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The price of war and peace for US economy

Stock market has rallied in part on hopes for diplomatic solution in Iraq. A war could be costly to the economy.

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The recent stock market rally - a 21 percent increase in the Dow since the five-year low reached in early October - has been fueled by a variety of factors, not the least of which is that US troops are not yet marching on Baghdad.

A drop in jobless claims, profitable signs from high-tech firms and manufacturing, and an overall growth of confidence are also propelling the economy forward. But economists worry that a war with Iraq may derail the nascent recovery. Their concerns center on federal deficits, oil prices, and, in turn, the stock market.

The threat of war - "heightened geopolitical risk" - is already a reason for the "soft patch" in the economy, Federal Reserve Chairman Alan Greenspan has said.

With this in mind, economists are buoyed by the possibility that the United States' dispute with Iraq could be settled by diplomacy.

But if there is fighting, economists are unsure what it will cost the US. The only public estimate by the administration of the cost of an Iraqi war is $100 billion to $200 billion over several years, made by Lawrence Lindsey, the economist in residence in the West Wing. That's small compared with the size of the entire US economy.

"I would be very doubtful if the impact on the economy is more than modest, largely because this is not Vietnam or Korea," Mr. Greenspan said. A war's cost would be "a concern, but not an overriding one."

Mr. Lindsey's estimate is within the ballpark for a short war, private economists say. But it doesn't include the costs of a prolonged occupation of Iraq, if necessary.

Thinking how massive rearmament for World War II lifted the industrial nations from the Great Depression, some believe a war with Iraq will boost the faltering American economy.

To many economists, that view is false. The uncertainty of conflict has slowed consumer spending and business investment, overwhelming any stimulation to the economy from today's extra defense spending.


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