about 12 trillion a year, so 1 per cent is $120 billion a year. A permanent flow of $120 billion a year can service around $6 trillion in debt at an interest rate of 4 per cent, so a permanent 1 per cent loss in income is equivalent to a reduction in wealth by $6 trillion.

For the world as a whole, income is around $50 trillion, so the corresponding figures are $500 billion and $25 trillion.

What kinds of policies and events fit into this scale?

  • A typical “small war”, like Iraq or the French war in Algeria, big enough to be a central policy issue for the duration, but not to impinge on the day to day life of most people (in the US/France that is, not in the country where the war is being fought) . The direct costs of the Iraq war have been running at over 1 per cent of GDP, and costs (such as looking after wounded veterans) will continue at this level for many years after the war is over. So the Stiglitz estimate of $3 trillion is about the right order of magnitude, but will probably turn out to be on the conservative side
  • A typical recession reduces GDP (the right measure in this case) by around 3 per cent relative to its trend value. In most macroeconomic models, this loss is made up over a few years in the recovery phase, but I doubt that this is correct. I believe that some of the income loss in a recession is permanent, or nearly so, and countries that experience a string of bad macroeconomic episodes (for example, New Zealand) tend to lag others (like Australia) for a long time afterwards
  • The amount promised by rich countries in development aid is 0.7 per cent of their income, which is in the range being discussed here. The amount actually delivered by most of them (around 0.3 per cent) is not. The amount required to achieve the UN Millennium goals is a bit over 1 per cent of rich country income. To give everyone in the world an income of at least $2 a day would cost around 2 per cent of the income of the rich countries (assuming 2 billion poor people with an average income of $1/day, doubling this would cost around $700 billion a year).
  • Chronic national budget problems like the long-term deficit in the US Social Security fund typically involve a gap between revenue and expenditure of 1-5 per cent of national income
  • The losses from the current financial crisis seem certain to be at least $500 billion and maybe more than $1 trillion. Allocated over, say, five years, this is comparable to a modest recession

[1] People mostly refer to Gross Domestic Product, which is much the same magnitude, but not a useful concept except in measuring shortrun economic activity

{ 12 comments }

1

Adam Roberts 03.02.08 at 9:14 am

A typical “small war”, like Iraq or the French war in Algeria, big enough to be a central policy issue for the , but not to impinge on the day to day life of most people

A central policy issue for the comma?

D’oh, yet again! Fixed now, I hope – JQ

2

James Wimberley 03.02.08 at 10:44 am

Link missing in the second line.

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abb1 03.02.08 at 10:49 am

Incidentally, from Aida Edemariam’s piece in The Guardian:

…rising oil prices have “had the effect of lowering the average income by 3% – more than offsetting all of the increase in foreign aid that they [African countries] had received in recent years, and setting the stage for another crisis in these countries.”

4

Adam Roberts 03.02.08 at 2:54 pm

Here I give voice to my ignorance of economics. Why are donations of this sort always tabulated as percentages of national GDPs? It’s not as if governments have the entire GDP at their disposal to spend. Wouldn’t it make more sense to cite it as a percentage of national tax revenue (say)? Don’t get me wrong: I think it’s shaming how little we in the west have contributed from our wealth to international aid; but I wonder if there’s a bias in the way the data is framed. Viz. 0.7% looks so small a figure not even Scrooge McDuck would baulk at it; 0.3% then looks beyond absurd and plain insulting. But it’s not comparable to me promising 0.7% of my post-tax income to charity, or something, is it.

5

harold 03.02.08 at 4:20 pm

I think the Algerian War affected the French people much more than the Iraq war does Americans. That at least is my subjective opinion, since I was in France briefly at various times while it was going on, though very young — though a precocious newspaper reader. Perhaps someone else remembers.

http://en.wikipedia.org/wiki/Paris_massacre_of_1961

Then there was the revolt (almost) of the Generals.

But mainly I remember an atmosphere of instability, in which fear, general bad feelings and outright anger, violence, & resentment (and privation — remember they had just come out of WWII and you saw amputated veterans everywhere) were palpable. At least that is my dim recollection. I don’t think we are there yet in the USA.

6

harold 03.02.08 at 5:07 pm

[The following quotes are excerpts from an article written in 1998 in the Algerian newspaper, Liberte. The paper containing the article was seized by the French Police when the edition reached Lyon in an attempt to censor the story — this was in 1998 — (since verified):

The repression was ordered by [Maurice Papon] the same person who organized the deportation of Jew for the Nazis.

