April 2003
By ROBERT PEGG
With the U.S. war in Iraq winding down, it is becoming clearer that the outcome will entail a high human cost and additional uncertainty for the economy. Few if any economic scholars would endorse the view that war must bring prosperity. Some experts have predicted that a relatively short war would lead to lower oil prices and increased consumer confidence. The removal of uncertainty could help some businesses to make investment decisions. However that may take some time and the war could lead to higher mortgage rates, deepening government deficits and lower economic growth.
In past wars, such as World War II, the Keynesian thinking was that the Depression in the 1930s had persisted because New Deal spending had not been enough to sufficiently restart the nation's economy. The war forced the government to abandon fears of large-scale deficit spending. World War II boosted demand for unemployed workers and under-utilized factories. The nation's capacity, for example, to build automobiles was only being half used, so it was relatively easy to pump up production of military equipment such as tanks and planes. The wartime demand for military production was so strong that after the war, many economists feared that the economy would quickly slip back into the recession.
However, postwar demand came from a revitalized consumer and their rapidly multiplying children, the baby boomers. The Cold War also kept military spending higher. At the time, government spending was viewed as a positive factor because the Depression left scars on the public psyche, producing the fear that, without continuous large government outlays, the private economy would falter. Mainstream Keynesian theory held that government spending was needed to bolster the economy during recessions. Few economists argued that the government should keep spending large sums even when the private economy was expanding. The stagflation of the 1970s and the prosperity of the 1990s reversed these popular perceptions. The 1990's boom demonstrated that a strong economy can persist not only amid budget surpluses, but also after substantial post-Cold War military cuts.
A comparison of the period around the Persian Gulf War in the early 1990s may be informative. In the months leading up to the current conflict, financial markets and the economy performed much as it did then. Between the time Iraq invaded Kuwait in August 1990 and the U.S.