Economists fear war could harm progress

A diplomatic solution in Iraq is best for the economy, experts report.
CHRISTIAN SCIENCE MONITOR
The recent stock market rally -- a 21 percent increase in the Dow since the five-year low reached in early October -- has been fueled by a variety of factors, not the least of which is that U.S. troops are not yet marching on Baghdad.
A drop in jobless claims, profitable signs from high-tech firms and manufacturing and an overall growth of confidence are also propelling the economy forward. But economists worry that a war with Iraq may derail the nascent recovery. Their concerns center on federal deficits, oil prices and, in turn, the stock market.
The threat of war -- "heightened geopolitical risk" -- is already a reason for the "soft patch" in the economy, Federal Reserve Chairman Alan Greenspan has said.
With this in mind, economists are buoyed by the possibility that the United States' dispute with Iraq could be settled by diplomacy.
Cost of war
But if there is fighting, economists are unsure what it will cost the United States. The only public estimate by the administration of the cost of an Iraqi war is $100 billion to $200 billion over several years, made by Lawrence Lindsey, the economist in residence in the West Wing. That's small compared with the size of the entire U.S. economy.
"I would be very doubtful if the impact on the economy is more than modest, largely because this is not Vietnam or Korea," Greenspan said. A war's cost would be "a concern, but not an overriding one."
Lindsey's estimate is within the ballpark for a short war, private economists say. But it doesn't include the costs of a prolonged occupation of Iraq, if necessary.
Thinking how massive rearmament for World War II lifted the industrial nations from the Great Depression, some believe a war with Iraq will boost the faltering American economy.
Many disagree
To many economists, that view is false. The uncertainty of conflict has slowed consumer spending and business investment, overwhelming any stimulation to the economy from today's extra defense spending.
"The stock market was relieved that we might not go to war," says William Quan, chief economist of Wall Street's Mizuho Securities USA.
Analysts are even encouraged by the prospect that, if there is war, it will be delayed to late winter or even spring.
"On the whole, later is better than sooner," says David Wyss, chief economist with Standard & amp; Poor's Inc. in New York.
The hope is that the vigor of the economic recovery will pick up in coming months, thus ameliorating the shock of war to the economy.
Impact on oil prices
One key reason that these economists see a diplomatic solution involving effective weapons inspections as best for the economy is the impact of war on oil prices.
When the rhetoric from the White House was threatening, the price of oil moved above $30 a barrel last month, up 40 percent for the year. With the rhetoric now softened and the acceptance of the United Nations' resolution by Iraq, the price has dropped back to about $25.
Peace means more money in the pockets of Americans and others abroad as the price of gasoline and energy decline, helping keep inflation down.
"Peace would give the world economy a boost," says Kate Warne, senior energy analyst with Edward Jones, a brokerage firm based in St. Louis.