The U.S. Economic Costs of Gulf War II

Washington Post

It is Feb. 7, 2003, just after U.S. troops have seized several Iraqi airfields to be used as staging areas. Suddenly, Scud missiles — armed with both chemical and conventional warheads — strike the airfields. Hundreds of Americans die. The U.S. battle plan is thrown into disarray. The Iraqis (it turns out) meekly abandoned their airfields with little resistance precisely to make them easy targets.

We don’t know if there will be a war or, as this imagined story suggests, how it might unfold. But the fact that we don’t know overhangs the economy. It weighs on confidence. Companies hesitate to make commitments.

The uncertainties can’t be dispelled by low interest rates or lofty reassurances. At a recent congressional hearing, Democratic Rep. Pete Stark quizzed Federal Reserve Board Chairman Alan Greenspan.

Stark: [President Bush has] an obsession, it appears, to plunge us into war. [On] the assumption that we will be there one or two years and [spend] $100 billion [or] $130 billion a year . . . what effect would this have on our economy?

Greenspan: The numbers you quote are clearly very much on the high side. . . . I would be very doubtful if the impact on the economy is more than modest, largely because this is not Vietnam or Korea. Korea . . . had a really monumental effect, because the economy was so much smaller.

Well, maybe. Since 1950, the economy’s gross domestic product has grown from $1.7 trillion to $9.2 trillion in 2001 (figures in inflation-adjusted 1996 dollars). A war would probably last some months, and the Congressional Budget Office estimates the costs to the federal budget at $6 billion to $13 billion a month: not crushing for so wealthy a society.

But the true economics are murkier. What happens to oil prices? Might war trigger a recession? Would a swift victory revive confidence? Because no one knows, “scenario building” — the next best alternative — is now in vogue.

Anthony Cordesman of the Center for Strategic and International Studies in Washington reports the following: Saddam Hussein’s army totals about 375,000 men; his air force has 316 planes, maybe half operational; the air defenses are extensive; weapons of mass destruction are unknown. For a CSIS conference, Cordesman provided three war scenarios, and economists judged the consequences.

The “benign case” anticipates rapid victory. Much of Hussein’s army surrenders or defects. Because uncertainty lifts, the economy fares better than under a “no war” scenario. The temporary loss of Iraqi oil is no big deal. Iraq’s production now represents about 2 percent to 2.5 percent of world oil use. Saudi Arabia and other Persian Gulf suppliers offset the loss. Their surplus capacity is about 6 percent of global oil consumption, says analyst Adam Sieminski of Deutsche Bank. The United States might also release oil from strategic reserves.

By contrast, Cordesman’s other scenarios — though deemed less probable — are scarier. In the “intermediate case,” fighting lasts up to three months. Iraqi attacks slightly damage other Gulf oilfields. Oil prices, now about $25 a barrel, hit $42 by early 2003. In the worst case, Iraq badly damages other oilfields. Production drops by at least 5 million barrels a day, out of a total global consumption of 77 million barrels a day.

Oil prices hit $80 a barrel. Intense urban fighting incites the U.S. antiwar movement. Social unrest spreads in the Middle East. In the intermediate case, unemployment (now 5.7 percent) reaches almost 6.5 percent by late 2003. In the worst case, it goes to 7.5 percent.

Another dark assessment comes from Yale economist William Nordhaus, writing in the New York Review of Books. He says that a worst case (including a long-term occupation and reconstruction of Iraq) could cost $1.6 trillion over a decade. Only about half this total would be federal budget costs; the rest would reflect slightly higher oil prices and slower economic growth.

“It seems likely,” he says, “that Americans are underestimating the economic commitment involved in a war.” (One omission in his math: In the next decade, U.S. GDP should exceed $100 trillion; even his cost is less than 2 percent of the national income.) Life after major wars is not like life before them. They change — for better or worse — the political, economic and psychological landscape in basic ways.

A quick and successful war against Iraq might transform the Middle East by empowering Arab moderates. A long and messy war might destabilize the region and, by showing that U.S. power is exaggerated, abet terrorism, tensions and conflicts around the world. Pax Americana would recede; a power vacuum would develop.

The wisdom of war depends on the answers to these questions and one other: What’s the alternative? If it’s peace and prosperity, then war makes no sense. But if fighting now prevents a costlier war later, it makes much sense. To be blunt: If Saddam Hussein gets nuclear weapons and threatens his neighbors (Saudi Arabia, Kuwait) or drops one on Tel Aviv, prompting Israeli retaliation, we’ll face a horrendous war.

The economy’s fate ultimately hinges on these issues. It’s unsatisfying to say that they are a matter of judgment and that we don’t know and, probably, can’t know the answers. But that is what candor compels.

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