War with Iraq will impact U.S. economy

NASHVILLE, Tenn. – With the Bush administration warning that “time is running out” for Saddam Hussein to comply with demands to disarm, prospects for a war against Iraq are looming large.

Whether the administration makes its decision based on the report submitted by the United Nations weapons inspectors t the end of January or ties its timetable for action to other events, one thing is certain: even the prospect of war is having an effect on the economy.

A few thoughts. Vanderbilt faculty are available to offer commentary and insight into what effect the prospect of war – and outbreak, should it happen – will have on the U.S. economy.

* War would depress economy, and threat of it may even be hurting markets now. The prospect of war and the uncertainties involving the outcomes of modern wars have usually had a depressing effect on U.S. markets, at least in the short term, says Peter Rousseau, associate professor of economics, who studies the financial markets from a historical perspective.

“Declines in the market surrounding the outbreak of World War I (when the markets actually closed) and the fall of France during World War II were considerable at first, but U.S. markets usually have recovered quickly and strongly after the nation’s role in the conflicts became clear.

Prolonged weakness in the current U.S. financial markets, though certainly not initiated by war prospects, may to some degree now be related to them.”

* One thing’s for sure: oil prices will spike. The real question for the economy concerns the war’s likely impact on oil prices, according to David Parsley, associate professor of economics at the Owen Graduate School of Management and an expert in international finance and the global monetary system.

“There was a sharp spike in the real price of oil in 2000 which greatly contributed to the recession of 2001, and there was a shorter – though much steeper – spike around the time of the Gulf War,” he said.

In the event of a new war, the same sort of oil price spike would occur, and its effect on the economy would depend on how long the conflict lasted.

Differences. “The difference in what we’re facing now vs. what happened around the time of the Gulf War is notable, however. The first Iraqi conflict began as the economy was heading into a recession, and the short duration of the war created an ebullience that accelerated the recovery.

Now, the 2001 downturn in the economy is behind us; there have been four strong quarters of real GDP growth subsequent to the relatively mild downturn of 2001, so the uncertainty surrounding the possibility of a new war can only hamper the current recovery.”