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US economy: A casualty of
war
By Ahmad Faruqui
With
both houses of the US Congress having passed resolutions
giving President George W Bush authority to make war on
Iraq, it comes as no surprise that a recent Newsweek
poll indicates that the war against Saddam Hussein has
displaced the economy as the number-one priority for
American people.
Congress has also passed a
military spending bill by an overwhelming majority
(409-14) to raise military spending by 11 percent to
US$355 billion. The bill would pay for new Aegis
destroyers, C-17 transportation aircraft, Blackhawk
helicopters and missile defense, in addition to
providing a 4.1 percent pay raise for military
personnel.
However, the overwhelming majorities
in the House and Senate mask the considerable dissent
that prevails among the American people and their
elected representatives. California's representatives
were about evenly split on the issue (28-24), and the
two senators were deadlocked. Representative Nancy
Pelosi of San Francisco, who is the Democratic Whip in
the House, called attention to the cost of the war on
the US economy. She noted in her speech on the Iraq
resolution that the markets did not like the uncertainty
that was being created in the buildup to what is
increasingly looking like the inevitability of war.
Referring to the speech of President George W Bush in
Cincinnati that preceded the House and Senate votes, she
said that he spoke about rebuilding Iraq's economy after
the US liberation, when he should have been focusing on
building the fragile US economy.
There are
deep-rooted economic and social problems on the home
front that represent a clear and present danger to
America's national security, and which have nothing to
do with al-Qaeda or Iraq. The person on the street is
more concerned about whether he or she will be employed
tomorrow, and whether he would be able to earn enough to
get out of debt, than with whether or not Iraq poses a
military threat to the US.
On the eve of the
recent annual meetings of the International Monetary
Fund and the World Bank, US Treasury Secretary Paul
O'Neill sounded an upbeat note, "I remain convinced that
we are on a path to 3 to 3.5 percent real annual growth
by the end of the year." The reality could not be more
different. According to Professor David Levine, a tech
downturn coincided with a recession for the first time
last year. In the spring of 2001, the dot-com bubble
burst. Then came the events of September 11, and the
accompanying rise in spending on homeland security. The
$10 trillion US economy grew at the anemic rate of 1.3
percent in the second quarter of this year, belying the
Bush administration's forecasts about a V-shaped
recession.
Scared by incessant talk about
fighting a multi-year war over several continents with
an invisible enemy, and facing joblessness, consumer
confidence has begun to erode. The University of
Michigan's index of consumer confidence has declined
four months in a row and stands at 86.1 percent, its
lowest level since November 2001.
In the eyes of
many economists, the stock market remains the best
predictor of future economic growth. Barring a
surprising recovery during the fourth quarter of this
year, it is likely to show three consecutive years of
decline for the first time since 1939-41. Hardly a week
has gone without the market displaying volatility, and
declining even on days when no new bad news about
earnings or corporate scandals has surfaced.
The
Dow Jones index is at a five-year low, and has been
hovering in the mid 7,000s for the past several days.
The technology heavy NASDAQ composite index is at a
six-year low. The broad based Standard & Poor's 500
index is in the low 800s. If these trends persist,
within the next two years, one can envision the Dow
dropping to 5,000, a value enjoyed by the NASDAQ just
two years ago. Similarly, the NASDAQ may drop to 1,000
and the Standard & Poor's to 500.
The fall
in stocks can be traced to a complete loss of investor
confidence in corporate leadership and lower
expectations of future earnings growth. Inflated balance
sheets drove the market to record levels, and as news
broke about one corporate scandal after another,
involving giants such as Enron, WorldCom and Global
Crossing, the market beat a retreat to more realistic
valuations.
The US unemployment rate stands at
5.7 percent. It is much higher in the technology and
telecoms sectors. The number of Americans who have been
unemployed for more than six months stands at 1.47
million, its highest level since 1994. This number is up
80 percent compared to a year ago.
The upshot of
economic stagnation is that the US poverty rate has gone
up to 11.7 percent. With a population of 284 million,
this amounts to 33 million Americans living below the
poverty line. This number is very large, when compared
with the incidence of poverty in other developed
economies.
To ward off another recession, the
Federal Reserve Bank has lowered short-term interest
rates to 1.75 percent, the lowest level in more than 40
years. Many in the business community no longer view Fed
Chairman Alan Greenspan as a maestro, and some even
wonder if his magic touch was an illusion.
The
big question is how will the coming war against Iraq
affect the US economy. There appear to be more downside
risks from this conflict than upside benefits. Even
before the war has begun, the Bush administration is
faced with the prospect of deficit financing to cover
increased military spending. The Democratic staff on the
House Budget Committee estimate that a war with Iraq
might cost $93 billion.
