A stock market commentator recent noted "the commonly held view that stocks will rally and oil prices will plunge as soon as bombs start dropping." Another alluded to the view "that stocks soar once the uncertainty over Iraq is resolved -- either through military action or through a peaceful settlement." An economist on CNBC promised the economy would rebound "once we get the Iraqi situation resolved."

These comments assume the start of war would "resolve uncertainty." That is because uncertainty was oddly defined as wondering whether or not the United States will attack Iraq. That is surely one of the least uncertain prospects in a world of ubiquitous uncertainty. It is no coincidence that stocks collapsed worldwide as uncertainty about "a peaceful settlement" virtually vanished. Investors rushed into "safe" gold and Treasury bonds, driving bond yields to a 44-yield low (bonds are safe only if you like to buy high and sell low). Markets clearly anticipate serious economic damage from war.

Once we define actual war worries more sensibly than the mere probability of war, it is obvious that the beginning of war cannot possibly be the time when "uncertainty over Iraq is resolved." That is when the most ominous uncertainties begin. War may increase risks of terrorist counter-attacks in the United States and Britain, for example. But stocks have fallen just as sharply over the past month in Japan, Germany and France. That suggests it is higher oil prices, rather than terrorist reprisals that have mostly accounted for anxieties depressing world stocks. That is potentially good news because high oil prices are something we can easily do something about, as I explain later.

Opinions about the economic impact of war are unavoidably tainted by opinions about its desirability, making it difficult to separate propaganda from analysis. Some say an Iraq invasion would be over in weeks, because Iraqi troops and government officials are thought to be eager to surrender. Others say laying siege to Baghdad, a city the size of Los Angeles, could be as risky as "Blackhawk Down" and prolonged for many months by U.S. commitments to minimize civilian casualties. After getting past that urban warfare hurdle, we would then face uncertainties about refugees and occupation.

Iraq's southern Shia, western Sunni and northern Kurdish tribes have been held together by brute force, and they may prove no more cohesive a "nation" than Yugoslavia. Some Iraqis who welcome liberation may violently resist occupation. Despite heroic talk about building a model democracy in Iraq, just keeping the place from coming unglued could be a chore.

Army Chief of Staff General Eric Shinseski estimates that occupation may require "several hundred thousand" troops. Central Command had earlier predicted that up to 200,000 troops would be needed for occupation. Top Defense officials nonetheless hope 100,000 would suffice. My judgment is that at least 200,000 would be needed for at least a year or two, which raises another uncertainty: Would US voters put up with that?

Proponents of war define just about anything as a weapon of "mass destruction," but what happens to U.S. and world support for a prolonged occupation if U.S. troops (who lack the scientific training of U.N. inspectors) fail to turn up much of anything? Alternatively, what happens if invading troops discover that Iraq really does have effective chemical weapons -- aimed at them -- so the invasion becomes far more difficult and deadly than we have been led to expect. What if Saddam proves as difficult to snare as bin Laden?

Starting a war resolves none of these uncertainties. That explains why estimates of the budgetary costs of war and occupation have a very wide range. William Nordhaus, an economist at Yale, has estimated that war, reconstruction and occupation could cost the U.S. government anywhere from $151 billion to nearly $1.6 trillion. The government keeps estimates below $100 billion by assuming no unpleasant surprises and ignoring related costs (e.g., bribing nations for U.N. votes).

My judgment is that the costs would be closer to $200 billion. Because the expense is temporary and unpredictable, it is appropriate to leave it out of the federal budget and smooth out the financing with a mix of nonmilitary spending cuts and debt. Continued...