Economics of War
WHEN war in the Gulf started last week, the stock market in the United States went bonkers. Marxists, and there are still some around, might charge that capitalists were rejoicing at the prospect of making money from conflict. Actually, investors were looking beyond the fighting to peace. When the Dow Jones industrial average soared 145.29 points, its biggest weekly point gain in history, the market had decided the war would be short. Investors relish peace because it would revive consumer confidence, maintain last week's drop in the price of crude oil, and lower interest rates, thereby perking up the economy. Indeed, some economists predict peace would end the recession in the US. In turn, economic recovery would boost corporate profits.
Lower crude prices would help the majority of developing countries reliant on imported oil, but hurt some oil producers, such as Mexico, Venezuela, and Nigeria that have had revenue windfalls during the Gulf crisis. Cheaper oil could also give the economies of Western Europe and Japan a modest boost.
To offset fluctuations caused by the war, economic ministers of the Group of Seven industrial countries agreed this week to stabilize world financial markets.
Speaking strictly in economic terms, the war so far has been affordable to the US. It is costing the US alone an estimated $600 million a day in this phase of primarily air activity. If ground war begins, costs could go as high as $2 billion per day.
The hundreds of Tomahawk cruise missiles that have been fired, costing $1.3 million apiece, are coming from stocks. Considering the size of US defense inventories and the end of the cold war, such weapons may not need to be replaced.
Further, Saudi Arabia and the Gulf emirates are picking up some war costs, and the Germans and Japanese are rightly being pressured to increase their share of the cost. Before war broke out, the Congressional Budget Office estimated that it could add from $17 billion to $35 billion to the Pentagon's fiscal 1991 budget. That would worsen the deficit. But it is an amount a $5.5 trillion economy can manage.
US policymakers cannot count on eventual peace alone to revive the economy. Alan Greenspan, chairman of the US Federal Reserve Board, warned in a Wall Street Journal interview last week that the market's euphoria could be premature, that the war isn't over. He also rightly expressed concern about weakness in the US money supply figures. The Fed must move to get money, the fuel for the economy, growing again or not even peace will revive economic activity.