Iraq a Likely ‘Villain’ in U.S. Recession : Economy: It would be tough for Bush to escape blame totally. And some say the oil price rise alone should not be enough to cause a downturn.

At first glance, the war clouds over the Persian Gulf may seem to contain a silver lining for President Bush and his top economic policy-makers: If the U.S. economy plunges into a recession this year, at least they would have someone else to blame.

Indeed, almost from the first days of the Bush Administration, White House officials have tried, without much success, to place the responsibility for any future economic slump on the anti-inflation policies of Federal Reserve Chairman Alan Greenspan.

Now “they have a real villain,” said Jeff Bell, a former Ronald Reagan adviser who is a political and economic consultant here for Lehrman Bell Mueller Cannon. “Alan Greenspan didn’t make a very good villain; Saddam Hussein fits the bill perfectly.”

But there are problems with trying to pin a recession on Iraqi dictator Saddam Hussein, whose sudden, ruthless attack on his rich Persian Gulf neighbor triggered sharply higher world oil prices.

It would be difficult for the White House to escape political blame completely if the economy plunges over the edge and unemployment jumps sharply. In the event of a serious recession, top political analysts doubt that Bush would be any more successful than his predecessors in trying to deflect public resentment away from the White House.

“Bush won’t be able to get away with blaming the recession on Saddam,” said William Schneider, a senior fellow at the American Enterprise Institute and a Times political consultant. “It didn’t work in the ‘70s for (Gerald) Ford and (Jimmy) Carter. I don’t see how it will work for Bush.”

Moreover, there are valid reasons to question the consensus among analysts that the Persian Gulf situation by itself makes a recession all but inevitable.

To begin with, a close analysis of past oil shocks suggests that prices will have to go a lot higher and shortages will have to get a lot worse to force the economy to deviate significantly from its earlier course.

“I don’t think most people recognize how hard it is to knock the U.S. economy off its feet,” said David Levine, chief economist at Sanford C. Bernstein in New York. “Oil prices of $25 to $30 a barrel won’t do it.”

Each $5-a-barrel increase in oil prices costs the American public an extra $43 billion a year, according to Levine’s calculations. But it is likely to retard overall growth by only 0.4% to 0.5% because of certain effects that help soften the economic impact.

So far, oil prices have risen about $6 from a recent low of roughly $19 per barrel. Unless the economy was already so weak that it was heading for a recession anyway, the recent price shock alone should not be enough to trigger a downturn.

The conflict in the Persian Gulf, of course, could worsen overnight, threatening to cut off supplies from the crucial Saudi oil fields and sending oil prices into the stratosphere. Under such circumstances, with prices possibly soaring to $40 a barrel or more, the already sluggish U.S. economy would be sure to break down.

And if war does break out, the American public is likely to judge Bush more on his success or failure in achieving U.S. foreign policy goals and in protecting national security than on Washington’s ability to sustain growth in the economy.

Many economists thought the U.S. economy was headed for harder times even before Iraq sent its tanks across the Kuwaiti border and the Bush Administration responded by imposing an economic embargo and sending troops to the Middle East to defend Saudi Arabia.

Economic growth has been weak for almost two years, slowing to an annual rate of just 1.2% last quarter, but inflation nonetheless has failed to subside, causing the Federal Reserve to keep interest rates uncomfortably high.

So when the Iraqi invasion began, pushing oil prices up and depressing future consumer buying power, many analysts concluded that it seemed sure to deliver the final blow.

“The U.S. economy looks like it has entered a full-fledged downturn,” said Allen Sinai of the Boston Co., an economic forecasting firm. “If not, the Iraqi oil shock probably will provide the finishing touches.”

The Bush Administration, however, has a number of economic weapons at its disposal that might cushion the blow from the loss of roughly 4.5 million barrels a day in Iraqi and Kuwaiti oil supplies.

The White House has so far rejected pleas from oil industry analysts to open the tap on the nation’s 590-million-barrel strategic petroleum reserve, but it has moved more quickly to make up some of the shortfall with supplies from other oil producing nations.

Last Tuesday, for instance, leaders in Saudi Arabia, which could increase its output by as much as 2 million barrels a day, and Venezuela, which is capable of expanding production by 500,000 barrels per day, told U.S. officials that several OPEC producers planned to boost production to help stabilize prices.

More recently, Venezuelan President Carlos Andres Perez said publicly that OPEC has a “commitment” to make up as much of the shortfall as possible.

“If this void is not filled, prices will shoot up, and therefore in agreement OPEC countries have to produce these 4 million or 4.5 million barrels a day which Kuwait and Iraq are going to stop producing,” Perez said Friday.

“The embargo is a test of whether the oil importing nations can find ways to mitigate our own economic pain long enough to squeeze Iraq’s economy dry,” said Alan Reynolds, chief economist at the conservative Hudson Institute in Indianapolis. “Unless we do something really stupid, like imposing price controls or trying to inflate our way out of the situation, we might just pull it off.”

That suggests that a recession, particularly given the day-to-day uncertainty about the situation in the Persian Gulf, may not be quite the inevitability that many analysts fear.

No matter what happens with oil prices and economic growth, one group of Washington policy-makers must be breathing a sigh of relief already. The threat posed by Hussein appears to have gone a long way toward taking budget negotiators from the Administration and Capitol Hill off the hook.

While Administration officials and top lawmakers insist they are still determined to press ahead with a deficit accord, the goals of the package have changed markedly in the past week. Instead of the earlier target of reducing the fiscal 1991 deficit by $50 billion, negotiators now concede they are unlikely to trim much more than $25 billion to $30 billion from a budget gap expected to exceed $200 billion next year.

“One of the risks of the budget agreement would be a $50-billion brake on the economy, just at a time when it’s already teetering on the brink of the recession,” said Senate Budget Committee Chairman Jim Sasser (D-Tenn.).

As a result, lawmakers expect the first-year deficit goal to be scaled back sharply when talks resume after Labor Day, arguing that any major spending cuts and tax increases should be delayed.

“It gives everyone an excuse,” acknowledged Rep. Bill Frenzel (R-Minn.). “People say they are worried that a big package will tip us over into a recession.”