The Economic Policy Behind Intervention in Libya Chases Its Own Tail

The Economic Policy Behind Intervention in Libya Chases Its Own Tail

By Marshall Auerback, a hedge fund manager and portfolio strategist. Cross posted from New Deal 2.0

Any intentions of boosting the economy will be obliterated by our spending on military actions.

As my friend Chuck Spinney has noted in an exchange of emails, President Obama’s actions in Libya show that he has caved in to the “humanitarian interventionists” in his administration, as well as British/French/American post-colonial and oil interests. The result: yet another war with a Muslim country that has done nothing to us. Additionally, the fact that we are doing nothing to staunch the Saudi/Bahraini/Yemeni crackdowns smacks of hypocrisy and will hurt us even more on the Arab streets.

We seem to have developed a very basic rule of thumb when it comes to these wars of choice: if an insurgency threatens oil supplies directly or indirectly, we move. If it doesn’t, we don’t. Hence Syria can kill thousands of insurgents (as they did in the early 1980s) and we do nothing. Yemen doesn’t have oil facilities; so we do nothing. In Bahrain we have a huge base and unrest has repercussions for the Shiite part of Saudi Arabia where the oil is. We move via the Saudis. In Libya there is oil. Again, we moved.

Gasoline today is where it was in 2008 when both WTI and brent crude oil were at $126 a barrel. Oil prices are at a level that can now impact demand. And not just by squeezing real incomes, but by depressing the sentiment of US consumers who are still lacking confidence from persistently high unemployment, threats of more downsizing, and falling house prices. The FHFA home price index for January with revisions just fell another full percentage point.

In short, we are out of policy levers to help the economy, especially now that we’ve unilaterally taken the fiscal policy option off the table. All of a sudden War #3 makes sense: We’re in Libya to make sure that the oil keeps flowing, because a high oil price depresses what’s left of consumer demand. In the meantime, as this nugget from The Hill illustrates, we’ve quickly blown through the budget “savings” proposed by the GOP, as we’re spending about $100 million a day in Libya. And oil prices have continued to rise as a consequence of perceived dangers to oil production facilities brought about by the escalation of this conflict.

Naturally, the GOP will look for more savings and the focus will invariably shift to “entitlement reform” led by “responsible, bipartisan” Senators, usually Democrats, such as my state’s own Michael Bennet. He is being applauded by the mainstream media for his “statesmanlike” actions in his efforts to negotiate a budget package that includes possible changes in taxes, discretionary spending and entitlements such as Medicare and Social Security.

In the meantime, defense is surely off the chopping block. We’re using our most sophisticated tomahawk weaponry in this conflict. The new tomahawk apparently is a very sophisticated piece of equipment. It stops over the target; it has an “eye” where it can look the target over, communicate with the command, and then go after the target. Now the courtiers in the Pentagon can go back to their Congressmen and use this as a sign that the American people are getting value for the money in their defense budget. “Look at how sophisticated this stuff is,” they can say. “Look how it’s enhancing our ability to win this war while minimizing American casualties. If you implement stringent defense cutbacks, this is precisely the sort of program that will be endangered.” A total crock, but it will work, as it always does.

So you can forget about defense cuts. This convenient little episode of military gymnastics has taken the defense budget off the chopping block — which is yet more proof that the progressives will never make any progress unless they muster the courage to take on the Military-Industrial-Congressional Complex.

So what’s on the horizon? More cuts in other areas of the budget for sure. The resultant fiscal contraction, if implemented, will put a halt to any incipient recovery, which the war is ostensibly designed to sustain by helping to reduce oil prices.

Do you ever get the feeling that American policy represents nothing more than a dog chasing its tail?