Grim Economic Scenarios Drawn From Crisis in Gulf : Outlook: All-out action could force U.S. onto a wartime footing and slash living standards, experts say.

If the United States embarks on an all-out war in the Middle East, it could have enormous economic consequences, potentially inflicting more damage on the U.S. and world economies than anything since World War II, government and private economists say.

Scenarios compiled by leading economic forecasting firms show that a major Persian Gulf-wide military action potentially could force the United States onto a wartime economic footing and slash living standards throughout America.

“Whatever benefit we get in the short run, we will lose in the long-term harm that we are doing,” contends Allen Sinai, economist for Boston Co., a New York-based economic consulting firm.

Peter Perkins, an analyst with DRI/McGraw-Hill, a Lexington, Mass., economic forecasting company, agrees.

“I don’t think, short of the world wars, there’s been the kind of economic impact a war in the Middle East could have,” he says.

The issue is important because while actual armed conflict often has accomplished its political objectives, the economic impact of launching and sustaining a huge military effort frequently has proved to be an economic turning-point.

Economists generally agree that it was World War II, not the Roosevelt Administration’s New Deal programs, that ultimately pulled the United States out of the Great Depression of the late 1930s and established this country as the world’s foremost economic power.

Government borrowing needed to finance both the $200-billion cost of the Vietnam War and the Johnson Administration’s Great Society programs is widely blamed for having been a major force behind the rocketing inflation and severe recession of the 1970s.

But economists say that for all its disadvantages, embarking on an all-out war--with a quick and presumably decisive victory--could prove a far better option than other alternatives, such as a protracted impasse, which would rapidly drain the economy.

Analysts warn that a lengthy stalemate, with continuing uncertainty over the availability of global oil supplies, would spur oil prices sharply higher and push the economies of the United States and other major industrial nations into a certain recession.

The Middle East has well over half the world’s oil reserves; few regions have such a hold on global economic interests.

When oil prices rise by only $6--about half the increase they showed in the first three weeks of the current gulf crisis--they add a full percentage-point to the inflation rate, and dampen the world’s economic growth by 0.5%, Georgia State University economist Donald Ratajczak says.

Here are three widely differing scenarios, along with forecasters’ predictions on what would happen economically under each of them:

* The quick victory:

Iraq provokes a U.S. attack. U.S. bombardment and amphibious assaults knock out Saddam Hussein’s army within a few weeks, before his tanks and missiles can damage Saudi and Kuwaiti oil fields. Oil prices rise briefly to near $50 a barrel, but plunge to $20 as the fighting ends.

Although the conflict would be costly, and even a short war could increase the already outsized-budget deficit by $15 billion or more, the United States would not have to go to a wartime footing, impose rationing or suffer severe shortages.

The victory over Iraqi strongman Hussein also might help keep oil prices significantly lower than they otherwise would have been--possibly for several years, David D. Hale, an economist with Kemper Financial Services Inc. in Chicago, contends.

“It’s the most benign” of the various scenarios “because you get this thing resolved,” Hale says.

But others contend that the situation would not be so simple, particularly if war left the Middle East so unstable that the United States were forced to maintain a large number of troops in the region. They say military spending could continue to drag down economic growth.

* The sustained battle:

The fighting begins, but continues for several months. Iraq destroys the huge Ghawar oil field in Saudi Arabia, and U.S. and Iraqi ground forces engage in a long, bloody struggle in the Arabian desert.

A prolonged war, or one that destroys major oil fields, would leave supplies disrupted for months, or even years. Fuel would be in short supply. Shortages could appear in other products as well.

The war could cost a quarter of a billion dollars a day--much more by some estimates--sending the U.S. government on a borrowing spree. Oil prices would soar, and stay high even after the conflict, particularly if production facilities were damaged.

The sharp rise in military spending would buoy heavy industry and high-technology outfits, but would not provide the kind of major boost to overall economic activity that earlier conflicts, such as World War II, did.

