Now, President Bush, how do we pay for it?

January 18, 1991|By Robert Kuttner

BUSH ADMINISTRATION economists are astonishingly sanguine about the economic costs of a Persian Gulf war. They have convinced themselves and the president that a war, to be won in a few brisk weeks, will be tonic for the economy. After the rousing victory, oil prices will tumble, consumer confidence will return, short-circuiting the recession.

The actual costs, of course, will depend on the contours of the actual war. But whatever happens, the costs will not be trivial, nor will they all be immediately obvious.

The most direct cost is budgetary. Now that the war is a shooting war, it will cost $1 billion to $2 billion a day. So even a short war will likely raise the annual cost to the range of $100 billion.

That in turn means that all previous estimates of the budget deficit are inoperative. As it is, the projected deficit for the current fiscal year has risen to over $300 billion. All of the political capital expended so painfully in last October's deficit-reduction deal is now down the drain. If Congress is serious about reining in the deficit, it must begin again.

A further round of deficit reduction will bite that much more deeply into programs that serve people. Medicare took the biggest single cut last year. Further deficit reduction means no new money for outlays that the public believes to be long overdue, such as better child care, repair of rotting bridges, roads, water systems, to say nothing of housing, crime, drugs, AIDS.

This is what economists call an "opportunity cost." Translated, that means that if you spend money on one thing, it isn't available for something else. Oddly, we can always "afford" war. Children, health, environmental cleanup -- somehow, these are never accorded the same urgency.

Moreover, unlike six months ago, the enlarged deficit crisis now takes place against the backdrop of a severe recession. Ordinarily, a war stimulates the economy. That is the one dubious silver lining. But this war will not bring with it a huge increase in military purchases.

Rather, this war is being waged with equipment "from inventory." The military has stockpiled some 7,000 tanks, hundreds of thousands of missiles and a cornucopia of other lethal hardware left over from the Cold War. A splendid little war is also a splendid way of getting rid of last year's models.

So don't look for a World War II-style stimulus to purchasing power. On the contrary, war fever has consumers intimidated, which causes us to defer purchases and deepens the recession.

Eventually, the military will want to resupply. In President Bush's "New World Order" (which looks suspiciously like yet another Pax Americana), the Pentagon will soon draw up a shopping list of new, costly generations of sand-resistant tanks, missiles, helicopters, fighter-bombers and the rest of an arsenal suitable to the new, post-Cold War theaters of combat.

Because of the immense deficit overhang, these purchases will not stimulate the economy either. Rather, they will come at the expense of domestic government outlay or they will be financed by new taxes.

Although a Persian Gulf war will not provide much of a spur to the economy, it could nonetheless generate inflationary pressures -- mainly by creating selective shortages, most notably on oil. Although several major oil companies announced price freezes yesterday, the world market price of oil predictably shot up as the first U.S. planes headed toward Baghdad. Experts predict oil prices will soar to the $40 to $60 per-barrel range.

That's not because of shortages; it is simply the way futures markets react to the prospect of greater uncertainty, by bidding up prices. If war does real damage to oil fields, pipelines and refining capacity in Saudi Arabia or even in Kuwait and Iraq, that will drive prices up even further.

In previous wars, government acted to allocate production in sectors vulnerable to inflation because of scarcity. Government has also paid for war through surtaxes, rather than printing money and inviting inflation.

In World War I, this effort was bungled. In World War II, it worked well. In Vietnam, Lyndon Johnson, desperately wanting both guns and butter, waited too long to support a surtax. The result was inflationary pressure that did damage for a whole generation.

George Bush, he of the speedboat, seems the most oblivious to these realities of all wartime presidents. Laissez-faire economics, debatable even in peacetime, is suicidal in wartime. If this war sends oil prices skyrocketing, it would be sensible to begin allocating oil supply and insisting on conservation, rather than trusting "markets" to do the job. But the administration has no such plans. Nor has it any plans for a war surtax.

The sanguine scenario only requires that everything go like clockwork on the battlefield. But if history is any guide, the economic effects of wars do not follow projections any more than military operations go precisely according to plan.

My dictionary offers two definitions of "sanguine." The second is "confident, optimistic." The first is "consisting of or relating to blood." We now know which definition applies.

Robert Kuttner writes regularly on economic matters.

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