This is just the direct
cost of the war. It does not include the indirect costs,
such as treating soldiers who may be afflicted with some
mysterious ailment. More than a 100,000 veterans of the
Gulf War developed a painful syndrome comprising
multiple symptoms, and to this day they remain without a
cure. An even greater indirect cost of the war would be
a US recession that may follow the war. Since the US has
served as the engine of growth for the world economy,
the recession may well become a global one. According to
David Wyss, chief economist of Standard & Poor's in
New York, America's past four recessions were triggered
in varying degrees by events in the Middle East. Spikes
in the price of oil caused the recessions during the mid
1970s and early 1980s. The Gulf War caused a major spike
in oil prices, bringing on a recession that doomed
George H Bush's chances for re-election. And last year's
recession can be traced in part to events originating in
the Middle East.
The price of oil, at $30 a
barrel, is up by 45 percent compared to last year. If
this price hike is sustained, it could shave off 1.2
percent percentage points off the annual growth rate in
the US, according to the IMF. The IMF is forecasting US
economic growth at 2.6 percent for the year, down 0.8
percent from what it was forecasting in April.
According to Macroeconomic Advisers, a firm
based in St. Louis, if war with Iraq causes oil prices
to rise to $41.50 a barrel early next year, and the
stock market falls by more than 6 percent, the US would
slip into a recession, and the jobless rate would stay
above 6 percent for the entire year. The impact of a war
on the travel industry would be unequivocally negative.
American Airlines CEO Don Carty says that the war would
be like having an "economic anvil dropped on the
industry".
Former vice president Al Gore, who
had disappeared from the public eye since his near
victory in the November 2000 presidential elections, has
made two very blunt speeches recently about the Bush
administration's policies. The first speech, focusing on
foreign policy, was given at the Commonwealth Club of
California. This was followed0 with a speech at the
Brookings Institution focusing on the Bush
administration's economic policies. Gore said that the
administration had been delinquent in addressing the
serious problems facing the American economy. ''How can
it be essential that we go to war prior to the election,
but absolutely fine to wait until after the election
before we take any action to deal with the economy? The
hard truth is there is a crisis of confidence in US
economic leadership throughout the world, and this lack
of confidence has become in itself an obstacle to global
economic recovery.''
Gore said that the country
had a weak economy, faced a crisis in financial markets
and was moving closer to war. He asked how Bush was
going to pay for the war, homeland defense, social
security and medicare all at the same time. The
government's financial surplus had vanished, he said,
and the nation had lost a quarter of the stock market's
wealth in less than two years. Gore said that the
president had "tried to create the impression that our
economic problems are primarily due to the terrorist
attacks". Bush was "like a lost driver who won't stop to
ask for directions".
Gore's speeches earned him
the ire of the Republican Party. A White House spokesman
dismissed his first speech as being "irrelevant". The
spokesman said that Gore was not even in touch with the
mainstream of his own party, let alone with the
sentiments of the American people. On his second speech,
Senate Republican leader Trent Lott said, "I guess he's
trying to find some way to become relevant for 2004. But
I think he's missed the boat."
The fact
remains that Gore
brought to the surface some genuine concerns that have
been lost in the headlines about the military threat
posed by Iraq to American security. Representative Jim
Leach, a Republican from Iowa, opposed Bush on Iraq
because calls and e-mail messages to his Congressional
office were running overwhelmingly against the war.
A new Pew Research Center poll has found that
American voters, by a 2-to-1 margin, believe that Bush
could be doing more to help the economy, and they want
candidates to talk more about their domestic worries
than national security issues abroad.
The
president has been forced to taking note of this
burgeoning issue. He used his weekly Saturday radio
address to say, "Confronting Iraq is an urgent matter of
national security. America's economic security,
especially the creation of good jobs, is also an urgent
matter requiring presidential and congressional action."
There is, of course, a big difference between
adding a topic to one's list of action items, and
actually doing something about it. Unlike weapons of
mass destruction, it is not possible to hide an economic
recession. From his father's experience, Bush Junior
knows that unless he is able to turn the economy around
during the next year, he will feel the heat from the
voters in the presidential elections of 2004, regardless
of the outcome of the war.
His best bet is to
obtain a conclusive victory in a short war against Iraq,
ending the uncertainty in US capital markets, and
dropping the world price of oil. That may be the primary
reason why US Defense Secretary Rumsfeld has asked his
generals to rewrite their Iraqi war plans to obtain
faster results.
(©2002 Asia Times Online Co,
Ltd. All rights reserved. Please contact content@atimes.com
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