|Calculating the Uncertain|
|Topic||Productivity and Growth|
|Key Words||Recession, Economic Growth, Budget Deficit|
The possibility of war with Iraq is generating much discussion and speculation
about its likely impact on the U.S. The first Gulf War was very costly,
and resulting higher oil prices helped to push the U.S. into recession.
The impact of a war on the U.S. economy would largely result from higher
oil prices, lowered stock prices, changes in consumer spending and federal
government spending. While economists are being asked to provide answers,
there is sufficient uncertainty concerning how the war will play out that
any answers provided are naïve guesses.
A second area of concern is how government spending would be affected. Increased use of military manpower and material would boost government spending, providing some stimulus to the economy. Depending on the duration and strategy of the war, there could be a considerable outlay of dollars that would add to projected budget deficits. U.S. allies covered the major share of the cost of the Gulf War, but this is not likely to happen this time.
Macroeconomic Advisors LLC, a St. Louis forecasting firm, released a
forecast of the macroeconomic consequences of a war with Iraq. Assuming
oil prices rise initially by $15 the first quarter and decline thereafter,
stock prices fall 6 percent and consumer confidence falls as well, economic
activity would fall at a 0.7 percent annual rate for the first quarter
and would lag predicted growth for the first 3 quarters of the year. Unemployment,
resulting from a war, would be one-half percent higher than the no war
(Updated October 10, 2002)
|Source||John M. Berry, "Economists Weigh the Uncertainties Arising From War With Iraq," The Washington Post, September 21, 2002.|
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