Economic casualties of war in Iraq
By Alice M. Rivlin

Alice Rivlin, Ph.D., a senior fellow at the Brookings Institution and former vice chair of the Federal Reserve, wrote this commentary for Bankrate.com.

The prospect of war with Iraq inevitably raises the question of what such a war would cost? Most answers focus on the budgetary costs, but it is the economic costs that would have the biggest impact both on Americans and the rest of the world.

War is not a certainty and, even if it occurs, would not necessarily be an economic disaster. Nevertheless, we should be conscious of the fact that a war could be very costly in both human and economic terms.

The U.S. recovery is extremely fragile. Housing and consumer spending have been keeping the economy growing, albeit slowly, thanks to low interest rates and fiscal stimulus. But uncertainty about war and terrorism has postponed the rebound in capital spending that a robust recovery requires.

War and a spike in oil prices could shatter both consumer and investor confidence and send the U.S. economy back into recession. Most of the rest of the world economy also is growing very slowly at the moment. A U.S. recession could precipitate a downward economic spiral around the world.

The budgetary costs of a war with Iraq depend on the size and mix of air and ground forces, how long the war lasts and the strength of the occupying army required to maintain order when hostilities cease.

Given the overwhelmingly superior U.S. military force, it is unlikely that those budgetary costs would run much over $100 billion, perhaps $150 billion at the outside. Big numbers, but they do not dominate a $2 trillion budget or a $10 trillion economy.

Economic losses, however, could dwarf a war's budgetary costs. The big question for the economy over the last 18 months has been, will the consumer stay in there and keep the economy moving long enough for capital spending to come back and the recovery to gather steam? The answer is less likely to be "yes" if we embark on war.

The recovery is still very fragile. Consumers have remained sufficiently optimistic despite uncertainty about the possibility of war to keep on spending enough to keep the economy growing slowly and avoid big increases in unemployment.

But there has been no resurgence of capital spending. Uncertainty about war and terrorism has put a lot of capital spending decisions on hold, and that's likely to continue as long as uncertainty exists.

If the recovery does not gather steam, a repeat of the Gulf War experience is certainly possible. We could get a significant spike in the price of oil, especially if war results in the destruction of oil fields. Our economy isn't as dependent on oil as it was 10 years ago, and sources of oil are more diversified, so the economic impact of losing Iraqi oil might not be devastating. But the psychological effect of a spike in oil prices and other consequences of actual hostilities could be severe.

Indeed, it is the psychological impact of war on a fragile recovery that seems most worrisome with respect to both consumer and business spending. The world is a dangerous place, and if we're moving into war and possibly escalating terrorism, we'll see cautious consumer and capital spending and maybe a double-dip recession.

Alice M. Rivlin is the Henry Cohen Professor at the Milano Graduate School of the New School University and a senior fellow in economic studies at the Brookings Institution.

She is the director of the Greater Washington Research Program at Brookings. Ms. Rivlin served as vice chair of the Federal Reserve Board from 1996 to 1999. She was director of the White House Office of Management and Budget from 1994 to 1996 and deputy director from 1993 to 1994.

-- Updated: March 14, 2003