TJP

It’s not the Economy; it’s the Stupid War

By Byron A. Ellis

March 09, 2008

The tendency of many Americans is to identify outcomes as root cause. Thus, when Americans cannot pay their mortgages, they call it a credit crisis; when the economy slows down, they call it an economic crisis. However, the question that we need to answer is what is the root cause of the mortgage and economic crisis.

Some have argued that homeowners bought houses that they could not afford, hence the mortgage crisis. Others have argued that technological shocks are responsible for the impending recession. Facts validating these arguments, however, are scant.

In fact, chained gross domestic product (GDP), as well as personal consumption expenditures, has been increasing at a healthy pace since the early 1990, as depicted on the graph below (Source BEA). So if GDP, which is income, has been increasing, what is preventing homeowners from paying their mortgages?

Consumers are endowed with a budget, which constrain their choices. Generally, their budget is the wage (w) that they earned per hour multiplied by hours worked (n). They allocate their limited budget to housing, food, transportation, savings, and so on.

Consumers are utility maximizers. That is, they attempt to maximize their level of satisfaction given their budgetary constraint. So, their tendency is to allocate their entire budget to commodities and services that maximizes their level of satisfaction.

However, when a component of the consumer budget allocation, say gasoline prices increases by 100%, without a similar increase in income (earnings), they reduce allocations to other budgetary components, such as housing payments. Most consumers cannot significantly reduce transportation, home heating payments, and food budgetary allocations.

Thus, it is the reduction in home allocations, due to higher crude oil prices, that caused the mortgage crisis, as well as the general economic crisis. Consumers are transferring their hard earned income to the energy industry as attested by the higher than normal quarterly profit reported by energy companies.

Monetary and fiscal policies cannot affect the energy variable; the adverse consequence of the energy variable is due to the instability in the Middle East, caused by a war choice. Hence, to begin to affect the adverse consequences of the energy variable, which have affected all Americans, the Middle East must be stabilized.

Some have erroneously argued that the US Military would bring democracy to the Middle East. However, that did not occur. Rather, the US military intervention accelerated instability, which increased the price of crude oil. In the face of violence, oil traders bid up the price of crude oil.

The ill-advised Bush administration last month advocated for fiscal and monetary policy intervention to solve the so-called mortgage crisis and are now advocating for a greater supply of crude oil to solve the general economic crisis. Their inability to focus on the root cause of problems and challenges has been well documented throughout their tenure.

The root cause of the US economic problem is instability in the Middle East due to the US invasion. Therefore, the administration should be advocating for stability in the Middle East by involving regional countries in a shared international solution.

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