What impact will the war in Iraq have on the economy?
There are two main effects. One is on labor supply: calling up reserves and sending them overseas obviously reduces the number of people available for gainful employment here at home. Relative to the overall size of the labor force, however, this impact is pretty small. A more subtle, but potentially much larger impact will be the burden of financing the war’s cost ($125 billion, so far). For now, the government is simply borrowing the funds it needs for the war. But eventually, the money will have to come from somewhere: either taxes will have to be increased, or other expenditures will have to be cut. The war’s ultimate economic impact will therefore depend on these future budgetary decisions, the effects of which will be felt for years to come. Will the Fed continue to be the driving force in the country’s economy? Yes, the Fed will continue to be a key player in U.S. economic policy although “driving force” might not be the right way to describe its role. The real force propelling
