On the occasion of the 10th anniversary of our invasion of Iraq, Dan asks, "How did Operation Iraqi Freedom affect the international system? The surprising answer is, not all that much." He concludes the post as follows:
So does this mean Operation Iraqi Freedom doesn't matter? Of course not. Affecting the international system is a really high bar. World wars, economic depressions, industrial revolutions -- these things matter at the systemic level. It's rare that a conflict smaller than that would have systemic implications (though the Soviet invasion of Afghanistan does come to mind). Rather, the conflict's primary effects were at the national level. Iraq did have a profound effect on American foreign policy thinking. Which is the subject I'll tackle in my next blog post.Military Keynesianism suggests that Operation Iraqi Freedom had such systemic consequences in the form of the global economic and financial crisis of 2007-13. As I know people resist a direct attack, let me back into it with an analogous case: Vietnam.
There is pretty broad scholarly agreement concerning three aspects of the Vietnam War. First, the US financed the war by running large budget deficits. Second, the deficit-financed war buildup sparked an inflationary boom in the US economy, which worsened the balance of payments position and led to a rapid increase in foreign claims on the American gold reserve. Third, the budget deficit-financed economic boom collapsed the Bretton Woods system as individuals, private institutions, and governments lost confidence in the dollar's peg to gold. The collapse began with the first massive speculative attack against the dollar in March of 1968 (an attack which led the Johnson administration to suspend all private dollar convertibility and sharply limit official convertibility). Thus, the US decision to finance the Vietnam War by borrowing rather than by raising taxes had severely negative consequences for the international system: it undermined global monetary stability.
Now consider the Iraqi case. The sharp increase of military spending sparked by 9/11 and Iraq followed a massive tax cut (and coincidentally, we had a massive tax cut in 1964). Like Vietnam, therefore, the US borrowed to pay for the War on Terror. If the Vietnam War experience is any guide, this budget deficit must have had consequences for US macroeconomic and financial performance. The deficit was larger and persisted for longer than the Vietnam case. I argue that the choice to finance the War on Terror by borrowing rather than by raising taxes worsened the US external imbalance and the resulting "capital flow bonanza" triggered the US credit boom. The credit boom generated the asset bubble the deflation of which generated the great global crisis from which we are still recovering. Obviously, it takes a lot of heavy lifting to get from the war-related budget deficit to the global financial and economic crisis. (That's why I am writing a book. I will begin posting chapters in the next week or so here if you are interested).
Regulatory considerations and the global savings glut may be important conditioning factors. But, the more I research this the more I conclude that these factors are less important than most of us believe. Hence my decision to compare the case to the Vietnam War experience and to the Carter-Reagan buildup sparked by Soviet invasion of Afghanistan in 1979. This was financed in the same way as the other two (budget deficits) and had the same economic consequences (housing bubble and the savings and loan crisis) as the War on Terror buildup.
So, I would argue that Operation Iraqi Freedom had a huge affect on the international system: it generated the largest economic and financial crisis the world has experienced since 1929. This massive shock continues to ripple through the global economy four years later, as the EU's current efforts to resolve the banking crisis in Cyprus demonstrate.