War May Have Profound Economic, Social Impact

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By Carl Nolte and Leonard Curry San Francisco Chronicle WASHINGTON - Beyond the personal tragedies of military families, a war in the Persian Gulf could have profound economic and social consequences for Americans - especially if something other than the ``surgical strike'' the military is promising occurs.

If the war lasts more than three months, experts here say Americans can expect higher prices, higher taxes, higher interest rates, and fewer freedoms.

``These could be critical days, historic days,'' said Ronald M. Johnson, director of the American Studies Program at Georgetown University, who feels the war will touch nearly everyone in this country.

It will start with security as the country moves into a war with a country that uses terrorism - travelers will notice it at airports immediately.

It will not only be more difficult for Americans to move around their own country, but it will probably be harder to move around the nation's cities as precautions are taken against sabotage.

Then, if the war lasts longer than a few weeks, the casualties - and the other bills - will start rolling in.

``If it is a surgical operation - maximum two weeks - then there will be minimal disruption,'' said Johnson. ``But if Saddam Hussein creates pandemonium, and the conflict balloons, or there is some sort of military catastrophe, all sorts of things can happen.''

There will be death and taxes - and wounded people.

U.S. policymakers said President Bush plans to submit a budget to Congress in February that will not include spending for the Persian Gulf. The military costs will be treated as ``off-budget'' expenses and paid through supplemental appropriations.

``It's the only realistic way to do it,'' a White House official said.

But there is uncertainty over whether the cost of the war would be borne through a surtax or through increased borrowing.

The president is opposed to taxes, but key Democrats on the tax-writing House Ways and Means Committee are leaning toward a surtax on those with higher incomes - perhaps on people earning $50,000 a year or more.

The alternative to higher taxes is increased borrowing. This will drive up interest rates, because the Federal Reserve is unlikely to inflate the money supply to accommodate a no-tax policy, a Fed official said.

``The administration would have to compete with other borrowers for available funds,'' the official said. ``That would drive up interest rates.''

Besides the off-budget treatment of spending for the military operation, U.S. policymakers said a 1950 law gives the president sweeping wartime authority to order cabinet members to ``divert goods to the military in an emergency.''

This provision allows the president, if he desires, to unilaterally cut spending for domestic purposes and to transfer the money into Persian Gulf operations.

Government sources also said that controls on wages and prices, such as those used in World War II and the Korean conflict, are unlikely.

All American wars in the past have tended to produce inflation, and this one may be no exception.

Daniel Mitchell, a senior policy analyst with the Heritage Foundation, a conservative think tank, said the government ``may use the excuse of war to heat up the economy.

The political leaders, he thinks, could raise taxes - he mentioned a war surtax. …