Politics

Libyan Assault Could Have Economic Impact at Home

President Obama's decision to put the U.S. military at the vanguard of a bombing campaign in Libya has its downsides. 

But, depending on how long the conflict lasts, it could give the economy a boost at a fragile time. The mission over Libya already has run up a bill in the hundreds of millions of dollars. Though the intervention is limited when compared with the wars in Iraq and Afghanistan, it still costs money -- for bombs, missiles, fuel and maintenance, among other things. 

While nobody should expect payrolls to soar as a result of a no-fly zone in North Africa, certain sectors of the economy stand to benefit. 

"It's definitely going to be good news for some of the major defense contractors," said Dean Baker, co-director of the Center for Economic and Policy Research. 

At the top of that list is Raytheon, which manufactures the Tomahawk cruise missiles that have bombarded Libyan leader Muammar al-Qaddafi's air defense systems since Saturday. A total of 162 missiles, costing about $1.5 million apiece, were fired in the first five days, with the coalition reportedly firing another 14 overnight Wednesday. Though Navy Adm. Gary Roughead told reporters Wednesday that the military can replace those missiles from its current inventory of more than 3,000, analysts say the Defense Department could over time up its order to make up for the loss. 

Baker said that spending could take place over the next couple years, though it "won't be very visible" in terms of overall GDP growth. 

Baker published a study in 1997 that found war-time defense spending has a "stimulus" effect on the economy typically for about five years, boosting employment and economic output. However, he found that spending eventually pushes up inflation and interest rates, ultimately putting the squeeze on the economy in the long term and hurting growth. "It certainly could have a very bad impact on the economy," Baker said, if the United States gets bogged down. 

There are untold variables in Libya, which would determine what kind of economic impact it has in the United States. 

The administration claims the initial missile strikes are over and the maintenance of the no-fly zone will soon be placed in the hands of the United States' international partners. But Thomas Donnelly, director of the Center for Defense Studies at the American Enterprise Institute, said U.S. involvement could well increase if Qaddafi clings to power. If the conflict drags on, he said, the cost of "consumables" as well as maintenance and spare parts will make their way into the economy. In addition to the Tomahawks, B-2 bombers dropped munitions on Libyan targets. The United States already has lost an F-15 in the mission. 

"It's going to be whatever ordnance is expended, whatever fuel is burned, whatever additional personnel cost is incurred," Donnelly said. 

He added, "Compared to Iraq or Afghanistan, it's still pretty small potatoes." 

A study released in early March from the Center for Strategic and Budgetary Assessments estimated it would cost between $30 million and $100 million a week to maintain a limited no-fly zone in Libya. The study estimated it could cost up to $800 million up front to take out Libya's air defense systems -- though that estimate could run high since it assumed the United States, now part of a coalition, would bear most of the cost. 

A Congressional Research Service study in 2008 showed that no military conflict has had anywhere close to the economic impact of World War II, which is largely responsible for the notion that war is an economic positive. 

Rather, the report showed that while wars have a stimulative effect, conflicts over the past several decades "were not large enough to dominate economic events of their time." Economic growth increased in the year after George W. Bush launched the second Iraq war, but the report said the stimulus effect was relatively "minor" -- and the spending from two wars only widened the deficit and certainly didn't forestall the collapse of 2008. 

So far, the markets have not balked at the sign of conflict in North Africa. The Dow Jones Industrial Average is up since Friday. Ira Walker, senior portfolio manager at the Walker Group, told Fox Business Network that geopolitical events like the tsunami in Japan and the strikes in Libya are driving the market and predicted they would not hurt it. 

"These events in and of themselves cannot cause a double-dip recession," he said. "It's as simple as that, and the markets are telling us that. The markets are saying that this is a contained crisis, not contagious." 

Any positive economic impact, though, could be more than offset by disruptions in the oil market. Baker said sustained fighting could take Libyan oil offline for awhile, triggering anxiety elsewhere and driving prices ever upward.