An Iraq war's economic toll

Early estimates put the total cost as high as $200 billion, but economists say it's hard to figure the actual impact.

By , Staff writer of The Christian Science Monitor

If the US decides to invade Iraq, New York real estate broker Steven Shapiro knows what it means for him: "I don't think my family will be going overseas too fast," he says. "Oil prices will spike, and we'll be doing a lot less driving and we'll keep the thermostat down and wear a lot of sweaters."

But in St. Charles, Mo., there's a somewhat different tenor. Boeing Integrated Defense Systems is trying to boost production of the kits that make dumb bombs smart, and by this December, it will have increased its assembly line by 16 workers. "The expansion gives people stable employment for a longer time," says spokesman Bob Algarotti.

Such is the economics of war with Saddam Hussein. Some will benefit and some – such as the airline and travel industry – will be hurt. Because the effects of the war are so varied, economists say it's hard to figure precisely what the actual impact will be. For example, no one knows how long the war would go on. If consumers like Mr. Shapiro pull back, will the "terror tax" be enough to push the economy back into recession? How will Arab oil producers react?

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"It's not something you can run a computer program on. There are too many intangibles," says David Wyss, chief economist for Standard & Poor's in New York.

There are, however, some economic areas to watch:

• The oil price. OPEC producers recently decided to keep production steady, which helped maintain crude prices at just under $30 a barrel. But if oil were to spike to $50 a barrel, it would probably cause a global recession. "It's a significant increase, but not beyond the bounds of possibility here," says Mr. Wyss.

• Consumer confidence. Often when it drops for noneconomic reasons, it has less impact on buying. But a lot will depend on how long the war lasts. From the consumers' point of view, the shorter, the better.

• The stock market. For the last several weeks, investors have been nervously watching the parrying between Washington and Baghdad. Although a number of issues have been affecting stocks, the markets have largely been down since the rhetoric heated up. "A war is probably not good for the market," says Wyss.

• The disruption factor. Security at airports has already been heightened because of 9/11. Look for it to be kicked up a notch if the US goes to war. This could keep would-be passengers put, or at least force them to take slower modes of transportation. "A lot of people won't fly unless they have no choice," says Janet Harrah, director of the Center for Economic Development and Business Research at Wichita State University in Kansas. Security will also be ratcheted up at everything from football games to hockey matches.

Despite the uncertainties, hardly any economist thinks the cost of the conflict will be too onerous for the economy. The Gulf War cost about $80 billion, or about 1 percent of US gross domestic product. Early estimates put a second Iraq war between $100 billion and $200 billion – again about 1 to 2 percent of GDP. "We can't say the cost will be negligible. But we have plenty of unused capacity in the economy, so we'll get no excess demand-driven inflation," says Don Straszheim of Straszheim Global Partners in Santa Monica, Calif.

But estimating the cost of the war is also slippery for economists. Robert Brusca of the New York consulting firm Ecobest thinks there are too many intangibles, such as what kind of havoc President Hussein will wreak in the region. He wonders if Hussein will try to destroy oil wells, or shoot dirty bombs at Israel. With so many uncertainties, he says, "I think the impact on the economy is going to be bad. This war will not be a cookie- cutter win like the last one."

Recently in testimony before Congress, Secretary of Defense Donald Rumsfeld said that the cost of war would be relatively modest compared with the damage that terrorists could do to the economy: "The cost compared to 9/11 is so insignificant, compared to the loss of lives, compared to the billions of dollars that were lost in material things and in market values and in disruptions in people's lives, in not being able to fly or go places or do things, in the concerns of families."

Still, there is no doubt there will be economic ramifications, especially for certain sectors of the economy. One of the most hard-hit is likely to be travel and lodging. During both the Gulf War and after 9/11, the industry faltered. "An Iraq war would be a disaster for the travel industry," says Edward Hasbrouck, a travel consultant and author of "The Practical Nomad: How to Travel Around the World." "It's pretty clear it would push a lot of struggling travel companies that are already hard hit and push them over the brink."

That may be why the airline industry is lobbying Congress for aid, tax breaks, or some form of terrorism insurance. The House subcommittee on aviation held a hearing Tuesday on the airlines' plight. Rep. John Mica (R) of Florida estimates the industry has lost about $7 billion to $8 billion in the past year.

For the first six months of the year, IATA, the trade association for the airline industry, estimates that 71.4 percent of airline seats were filled with paying passengers. IATA estimates the industry needs 76.3 percent to break even. "Unless business picks up, the industry will be reducing capacity more significantly," says Mr. Hasbrouck.

On the other hand, defense contractors are growing. For example, Boeing is building a new 30,000-square-foot factory in St. Charles. Since the company has doubled production every year for four years, the old facility couldn't get the job done.

The company's suppliers, such as Lockheed, Honeywell, and Textron, are also ramping up production. As the product gets used, says Mr. Algarotti, it receives more attention from foreign buyers. "We should be at a higher level of production through the end of the decade," he says.

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