The economic case for war now assumes that most people are preparing–mistakenly–for a long, ugly conflict. So, fearing the worst, traders are jacking up the price of oil (imposing a “war premium” of about $5 a barrel), consumers are losing confidence, bankers are raising the cost of loans and investors are fleeing risky stock markets for safer havens, like gold. They will all be pleasantly surprised when the war begins, or so this argument goes. Bush’s “coalition of the willing” will quickly gain the upper hand, oil prices will drop and stocks will rebound, giving a lift to consumer confidence and spending. Indeed, in the first gulf war, a quick allied advance sent global oil prices down from $32 to $21 per barrel in the biggest one-day drop ever, helping to set the stage for the boom of the 1990s. Now, with oil prices once again hovering above $30, it could happen again if victory comes quickly. “The German economy, the French economy, the Mexican economy, the Japanese economy all are arguably in recession, and it’s related to–and created by–this looming war,” says Mark Zandi of Economy.com. “It will be a cathartic event if things go as scripted. It will be a catalyst for quick improvement in the economy.”
The argument that war is now economically more advantageous than peace has some powerful backers. In November, a panel of economists from major investment banks–Goldman Sachs, Deutsche Bank and Salomon Smith Barney–tracked the likely course of oil prices, consumer confidence and other variables through four possible war scenarios. They found that the U.S. economy would follow a stronger growth path in the event of a quick allied victory than if there is no war at all. Building from there, a London group of corporate managers called the Institute of Directors released a report last week saying that a short war would push oil prices back to $20 and stock markets up 5 percent this year, helping to restore business and consumer confidence around the world. “In economic terms, a short war is better than no war, or no regime change, because of the removal of uncertainty,” the IoD concluded. Consensus forecasts now call for a quick war before March, followed by a drop in oil prices and the beginning of a broad global upswing by June.
Global investors are among the most eager to get the war over with. “People are uncertain about the uncertainty,” says Paul Donovan, global economist with UBS Warburg. “It’s a complicated mess, which is why the markets are so volatile now.” For example, are investors fleeing stocks because they’re worried about Iraq, or because they’ve lost more than $4 trillion on Wall Street in the past two years and are done waiting for the turnaround? Goldman Sachs chief economist Bill Dudley says it would make no sense for U.S. investors to dump stocks because of the mere possibility of a war that is almost sure to take place “over there,” and to last only a short time. The problem, he says, is that people are selling, and “no one knows” whether Iraq or market fundamentals are the real cause.
A quick war would thus clear up one, but only one, source of global uncertainty. Another big debate in markets around the world right now is over the “war discount.” Have investors already discounted the costs of war from the price they’re willing to pay for stocks? If they have not, stock prices could crash when the war begins. If they have, stock prices could boom. A portfolio manager in Hong Kong who controls $1.1 billion for a European fund notes that emerging markets including Asia outperformed world averages last year, but are now wavering because of the war: “I thought war risk was priced into the equities already, but I’ve changed my mind. I think when war happens, there will a 30 percent drop in stocks. The markets have been moving sideways because of this wait-and-see attitude.” The one thing everyone seems to agree on is that the faster the war comes–and ends–the better for all emerging markets.
Governments around the world are now bracing for the economic fallout of a war that they, too, hope will be short. Asia is particularly dependent on oil from the Middle East and exports to the United States–both likely casualties of war. Quietly, nations in the region have been stepping up efforts to build their oil reserves, or (in the cases of Malaysia and Thailand) discussing ways to boost domestic demand if American consumers stop spending in wartime. Already, war fears have depressed foreign investment in every Asian nation but China, says Ifzal Ali, chief economist at the Asian Development Bank. “We can’t win,” says Ali. “Even without a war, countries in this region are already paying a price, and this will only be heightened.”
Europe is even more limited in how it can respond to the potential shock of war. If anything, says Daniel Gros, director of the CEPS think tank in Brussels, the high taxes of the Eurozone and its cap on government spending are depressing demand in a slumping economy. Normally, the European Central Bank could ease the inflationary effect of rising oil prices by raising interest rates. But higher rates would choke off hope for reviving European growth, so the bank is stuck. Last week, when German Economy Minister Wolfgang Clement lowered his 2003 GNP growth forecast to just1 percent, he said this dismal outlook did not include the “incalculable” but clearly “long-term negative effects” of war in Iraq.