The 17th of October 1961 was a date that marked the height of the repercussions of that hatred which had thrown an ever-increasing number of Algerians whose only crime was their nationality into the murky waters of the river that flows quietly through Paris. Because it had become common practice to get rid of the bodies of Algerians – and sometimes Algerians who were still alive – who bore rather too visible signs of police brutality by depositing them in the Seine. It was way of avoiding embarrassing questions. During the summer of 1961 it was quite clear how the war was going to end and some people in France were unwilling to accept that thousands of workers with the dubious privilege of taking on all the dirty jobs, those thousands of men with swarthy features on whom they were used to venting their xenophobic spleen, should be on the point of belonging to a free, sovereign nation.

The provocation came in the form of a police order that Moslem “citizens” of Algeria only should be subject to a curfew from 8.30pm to 5.30am, on the pretext that there had been a significant increase in the number of attacks on policemen. Does it need to be pointed out that the number of these attacks, at a time when the first negotiations were signaling an end to the fighting, was tiny compared to the number of victims of “excesses” by the French police? The implications of these restrictions on the Algerian community were such that the leaders of the armed struggle in France organised a response.

For quite apart from the fact that it discriminated against Algerians, the curfew opened the way to all kinds of abuse of authority, making such abuses legal, effectively making it a crime to look like a foreigner and forcing unemployment on the countless workers who needed to go to and
As a result, history made this one of the most tragic episodes in the war of national liberation. And if the events of October 1961 were wrapped in a cloak of silence in France, doubtless because they hardly showed the French authorities in a good light, they were nonetheless the subject of various investigations by impartial observers and even nationalists who were ashamed of the wave of brutality organised by their leaders and carried on with matchless zeal by the “forces of law and order”. http://www.fantompowa.net/Flame/algerians_liberte.htm

Some publications in France that tried to reveal the truth were censored. Temps Modernes, the magazine of Jean-Paul Sartre, the philosopher and author, called the episode “a pogrom”. Papon had the edition seized.
http://www.fantompowa.net/Flame/algerians_sunday_times.htm

[Sartre has been discredited to this day. And speaking of Sartre, vilified even posthumously, and not, I suspect, solely for his sexlife, sordid as it may have been, I sometimes wonder why a hothead like Alexander Cockburn is permitted to write in the pages of the neo-con NYT book review, while Noam Chomsky is a non person on its pages and everywhere else in the US mainstream media.]

7

John Quiggin 03.03.08 at 2:19 am

Adam, GDP/national income is much more comparable between countries than is government revenue. For example, looking at the US, would you use only federal revenue, or federal, state and local? Only the feds are likely to give foreign aid, but this creates an obvious bias in making comparisons between federal and unitary states.

8

Sortition 03.03.08 at 8:32 pm

While we are on this subject, I have a question: The “personal income” in 2006 in the U.S was about 10.9 trillion dollars. At the same time, the mean household income is $66,570, which, with 116 million households, gives 7.7 trillion dollars. What is the reason for the difference?

9

dogfacegeorge 03.04.08 at 1:53 am

Iraq’s entire GDP is something like $100B. Much less than the cost of the war. Wouldn’t it be cheaper if we just paid them not to kill each other? Or maybe that’s what the Awakening is all about.

10

Dave 03.04.08 at 12:03 pm

Haven’t most recent wars demonstrated that it would be cheaper to offer the other side a huge pile of money to do what the West wants? Unfortunately it overlooks the point that sometimes there are people that other people *really want to kill*… And that there’s no guarantee that said huge pile of money won’t just buy more bombs’n’guns’n’funky stuff…

11

ajay 03.04.08 at 2:43 pm

10: I think using that policy in Iraq would fall foul of the fact that those running the war have no idea what their strategic aims are.

Comparison with other recent wars is interesting. Maybe Britain could simply have bribed Galtieri to withdraw from the Falklands. Maybe the UN could have bribed Saddam to pull out of Kuwait. Maybe Bush could have bribed Noriega to resign. Maybe Dudayev could have bribed Yeltsin to grant Chechnya its independence.

But… who, exactly, would we bribe in Iraq? And to do what? Who’s the enemy? What are they doing that we don’t want them to do and why? This is Question One of the Seven Questions (British Army tactical appreciation process) and we can’t even answer it.

12

abb1 03.04.08 at 3:57 pm

They do bribe too, of course – Egypt, Pakistan. Your know, a time to mourn and a time to dance, a time to scatter stones and a time to gather them.

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