Peace Will Give a Boost to America’s Economy, but It’s Not a Cure-All
The Persian Gulf war may be thousands of miles away from the Z. Frank Chevrolet dealership on Western Avenue in Chicago, but it has had its effects there nonetheless.
During the first 10 days of the war, when Chicagoans, like other Americans, thought the fighting might be over in a matter of days, they began packing into the downtown showroom.
But as the war stretched into weeks, confidence gave way to uncertainty, and “everything just clammed up again,” the dealership’s vice president, Bob Kerpec, says. Now, Kerpec estimates that showroom traffic is only one-third what the dealership would normally expect at this time of year.
So now, with the announcement of a conditional cease-fire, can businesses and consumers expect to see the end of the recession as well?
No question about it, to listen to President Bush, Treasury Secretary Nicholas F. Brady or Federal Reserve Chairman Alan Greenspan. All three say the war has been the major reason for the current “temporary interruption” in the nation’s long-term economic growth. Brady even went so far as to predict there would be “business as usual” after the war.
But from his vantage point on Western Avenue, Kerpec is far less sanguine. “We look for optimistic signs wherever we can find them, but we are not yet optimistic enough to be investing our money in radio and television ads,” he says. “That would be like throwing our money away right now. I just have no idea what’s going to happen in the economy.”
Here and abroad, forecasters seem to agree that while peace almost certainly will prove to be a tonic for the U.S. and the world economies, it most likely will not be a cure. “It is quite easy to exaggerate the effect of the war,” says Rupert Thompson, an international economist with the investment bank, UBS Phillips & Drew, in London.
To be sure, the end of the war will bring some economic benefits, notably in lower oil prices, bolstered consumer confidence and a Middle East reconstruction program so huge that it may rival the Marshall Plan effort to rebuild Europe after World War II. But even if the U.S. recession is relatively short and shallow, as some economists are coming to believe, many still caution that Americans should not expect the recovery to be robust or swift.
Analysts say one reason that peace may not spur a bigger rebound is that the war itself inflicted relatively little strain on the world’s major economies.
In the United States, for example, the effort probably consumed well under 1% of the total gross national product, or national output--compared with 45% for World War II at its peak, 14% during the height of the Korean War and about 9% during Vietnam.
Moreover, the weapons that U.S. forces consumed were taken out of the huge stocks that were built up during the Reagan Administration--and so don’t have to be replaced, government and private analysts say.
And since future federal budgets anticipate reducing defense spending in order to cut the deficit, these weapons will be replaced slowly, if at all, experts say.
But perhaps the biggest reason that peace does not necessarily mean prosperity is that many countries will be left with the problems that were dragging down their economies even before the war started.
The recession “is kind of like a layer cake, where one more layer was the war,” Alan Stoga, managing director of Kissinger Associates, a New York consulting firm, says.
In the United States, for example, the banking system may be too fragile to start lending much more, despite the lowering of interest rates aimed at easing what is called a “credit crunch.”
What’s more, Stoga notes, the Federal Reserve may be less willing to nudge interest rates down further once the war has ended. The Fed has deemed this “the Saddam Hussein memorial recession,” he says. “If they actually believe that, you have to wonder if the end of the war is the end of the Fed’s easing.”
Meanwhile, many consumers and companies are so far in debt that they are thinking of retrenching, not spending more. The same can be said for governments--national, government and local--whose spending has often been an engine of economic growth.
Brian V. Mullaney, vice president and senior economist for Morgan Stanley International in London, says sagging consumer confidence in the recessionary countries stems not from tension in the Middle East but from excessive consumption in the 1980s, fueled by either huge government deficits--as in the United States--or loose monetary policy, as in Britain.
U.S. consumers will bounce back, Mullaney says. But he is less sanguine about Britain, where the government has corrected for its loose monetary policy by tightening sharply. The key government-set interest rate rose as high as 15% last year and remains at 13.5% now.
West Germany’s economy remains robust, Mullaney says, although the absorption of East Germany last year has put enormous strains on one of the world’s most resilient economic systems.
But France, Italy and other European countries are suffering from tight monetary policies and currencies so overvalued that their products are overpriced in global competition with American goods. In that equation, Mullaney says, the Gulf war is a negligible factor.
Japan, he says, faces problems of its own, including a slowdown in capital spending and overall economic growth.
The recession “is a vicious cycle,” Stoga says. “I don’t think (peace in the Middle East) breaks it.”
Indeed, business people such as Kerpec, the Chicago car dealership manager, say they are not looking for an economic miracle at the end of this war. “I just hope it will get us going back in the right direction,” he says.
Karen Tumulty reported from Washington; Joel Havemann reported from Brussels. Times staff writer William J. Eaton contributed to this report.