Economics Faculty Provide Expert Analysis on the War in Ukraine

Experts in the University of Maryland’s Department of Economics recently gathered in a nearly full room of the Edward St. John Learning & Teaching Center to share their economic analyses of the war in Ukraine. 

Moderator Jessica Goldberg, an associate professor in the department, was joined by fellow professors Sebastian Galiani, John Wallis, Luminita Stevens and Sebnem Kalemli-Ozcan. Each approached their portion of the discussion differently according to their unique area of expertise, but they all ultimately arrived at the same conclusion: That the war in Ukraine will have negative consequences for the United States, especially if it decides to get even more involved. 

Galiani kicked off the event by shedding light on the stated motivations behind the conflict—Ukraine wanting to join the European Union and NATO, against Russia’s wishes for it.

“We have an understanding that each country, when it is sovereign, should be able to decide all of its policies and what it wants to do. But in the real world, when a country decides on a policy, it affects other countries, so other countries also have goals about the policies of other countries,” Galiani said. “In  economics, we call this ‘externalities’, and we are living in such a world; a world of externalities.”

He went on to explain that the problem with this “world of externalities” is the fact that there is no “world organization that plays the role of a third-party enforcer” of a country’s sovereignty. 

“Consequently, the sovereignty of a country is only as good as its defense, the allies that can mobilize in its support, and the willingness and capacity of other countries to challenge that sovereignty,” Galiani said. 

To that end, Wallis then took the time to highlight how much money the United States has historically invested in its own defense by way of military spending as a share of the country’s GDP. He pointed out that during times of war, military expenditures typically shoot up, then decline again because the government raises taxes, doesn’t increase spending, and gradually pays down the debt. 

But, he said, “That is a pattern that we no longer live in,” due in part to former President Ronald Reagan coming into office in the 1980s and creating an unprecedented peace-time deficit where an increase in social welfare spending was balanced out by a decrease in military spending. 

“We are borrowing faster than we are growing; we have been living in a period in which we decided to borrow more money and we tax a little less and we spend a little more,” Wallis went on to explain regarding the current U.S. economic landscape. “So, there is no reason to believe we can’t intervene in Ukraine and that we can’t afford to do it, but we have made the politics of spending money and raising taxes much different.”

“The U.S. can definitely find money if the U.S. wants to get into the war. This is never an issue of finding money,” said Kalemli-Ozcan later during her discussion, which emphasized countries’ interconnectedness as well as what economic impacts Russia did and did not appropriately account for. 

“We live in a global system and we are connected through finance and trade. Russia clearly knew about their integration to the world; they built an economic fortress, and have over $600 billion in reserves—and were smart to diversify those reverses; they are not all in dollars, some are in Chinese currency and some are in gold, but 60 percent were still in dollars, which is why sanctions worked,” she said.

What Russia didn’t realize, however, was how much the country relied on tech imports, and that, especially because Apple Pay and Google Pay withdrew services from the country, citizens would not be able to pay for daily activities such as taking the metro.

Similarly, because of globalization, what many American consumers didn’t initially realize was the impact of the war on United States’ oil and gas prices—part of Stevens’ discussion about commodity prices and inflation, the economic consequences of past wars, and fiscal considerations. 

“We know where there is shock to oil supply, there is an increase in inflation and a significant decline in output,” said Stevens, explaining that while the United States does not get much oil and gas from Russia, the U.S. is seeing increased prices because they’re set on the global market. “I do want you to keep in mind though that these impacts are nothing like the impact that will be felt by the Ukrainian economy and the Ukrainian people.” 

A post-panel Q&A session followed each 15-minute talk. While attendees brainstormed questions, Wallis reminded them of how the United Nations came to be after WWII, who the original member countries were—the United States, France, Britain, Russia and China—and what that has to do today with the war in Ukraine.

“It threatens the agreements that we made between sovereign nations during WWII,” he said. “The humanitarian crisis in Ukraine is an enormously costly problem that is something that needs to be responded to, but at the moment, the really big problem is that if these agreements break down, then we are going to go back to the situation we were in in the beginning of the 20th century, not the end of the 20th century. That is a disaster.”

Photo is by iStock.

Published on Tue, Apr 5, 2022 - 9:21AM