Will the much-anticipated war on Iraq disrupt the American
economy? That's highly doubtful. No matter what the pessimistic pundits say,
the U.S. economy is slowly mending.
A combination of lower business and personal taxes plus newly
created cash from the Fed is already prompting a modest 3 percent economic
rebound. The current level of gross domestic product is nearly $150 billion
higher than the last quarter of 2000, or the peak of the 1990s boom.
Inside the economy, profit margins are widening and top-line
sales revenues are gradually moving up. Record-setting productivity is
holding down costs. And an overly pessimistic stock market is beginning to
catch up to a rise in corporate earnings. Skeptics proclaim a double-dip
recession, but they are being proven wrong. Emblematic of business recovery,
the Wall Street rally will continue.
Potential wartime economic problems center on oil, which is
still a major lubricant for industry and commerce. Right now, oil futures
predict lower, not higher, energy costs. The barrel price has already
dropped $2 from its $30 peak, and the futures point to a $24 barrel. This
positive movement hints at the tax-cut effect of lower energy costs borne by
businesses and consumers. It's a stimulant, not a depressant. It will
energize growth, not dampen it.
Surely the United States and allied forces will quickly capture
the Iraqi oil fields in the event of war. Already, intelligence sources
report that U.S.-led special forces control about one-third of Iraq, with a
relatively large contingent camped right outside of the northern oil fields
around Kirkuk. More, massive British and American bombing raids have
decimated air defenses and command centers in southern Iraq, paving the way
for a large-scale allied incursion.
In other words, oil will not be a problem. Additionally,
government officials and oil-industry chiefs from Russia and the United
States have been meeting regularly to expand our oil-and-energy
relationship. The U.S. Export-Import Bank will underwrite at least $100
million in sales of U.S. equipment and services to Russian oil companies.
U.S. firms will help companies in and outside Russia to develop the Caspian
Sea basin, which holds an estimated 230 billion barrels of oil.
Meanwhile, Russia is contributing to the U.S. strategic
petroleum reserve. The reserve's inventory is approaching 800 million
barrels, enough to add 4 million barrels daily to world petroleum stocks for
months if necessary. The U.S. government and private corporations are also
looking to develop American petroleum interests in West Africa. All of these
positives are helping sink oil futures.
Will the budget cost of war pose a problem? Hardly. A recent
study by Democratic staff on the House Budget Committee concluded that a war
lasting 30 to 60 days could run between $48 billion and $93 billion. This
assumes a U.S. force structure of one-quarter to one-half the size of the
Persian Gulf War force, or up to 250,000 troops.
With U.S. GDP now standing at $10.6 trillion, even a $100
billion war is a drop in the bucket, capturing only 0.9 percent of national
income. As economic recovery gathers force (with lower tax rates kicking in
over the next four years), the war-cost share of GDP will slip to virtually
nil. As the stock market recovers in the years ahead, trillions of dollars
of newly created wealth will render the so-called "war cost" to a level of
Above all, a just war to defend security and freedom is not the
only critical factor regarding our long-term economic prospects. Economic
policy is equally important. During the Vietnam period, monetary policy was
inflationary and tax policy was contractionary, giving birth to ugly
stagflation. Many blamed the battle against the spread of communism in
Southeast Asia for the economic woes at home, but the mistaken application
of liberal Keynesian fine-tuning was the culprit.
During the 1980s, President Ronald Reagan delivered the final
coup de grace to Soviet communism with tax-cutting policies to re-ignite
economic growth, and large-scale military-spending policies to restore the
superiority of American defense. The economy soared. At the end of the day,
the Soviets lost because they couldn't keep pace with American production.
Free-market capitalism imposed the ultimate defeat on state-planning
In the first decade of the new century, as President Bush sets a
course of regime change and open-society pluralism in the Middle East, the
only thing we have to fear is bad economic policy at home. Provided that
tax-rates are held down, regulatory costs are minimized, stable money and
prices are maintained and trade expansion is kept intact, the economic
consequences of the war on terror will remain benign, as freedom and
democracy spread to the darkest corners of the world.