The Economic Impact of War

By Samuelson, Robert J. | Newsweek, December 2, 2002 | Go to article overview

The Economic Impact of War


Samuelson, Robert J., Newsweek


Byline: Robert J. Samuelson

It is Feb. 7, 2003, just after American 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 whole U.S. battle plan is thrown into disarray. The Iraqis (it turns out) 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 story suggests, how it might unfold. But the fact that we don't know now 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 chairman Alan Greenspan.

STARK: [President Bush has] an obsession, it appears, to plunge us into a war. [On] the assumption that we will be there one or two years and $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 federal budget costs from $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 new 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's Army totals about 375,000 men; the Air Force has 316 planes, maybe half operational; the air defenses are "dense"; 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 Saddam'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. …

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