The War Economy WAR IN THE GULF

February 03, 1991

Make no mistake about it: the duration of the current recession is directly tied to the length of the Persian Gulf war. This is one vital interconnection the Bush administration, its critics and most economists, from bears to bulls, seem to agree upon.

President Bush continues to insist publicly that both the war and the recession will be short. But the private fears of the White House are probably best reflected in Fed chairman Alan Greenspan's bleak warning that if the war goes on beyond three months, a drop in consumer confidence would abort any meaningful early recovery.

The Federal Reserve Board's Friday morning decision to drop its discount rate to 6 percent, its second half-point reduction in six weeks, was vivid evidence of how seriously the government views the situation. It could not have been an easy decision, especially with competitive German interest rates on the rise. But a jump in the unemployment rate to 6.2 percent -- the highest in six years -- plus Pentagon warnings that the war can last months, not weeks, goaded the Fed into action.

The White House, which has felt for months that restrictive Fed policies were a factor in pitching the nation into recession, must be pleased by the new stimulus for the economy. Mr. Bush had called for lower interest rates and had pleaded with strong banks to be more liberal with their lending as a means of stopping the credit crunch.

When it is revealed tomorrow, Mr. Bush's proposed $1.5-trillion budget for the fiscal year starting next October is unlikely to be much of a stimulus in itself. Under rigid spending caps imposed by last year's budget agreement, outlays for both domestic and "normal" defense needs will rise less than the inflation rate. However, the "off-budget" costs of Operation Desert Storm and the bailout of the the savings and loan system will push total deficit spending close to a record $300 billion.

Just how stimulative this will be is a matter of debate, especially with Pentagon arsenals so chock-full of weaponry that inventory drawdowns are far exceeding new orders. Contrary to the old notion that war is good for business, the present situation clearly suggests that the rapid consumption of U.S. resources in the Persian Gulf, plus the danger of oil-supply disruption, is very bad for the economy -- especially if the drain continues for more than 100 days.

The administration figures that $45 billion of the $60 billion cost for a 100-day war will be borne by Saudi Arabia, the Kuwaiti government in exile, Japan, Germany and other members of the anti-Iraq coalition. But actual receipts are lagging badly and putting pressure on an American economy that is hardly in the best of shape.

So for economic as well as human reasons, the nation has to pray this war will be over quickly. Obviously, service men and women in the gulf are making the greatest sacrifices. But the suffering on the home front that could be caused by a long war should be a sobering prospect for all Americans.

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