Ending the specter of war isn't an economic cure-all
www.stltoday.com By Chern Yeh Kwok Of the Post-Dispatch 02/15/2003 04:00 PM
Federal Reserve Chairman Alan Greenspan testifies before a Joint House Economic Committee hearing about the state of the economy in November (File photo)
Federal Reserve Chairman Alan Greenspan, in testimony to Congress last week, pointed to nervousness over Iraq as the major factor slowing growth in the U.S. economy. But some private economists warn that resolving the uncertainty isn't the cure-all.
Oil prices would dip, but with the continued threat of terrorism, prices might not fall so sharply as previously thought, they say. The economy still must adjust to the overinvestment of the late 1990s and the bursting of the equity bubble.
If Iraq were no longer an issue, the uncertainty could shift to North Korea, where tensions with the United States have escalated in recent weeks.
"Right now, everyone is expecting, post-Iraq, everything is going to be peace and tranquillity," said Patrick Fearon, an economist at A.G. Edwards & Sons in St. Louis. But "some time after the Iraq situation, the administration could then start putting military pressure on North Korea."
As the nation appears to inch closer to war, a shortage of spare capacity in the commercial oil markets also is worrying analysts and economists. "Oil-price shocks have been associated with at least three of the last five recessions," Yale economist William Nordhaus said in a recent study of the economic effects of an Iraq war.
For months, businesses, investors and consumers have weighed spending decisions against the potential for a U.S. invasion of Iraq. The uncertainty has cast a pall on the economy, analysts say.
Fear that a conflict could spread to top oil-producing Middle Eastern countries has led to a more than 35 percent spike in the cost of crude oil, to about $37 a barrel, in the last three months. Along with the likelihood of swooning consumer confidence from a war, that and other factors have depressed stock prices. The Standard & Poor's 500 index closed Friday at 834.89, down more than 8 percent this year.
Certainly, spending on weapons would boost some sectors of the economy. Yet, such spending would have a largely negative economic effect, analysts say.
"If you spend on infrastructure, you've made a capital investment," said Sherman Katz, a fellow at the Center for Strategic and International Studies, a Washington think tank. "When you've spent on weapons, it's a depleting asset."
Unlike the Persian Gulf War in 1991, when several allies helped to pay the costs, the United States likely would foot most of the bill for another war. Nordhaus, in his study released in December, estimated that the cost of war could range from $50 billion to $140 billion; the first Persian Gulf War cost $80 billion.
Post-war occupation and Iraq's reconstruction could cost even more, Nordhaus said. Factoring in those costs, Nordhaus estimates that total spending would range from $99 billion to $1.9 trillion, depending on the outcome of the conflict.
"The impact on budget deficits and interest rates could be high," Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis, wrote in a research report released Thursday. Sohn estimates the cost of a "drawn-out war" at $650 billion.
But those effects are dwarfed by the implications for oil prices and the global economy, analysts say.
Greenspan, in his testimony last week, said uncertainty about the war has blurred the economic outlook. Until there's a resolution, it's unclear if the economy could grow more rapidly - "our most probable expectation" - or if the economy's problems are deeper, he said.
Some economists and military analysts, however, have tried to quantify the effects of the potential outcomes. They assume four scenarios: no war, a quick and decisive U.S. victory, a war with moderate complications and a war that drags on for up to six months.
The favorable outcomes would be no war or a short, decisive conflict, according to their analyses. Most economists assume a short and decisive war would be most likely.
If war is averted, crude-oil prices could fall below $25 a barrel by June and move slightly upward in coming years, according to analyses. If the war is swift and decisive, oil prices could spike higher early in the conflict and then decline sharply.
But if the conflict is prolonged, rising oil prices easily could tip the U.S. economy back into recession, economists say.
A three-month war could result in crude oil spiking above $40 a barrel. A war that stretches up to six months could push crude-oil prices to $100 a barrel, a scenario that would be similar to the 1979 oil shock, according to economists at Morgan Stanley Dean Witter. "Oil prices would be so high that a global recession would be unavoidable," two Morgan Stanley economists, Eric Chaney and Richard Berner, wrote in December.
Rising oil prices could hurt consumer spending, raise business costs, lead to inflation and further slow the economy's growth.
During the Persian Gulf War, the price of crude oil topped out at $47 a barrel.
What's different this time is the lack of spare capacity in the global oil markets, said Larry Goldstein, president of the Petroleum Industry Research Foundation, a New York-based trade group.
Iraq exports about 1.5 million to 2 million barrels of oil a day; daily global demand is 75 million barrels. So, seemingly, Iraq exports an "irrelevant" amount, he said.
But strikes by oil workers in Venezuela have led to low global oil inventories, Goldstein said. The South American country is producing at only about 40 percent of its capacity.
"Even if all the oil producers produce at capacity, you'd be just barely short of having enough production" in case of war, he said. "There would be no cushion for the next surprise."
Reporter Chern Yeh Kwok: E-mail: cykwok@post-dispatch.com Phone: 314-340-8206