What Did You Learn in the War, Daddy?

Times Staff Writer

One way to judge recent upbeat predictions about the economic consequences of war with Iraq is to look back at the flawed estimates that followed the 2001 terrorist attacks.

Then, economists’ favorite analogies were to Hurricane Andrew and the Northridge earthquake. Like the storm that flattened south Florida and the temblor that shook Southern California, the jetliner assaults on New York and the Pentagon were terrible tragedies but ones that many analysts said ultimately would prove economically containable, even growth-spurring.

“A medium-sized city has disappeared from the face of the U.S.,” a senior White House official said in trying to explain the relatively modest effect the attacks were expected to have on the $10-trillion U.S. economy.


But in fact, the economic fallout from 9/11 has proved substantially greater -- and far more enduring -- than those early assessments suggested. It has been more like living through a hurricane that stubbornly refuses to move offshore or an earthquake that keeps right on rumbling.

Today, just as after 9/11, there is a lot of easy talk about a war’s likely -- and potentially bracing -- effect on the economy.

To be sure, no one is saying there would be no cost to a conflict. Washington insiders estimate that the tab for defeating Iraq, occupying the country and aiding regional allies such as Israel could run from $80 billion to $100 billion in the next six months alone. That could widen the federal budget deficit and send four decade-low interest rates back up again.

And, of course, if Middle Eastern oil fields are damaged, $2-a-gallon gasoline could become a regular -- and economically damaging -- feature of the American landscape.

But even with these caveats, many experts offer decidedly sunny accounts of the economic consequences of war. A quick U.S. victory, they assert, would hearten nervous investors and generally give American businesses and consumers reason to be confident once more.

In the present case, the most popular comparison is not to a hurricane or an earthquake but to the Persian Gulf War in 1990-91.

According to this line of thinking, just as Iraq’s 1990 invasion of neighboring Kuwait hammered an already declining U.S. economy, so its current defiance of American and U.N. demands to disarm threatens a weak U.S. recovery. And just as the U.S.-led expulsion of Iraq in early 1991 lifted America from recession, so a U.S.-led military campaign to expel Saddam Hussein would send the nation’s economic prospects rocketing.

“The removal of Saddam Hussein is the linchpin to peace, stability, growth and higher asset values,” declared Brian Wesbury, chief economist at Chicago investment bank Griffin, Kubik, Stephens & Thompson.

Flawed Analogies

The trouble is that the analogy between the Gulf War and the current situation is as flawed as the comparison of Hurricane Andrew to the collapse of the World Trade Center. The bottom line is that America is going to be hard-pressed to repeat its military success of a dozen years ago -- or reap the same kind of economic benefits.

The country profited last time because “the U.S. was able to achieve a decisive victory at essentially no cost to itself and little disruption to the world,” said David Hale, a veteran economist with Helix Capital, a newly formed Chicago investment firm.

But “it is far from clear,” he noted, that a new war would produce all -- or even any -- of these results.

The very fact that a country with a gross domestic product the size of Louisiana’s has managed to set off a diplomatic and economic stalemate of global proportions shows how out of scale the current confrontation has become even in advance of a shooting war.

Confusing matters further, U.S. goals this time around are much more complex than they were in the 1990s. The current Bush administration is gunning for conquest, the removal of Hussein and nation building, as opposed to simply throwing Iraqi troops out of Kuwait.

This ambitious agenda almost certainly would require a lengthy U.S. occupation of Iraq, which would increase chances of counterattacks abroad such as the 1983 Beirut barracks bombing that killed more than 240 Marines. Many also warn of a new era of terrorist threats against America at home.

In short, it’s going to be difficult, if not impossible, for the United States to achieve the “decisive victory” that Hale pegged as one of the keys to producing the economic benefits that flowed from the last conflict.

Meanwhile, America will enter the fray without an advantage that it has had for most of the last half-century -- others with whom to split the bill. The contrast with the Gulf War is especially striking.

In the early 1990s, Washington appointed an ambassador for “burden sharing,” who proved so successful at drumming up aid from the international community that the United States may actually have made money on the war.

But with diplomatic rifts over the latest conflict widening, the chance of repeating that performance is fading to zero. With it disappears the second element that Hale identified as crucial to producing economic benefits for the United States: fighting “at essentially no cost to itself.”

Global Ripples Seen

Arguably, the early 1990s confrontation should have been much more disruptive than the current conflict promises to be. The industrialized world still was unsettled by the recent end of the Cold War. America was in the midst of not only recession but also a savings-and-loan debacle that threatened its financial system.

By contrast, the current hostilities come as the United States is acknowledged to be the only remaining superpower and shortly after it elicited the sympathy of the world for suffering the 2001 terrorist attacks.

Yet to date, President Bush appears to have maximized political friction and, some worry, the danger of global economic disruption.

Just as such long-standing diplomatic institutions as the United Nations could end up being casualties of unilateral U.S. action against Iraq, so could the trade and monetary agreements that were negotiated in the wake of World War II and that have served as the mainstays of the global economy for 60 years.

If these arrangements were to weaken or fall, the economic disruption here and abroad would be tremendous. And recent predictions about a war’s positive effects on the U.S. economy would look as wide of the mark as the early estimates of 9/11’s consequences do 18 months after the fact.