The Economic Consequence of the War
War is expensive and inflationary.
The economic impact of the war that began with the surprise terror attack by Hamas on Israel will turn on many questions that cannot be confidently answered at this point. How long will the retaliatory Israeli siege on the Gaza strip last? Will war have significant spillover geopolitical effects, perhaps impacting relations between Israel and Saudi Arabia or between the U.S. and Saudi Arabia? Will global oil supplies be constrained by tightening enforcement of Iran sanctions or further production cuts by OPEC+?
“As it has been reported, this is not the typical Hamas-Israel scuffle, but something potentially larger that could have implications on the war in Ukraine and the proposed deal between Israel and Saudi Arabia. The conflict could also potentially raise tensions between Israel and others in the region if more information surfaces regarding their potential involvement in the attack,” analysts at Bank of America pointed out in a client note on Monday.
Importantly, this is not an isolated event. Rather it should be viewed in the context of the Russian invasion of Ukraine. It is the second major attack on a U.S. ally in the past two years. It raises the prospect that the future holds more military conflict than the recent past.
It is widely agreed that Russia’s invasion of Ukraine had an inflationary effect, primarily through the channels of energy and food supplies. In an era in which disinflationary forces were stronger, the Ukraine war shock could likely have been readily absorbed without increasing prices too much. Coming in an already inflationary environment, however, the supply shock was likely amplified.
Oil and War Stocks Jump
Oil prices moved sharply higher on Monday, implying at least some concern among traders that supplies could be constrained in the near future even if there is no immediate impact on global oil production. U.S. stocks tumbled as investors were confronted with yet another source of uncertainty about global economic developments.
Of course, the war will have a profound impact on the economy of Israel, the West Bank, and Gaza. Geographically neighboring economies and those closely tied to Israel are also likely to experience “collateral damage.” Studies suggest that wars tend to trigger higher rates of inflation in countries in close proximity to military conflict.
Israel’s economy is the 28th largest in the world, according to the World Bank. It is 43rd in terms of imports, according to the International Trade Centre, and 36th in terms of exports. Its major exports are high-tech equipment, pharmaceuticals, and cut diamonds. Imports include petroleum, autos, and diamonds. The U.S. is Israel’s largest trading partner, with $50.6 billion of goods and services crossing between the two countries. Exports from Israel to the U.S. were $20.0 billion in 2022 and imports were $30.6 billion, according to Office of the United States Trade Representative.
Apart from the impact on oil prices, the war triggered big jumps in the prices of U.S. makers of war machines or “defense stocks” as they are more politely called. Shares of Northrop Grumman rose by more than 11 percent on Monday. Raytheon shares were up 4.3 percent. General Dynamics shares rose 8.5 percent. Lockheed Martin shares climbed 8.2 percent. Shares of Palantir were up by around 5.4 percent.
Traders in these stocks appear to be anticipating the possibility that the conflict will trigger more spending on military equipment.
An Israeli soldier arranges artillery shells on the border with Gaza in southern Israel on October 9, 2023. (JACK GUEZ / AFP) (Photo by JACK GUEZ/AFP via Getty Images)
Israeli tanks are transported along a road in an undisclosed location on the border with the Gaza Strip on October 8, 2023. (MENAHEM KAHANA/AFP via Getty Images)
“This may force the US government to increase investment in the defense industrial base to build munitions and weapon systems at faster rates and in higher volumes. Ultimately, the US will be supplying munitions, missiles, and anti-missile systems to two allies (Ukraine and Israel) on top of supplying its own needs,” Bank of America’s analysts wrote. “As in any resource-constrained environment, difficult choices may have to be made as to who gets what from Pentagon inventories. Further, the potential strain on the US defense industrial base could embolden global bad actors.”
Keep in mind that orders for military goods produced by U.S. manufacturers are already elevated. Year-to-date, new orders for defense capital goods in August were up 15.6 percent compared with the first eight months of 2022. Orders for defense aircraft were up 13.0 percent.
The Woman Who Destroyed the ‘Discrimination’ Theory of the Gender Pay Gap Wins Nobel Prize
The Nobel Memorial Prize in Economic Sciences was awarded on Monday to Claudia Goldin, the first woman to secure tenure at Harvard’s economics department, for her research on women in the workforce. She is the first woman to ever receive the prize solo—the two other women laureates shared the prize with others.
Claudia Goldin, the Henry Lee Professor of Economics at Harvard University, speaks at a press conference in Cambridge, MA, on October 9, 2023, after being named this year’s Nobel Laureate in the Economic Sciences. (Carlin Stiehl/Getty Images)
You would not know it from much of the establishment media’s coverage of Goldin’s work, but her findings about what drives the pay gap between men and women very much contradicts much of the public discourse about the topic. First of all, Goldin shows that the pay gap has in fact shrunk considerably over the past 50 or 60 years, progress that is all too often ignored. But in recent years, that progress has stalled.
Perhaps most controversially, Goldin’s work shows that discrimination plays very little or no significant role in the persistence of the pay gap, and anti-discrimination laws played almost no role in the pay gap shrinking in the past.
So why do women still earn less than men? Goldin’s work revealed that immediately after college or graduate school, there is very little evidence of a pay gap for women, and it remains small for the first few years of employment. It is not until about a decade later that men start to out earn women.
The key to understanding this late emergence of the pay gap is that it typically begins a year or two after people start families. Couples often divide their labor along gender lines. Men are more likely to keep on in jobs that have high time requirements, what Goldin calls “greedy jobs” because they reward the large time requirements—or being “on call” constantly—with higher pay. Women switch to jobs that have lower time requirements so that they can be “on call” at home.
One of her findings is that pay is non-linear. The greedy jobs disproportionately held by men pay more than the more flexible jobs held by women even controlling for the amount of hours worked. There is a premium for submitting to the demands of the greedy job.
While not all left-wing types have noticed her heterodoxy, those paying close attention have picked up on it—and criticized her for it.
Here’s an excerpt of a review of her book Career and Family that ran in the far left Nation magazine:
Goldin also insists that what she calls “greedy work”—work that pays a premium for extra hours put in on the job and rewards in-person time and being on call—is the only remaining barrier to workplace equality between men and women. Straight-up bias, she argues, has disappeared. But asking employers to cut back on hours won’t fix the fact that women are often seen as worth less than men when they’re on the clock—receiving fewer promotions and raises while continuing to endure both outright and subtle harassment and discrimination. She appears to see the fact that women are still the default caretakers in their families as a genuine choice. On the whole, her book lacks any assessment of the power dynamics and social forces that warp women’s experiences at both work and at home.
The charge that she thinks the women are “still the default caretakers in their families as a genuine choice” would likely spur a lot more criticism from the left if it were more widely understood.