Indeed, even in Germany, the nation diplomatically most dead set against war, there is a growing sense that if an attack is inevitable, best get it over with soon. Mark Wells, Deutsche Bank senior economist in London, figures a six-month delay would lower Eurozone growth 0.6 percent through oil prices alone. “We don’t want to be wagging the dog, but there are definite costs to delaying military action,” he says.
There are certainly no economic benefits to dragging out any war. During World War II new factories sprouted up to power the American military, and helped drive the United States out of the Depression. Now, with stocks suffering their worst setback since the 1930s, there’s no hope of a similar boost. This war will be fought with hardware “off the shelf,” says Hank Cox of the National Association of Manufacturers. In general, defense stocks are getting little lift from the war on terror, because many defense contractors are also heavily involved in the troubled commercial aviation business. The same was true during Gulf War I, notes Paul Perkins, an economist at BCA Research in Montreal, when only Raytheon got a boost because people saw some of its cruise missiles on TV.
And even if you accept the short-war scenario, it’s not entirely clear a global recovery would follow. Many of the world’s worst troubles, from Japan’s bad loans to Germany’s labor market and America’s bubble hangover, predate jitters over Iraq. So how could even quick victory over Iraq ease the troubles? Consider just one key indicator: when U.S. consumer confidence hit a nine-year low last week, analysts cited the Iraq factor. Yet confidence began a downward creep on the Friday before September 11, the event that put Iraq back on the radar. Surveys show Iraq is only a minor consumer concern compared with jobs, housing and stocks.
The world’s hopes for recovery still rest on the United States, where businesses have fallen into a funk. Zandi figures U.S. corporations would be investing about $50 billion more per year if it were not for war fears. Spending on information technology fell for two years after the bubble crashed, and is now flat. Investors are hiding in the safety of big names like IBM, Microsoft and Intel. Bruce Huber of Broadview investment bank says the value of external tech investments in the United States and the European Union fell by 60 percent, or $296 billion, in 2002, compared with the pre-bubble year of 1998. Huber blames “geopolitical uncertainty,” the current code for Iraq, but stops short of suggesting that regime change will somehow fix the tech industry. There are limits to what even easy victories can accomplish. That’s worth remembering in the rush to war.
title: “The Waiting Game” ShowToc: true date: “2023-01-14” author: “Mariko Nix”
These ideas aren’t going anywhere, however: the filibuster is here to stay. “Republicans… know someday the tables are going to turn, and when they’re in the minority, they don’t want to be without any weapons,” says a Senate Democrat. And though Bush is losing a few nominations, overall he’s making the courts conservative. The Senate has confirmed 124 Bush appointees, nearly all presumed pro-lifers. Republicans thought Democrats wouldn’t dare filibuster the Hispanic Estrada, and two women. But the Dems’ core interest groups are putting pressure on the leadership to take a stand against nominees they believe aren’t in the mainstream on a woman’s right to choose, affirmative action and civil rights. Democrats are particularly outraged that James Leon Holmes, the former president of Arkansas Right to Life, is up for a district-court judgeship. He thinks women should be “subordinate” to their husbands, and that “concern for rape victims is a red herring because conceptions from rape occur with approximately the same frequency as snowfall in Miami.” By skirmishing over lower-level federal judges, Democrats are telling Bush they have the political muscle to do battle over the next Supreme Court vacancy.
Battles over court nominees have intensified since 1996, when the Republicans unveiled a deliberate strategy to slow President Bill Clinton’s appointees. The GOP put secret holds on nearly 60 nominees. When Clinton left office, the vacancies on the federal bench were at a record high; today, they are the lowest in 13 years. But Republicans say the system is broken, and Bush accuses Democrats of damaging judicial independence. That’s a hard case to make: of the 13 circuit courts in the country, Republican appointees control eight, Democratic appointees control three, and two are divided between the parties.
