#120 War Makes Us All Poorer

By D. Arnott | April 14, 2022

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#120 War Makes us all Poorer

We tend to think that war only impinges upon those directly affected, but we all pay the economic price of war.

The Broken Window Fallacy

After a hurricane or tornado, you will often hear someone claim that the rebuilding investment is good for the economics of the community. In a very narrow sense, that might be right: It’s good for the specific community that received the funds to rebuild. But an economist would ask where that money came from, and what alternate use would it be put to?

It’s something like a gambling casino. I’ve covered some of this in podcast #64 titled Gambling for God. But for today, let’s just state that all money that gets lost at a gambling casino might enrich the very small community that surrounds the casino, but it hurts others from outside that very small circle, because that money would have produced more value in another enterprise.

Back to the broken window fallacy. Oh, and one clarification: I’m not talking about the broken-window theory of policing: That idea states that if you allow small crimes, you will get larger crimes. That theory would be used to show that Vladimir Putin was allowed to take Crimea (a small window break) during the Obama administration, so he felt empowered to break a larger window, the entire country of Ukraine.

The economic broken window fallacy is very different. Its author is the French economist, Frederic Bastiat. It states that the money spent to repair a broken window came from somewhere, after all, there is no free lunch. And, that money would have found a higher use in some other place. In a greater sense, Bastiat says “You see what you see, but you don’t see what you don’t see.” You see the economic impact of the rebuilding effort, but you don’t see where those resources would have been spent if the destruction had not taken place.

You will even hear some say that the insurance company will pay. Well, if the insurance companies paid fewer claims, – assuming it is a competitive industry – they would be forced to lower their prices, so there would be more consumer surplus. And, if they made more profit, there would be more producer surplus, and those profits would go to the managers and owners, who would put the money to higher use than paying insurance claims.

Destruction makes all of us poorer, because valuable resources are destroyed that have to be re-built. Simply, applying those resources to building new value-creating efforts enriches us more than re-building destroyed resources.

Less Production

Disruptions of supply chains and reduced production has caused the price of wheat to inflate 27%. The world essentially lives on wheat as a food commodity. When prices go up 27%, the poor have to pay more for bread. The commodity increase you hear most about is oil, and as of today, it’s up 19%, and likely will be higher by the time you watch this. All products get transported, including the bread we just talked about. So the price of all products will inflate because of this.

Since God created humans, our needs have never changed. It makes no difference if you’re a believer in an earth that is 6000 or millions of years old. Needs have never changed. How we satisfy them changes. In economics, we call those new needs satisfiers substitutes. Wool and cotton prices won’t change much because of the war, but their substitutes, which are oil-based products will. So spandex, polyester and nylon, which are substitutes for wool and cotton, will be driven up by the increase in oil prices. Ukraine is a top corn exporter, and the US has entered into this foolish idea of making it into ethanol. So oil prices will go up even further. Also, corn is an input for the production of beef and chicken, so you can expect those prices to increase. Food price increases are particularly painful for the poor – whom we Christians care about – because they spend a larger portion of their meager income on food, than the rich do.

Ukraine produces half the world’s sunflower oil, and the production is certain to be curtailed. Sunflower oil is used for cooking, and it’s also an input item for biofuels, which I mentioned a moment ago. You can expect the price of those substitutes to increase. Another example is the vegetable oil called canola, known in Europe as grapeseed. Natural gas prices in Europe are clearly on the rise, and this has driven up the price of coal, which is an energy substitute. House prices are already skyrocketing in the US. Germany and Sweden export lumber to the US, and if the war causes them to sell those products closer to home, it will drive up lumber prices in the US.

Less Trade

Even if the Russian invasion of the Ukraine ended today, there would be a lag in trade resumption with Russia for years, maybe decades. It’s sometimes too easy to have faith in rational economics, which states that supply and demand sets prices that determine global trade patterns. There will be lingering trade discrimination against Russia, and the effects are hard to predict. In the first week of the war, Stolichnaya vodka changed their brand name to Sloli to try to sound less Russian. If I mis-pronounced Stolichnaya, I’ll blame it on my Baptist heritage.

In a recent Wall Street Journal article titled “Ukraine War Drives up Cost of Wind, Solar Power,” they point out that, “renewable-energy projects are now being hit by soaring post-invasion prices for key materials such as aluminum and steel, as well as higher transportation costs stemming from higher oil prices, which have surged by more than 50% this year.”

The rising costs are particularly acute in the U.S., where many projects were already facing increases in part because of trade tariffs targeting China, a dominant producer of solar cells and other renewable-energy components.

I did my PhD dissertation on US-Russian joint ventures, and I will try to make this explanation more interesting than my dissertation. But, in brief, there are very few items in your house today that were made in Russia. In most joint ventures between Western and Russian firms, the western firm provides the technological know-how, and the Russian firm provides the natural resources, like gas & oil and nickel.

Specialization

Russia specializes in oil & gas. I talked about that in length during a recent podcast titled Scriptural Specialization and Vladimir Putin. When the west stops buying oil and gas from Russia, the price will go up. Okay, I’m back to a theme that flows throughout the Christian Economist podcasts: Christians care about the means, because we believe God has determined rights and wrongs. And economists almost always measure the outcomes. It’s rather obvious today that the West has chosen to ban the purchase of Russian oil, so that’s clearly the right thing that western countries will do. The economic outcome is clear: Prices are going up already.

As I stated earlier about US-Russian joint ventures, when I spared you from the boring details of my dissertation: The US specializes in technology. And I don’t mean just information technology, I mean the economic definition of technology, which includes the means of increasing value, when commodities are converted into consumer goods. As the US begins to deny those technologies to commodity producers like Russia, all those prices will increase.

Nickel is just one example. The London Metal Exchange made an extraordinary decision on March 8 to halt nickel trading. This was caused by a short squeeze triggered by a Chinese metal tycoon’s large short position. This sent commodity prices skyrocketing more than 100% in one day, to a high of more than $100,000. Nickel is a key input in battery production, which is expected to support the move to electric vehicles. The price just went up.

The Christian Response

Hundreds of Christian organizations are responding with humanitarian care and aid, among them the American Bible Society, AWANA, Hope International, Medical Teams International, Mercy Chefs, Samaritan’s Purse, Save the Children, World Relief, World Vision, and hundreds of others. We personally know two guys who are going to serve with Texas Baptist Men. You know of many charities in your own home town who are mobilizing their efforts to provide care, as Christians have done for 2000 years.

Just a thought: I don’t know of an atheist organization who is helping. I’m tempted to launch into a philosophical discussion about how Christianity makes the world better and atheism makes it worse, but I’ll avoid that today, because we’re running out of time. I will let the record of history speak for itself.

Here’s the point: We tend to think that war only impinges upon those directly affected. And while that is true in terms of physical and psychological harm, we all pay the economic price of war.

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Posted in Blog, Conservative Economics, Podcast