- PORTLAND, Maine (Reuters)
- The United States can bear the financial cost of whatever action against
Iraq is needed, U.S. Treasury Secretary Paul O'Neill said on Monday, after
a top White House economic adviser said that price tag could run as high
as $200 billion.
-
- "Importantly, (President Bush) hasn't said we're
going to war. He said he's determined that there's going to be a regime
change (in Iraq) and so we'll see how this unfolds," O'Neill said
after a speech in Portland.
-
- "Whatever it is that's finally decided to be done,
we will succeed and we can afford it," the Treasury chief, who is
on a short swing through New England and New York to discuss the president's
economic agenda, said during audience questions.
-
- The potential economic and fiscal cost of military action
against Iraq -- in the form of greater defense spending, rising oil prices
and investor uncertainty -- has become a hot topic as the drumbeat of U.S.
calls for action against Iraqi leader Saddam Hussein gains in volume.
-
- Bush economic aide Lawrence Lindsey told the Wall Street
Journal he estimated the United States may have to spend as much as an
"upper bound" of 1 percent to 2 percent of its gross domestic
product on a war with Iraq.
-
- With U.S. GDP running at about $10 trillion a year, that
translates into a one-time cost of $100 billion to $200 billion, considerably
higher than a preliminary private Pentagon estimate of about $50 billion,
the Journal said.
-
- White House officials showed surprise at Lindsey's estimates
and described his assessment as "premature."
-
- Later on Monday O'Neill said he thought the newspaper
made more of Lindsey's numbers than the White House aide had intended.
"The president hasn't decided if he'll do anything," O'Neill
told reporters after touring a factory in Nashua, New Hampshire.
-
- "Until you've decided what, if anything, to do,
it's not possible to put a cost on it. I don't know what Larry was thinking
and I don't know if he agrees with the way he was characterized."
-
- FLEETING PAIN
-
- While the financial costs sound high, economists, officials
and even Federal Reserve Chairman Alan Greenspan have said that unless
the war is prolonged, the economy will suffer only fleeting pain from such
a campaign.
-
- Lindsey told The Washington Times there were a number
of possible forms that U.S. action against Iraq could take.
-
- "But under every plausible scenario, the negative
effect is quite small relative to the economic benefits that would come
from a successful prosecution of the war," he said. "The key
issue is oil, and a regime change in Iraq would facilitate an increase
in world oil (that would reduce prices)."
-
- Oil prices have surged on concerns about potential U.S.
action in the Middle East, which some fear could lead to supply disruptions.
International benchmark Brent crude touched a year-high, while U.S. crude
last month rose to a 19-month peak. Prices slipped back slightly on Monday.
-
- While economists and Greenspan say the U.S. economy is
less vulnerable to oil price shocks than in the past, those in 1973 and
1974, the late 1970s and early 1990s "were all followed by recessions,"
according to a report on the U.S. Energy Information Administration Web
site.
-
- "The pressure of energy prices on aggregate prices
in the economy created adjustment problems for the economy as a whole,"
the report said.
-
- The government is due to report its first full-year budget
deficit since 1997 for the fiscal year ending this month and the costs
of a war will likely receive close attention.
-
- Lindsey dismissed the economic consequences of even the
substantial spending he estimated might be necessary, saying it would not
have an appreciable effect on long-term interest rates or add much to the
federal debt, the Journal reported.
-
- 'DROP LIKE A STONE'
-
- Some economists appeared to agree with Lindsey's take
on the overall economic impact.
-
- Roger Kubarych, senior economic adviser for the Americas
at Hypo-Vereins Bank, sees the impact from any confrontation as temporary,
in part because he thinks Iraq will acquiesce to UN weapons inspections.
If there is a war, he said, it could be won quickly. He also said Lindsey's
numbers on the potential cost sounded high.
-
- "I don't think it will be a big impact. The stock
market will go down and oil prices will go up right at the beginning. ...
This will scare people and they will become risk-averse," Kubarych
said. " Once the war is clearly won, oil prices will drop like a stone,"
he added, noting there was already a war premium in oil prices.
-
- Greenspan was dismissive of the economic damage an action
against Iraq could wreak, unless hostilities were prolonged.
-
- "If that's the case, then we could run into difficulties,"
the Fed chief told the House of Representatives Budget Committee last week
under questioning by lawmakers.
-
- He said the 1991 Gulf War was the only useful historical
guide to the possible impact of any new campaign. The Gulf War was a short-lived
affair, in which the United States started bombing Iraq on Jan. 16, 1991,
and sent in ground troops on Feb. 23. Just four days later, Iraq was defeated.
-
- "As soon as it became apparent that the war was
going to be over quickly, the (oil) markets came down very dramatically,"
Greenspan said.
-
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