Indeed, some analysts argue that the buildup would only deflect investment from where it is most needed--education, infrastructure and research and development that makes U.S. industries more competitive with those of other countries.

While factories might hum, their output would not be contributing to a better life for most Americans. “You can’t consume tanks,” Perkins points out.

Sinai agrees. “Whatever benefit we get in the short run, we will lose in the long-term harm that we are doing,” he contends. “It helps (gross national product, the benchmark of immediate economic vigor), but it doesn’t help our long-run, competitive problems.”

Those who lived through World War II remember it as a time of deprivation. Women drew lines for stocking seams on the backs of their legs, because silk, once used to manufacture the hosiery, had to be used for parachutes. Butter was replaced by dyed lard. Gasoline, sugar and meat were rationed.

No one expects such drastic measures in the event of war in the Middle East, but a long war--or one that destroyed major oil fields--would seriously crimp consumption.

Gasoline lines could return if Saudi, Iraqi and Kuwaiti supplies were interrupted for a long time. Higher fuel prices, possibly as much as 50 cents a gallon over pre-conflict levels, would discourage many American families from taking long driving vacations.

The only economic winners would be U.S. oil producers, and the economies of such states as Texas and Oklahoma.

* The prolonged impasse:

More than 200,000 U.S. troops face Iraq’s million-man army in a standoff that continues for months. The best hope is that the international embargo will eventually force Saddam Hussein to withdraw from Kuwait, but that will take at least another half-year, and possibly longer.

All bets would be off as the nation hunkers down and shifts to a wartime footing.

The higher oil prices initially would be felt by airlines and trucking firms, but the impact would spread quickly throughout the economy. Within months, the cost of making everything from aluminum to toiletries would rise.

At the same time, consumers would cut back sharply on spending and borrowing, forcing some firms, mainly those without much potential for defense work, into a slump. Even healthy companies would find it harder to keep their businesses going.

While neither the higher prices nor the economic slump would amount to an outright economic disaster, the prolonged uncertainty “guarantees that we are going to be smack dab in the middle of stagflation,” the double wallop of economic stagnation and inflation, Perkins contends.

Further, managing these problems would be made more difficult because the gulf crisis has been imposed on an already weakening U.S. economy--and a shaky U.S. financial system--leaving top economic policy-makers with virtually no leeway in dealing with the situation.

The federal budget deficit, already spinning out of control, would mushroom to historic highs of as much as $300 billion. Operation Desert Shield already is expected to cost the government $2.5 billion by the end of September--about double what the Pentagon had earlier estimated.

Facing a continuing commitment on that scale, the President and Congress would have lost their best options for bringing the budget into better balance. They could not cut military spending. Nor would voters who are feeling the bite of higher oil prices likely be willing to agree to higher taxes--particularly on gasoline.

Besides military outlays, spending for welfare benefits, unemployment insurance and other transfer payments would rise sharply.

The Federal Reserve Board also would have its hands tied. The higher oil prices and the need to keep the dollar strong so Washington can sustain its military operations would force the central bank to keep interest rates high.

That would be enough to sink many of the debt-laden businesses that had propelled themselves with junk bonds during the 1980s. Also high on the casualty list would be some of the shakier savings and loan associations that had managed to survive until now.

In short, the crisis “could not have come at a worse time for the U.S. economy,” Perkins says.

One of the most difficult factors for economists to predict is what effect the Mideast crisis may have on public psychology. If consumers panic, as they did in 1974, a relatively small oil shortfall could spawn severe shortages and send the economy into a slump.

Although most such conflicts prompt consumers to cut back, the outbreak of the Korean War in 1950, which came when memories of wartime rationing were still fresh, produced the biggest surge of consumer spending in history.

But from initial indications, the Mideast crisis appears to be having the opposite effect--dampening consumer confidence and leading some forecasters to predict a slowdown in sales of automobiles and homes.