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A Just and Affordable War
Oil, cash, and economy are not problems as we look to Iraq.


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Larry Kudlow

Will the much-anticipated war on Iraq disrupt the American economy? That’s highly doubtful. No matter what the pessimistic pundits say, the U.S. economy is slowly mending.

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A combination of lower business and personal taxes plus newly created cash from the Fed is already prompting a modest 3% economic rebound. The current level of gross domestic product is nearly $150 billion higher than the last quarter of 2000, or the peak of the 1990′s boom.

Inside the economy, profit margins are widening and top-line sales revenues are gradually moving up. Record-setting productivity is holding down costs. And an overly pessimistic stock market is beginning to catch up to a rise in corporate earnings. Skeptics proclaim a double-dip recession, but they are being proven wrong. Emblematic of business recovery, the Wall Street rally will continue.

Potential wartime economic problems center on oil, which is still a major lubricant for industry and commerce. Right now, oil futures predict lower, not higher, energy costs. The barrel price has already dropped $2 from its $30 peak, and the futures point to a $24 barrel. This positive movement hints at the tax-cut effect of lower energy costs borne by businesses and consumers. It’s a stimulant, not a depressant. It will energize growth, not dampen it.

Surely the U.S. and allied forces will quickly capture the Iraqi oil fields in the event of war. Already, intelligence sources report that U.S.-led special forces control about one-third of Iraq, with a relatively large contingent camped right outside of the northern oil fields around Kirkuk. More, massive British and American bombing raids have decimated air defenses and command centers in southern Iraq, paving the way for a large-scale allied incursion.

In other words, oil will not be a problem. Additionally, government officials and oil-industry chiefs from Russia and the U.S. have been meeting regularly to expand our oil-and-energy relationship. The U.S. Export-Import Bank will underwrite at least $100 million in sales of U.S. equipment and services to Russian oil companies. U.S. firms will help companies in and outside Russia to develop the Caspian Sea basin, which holds an estimated 230 billion barrels of oil.

Meanwhile, Russia is contributing to the U.S. strategic petroleum reserve. The reserve’s inventory is approaching 800 million barrels, enough to add 4 million barrels daily to world petroleum stocks for months if necessary. The U.S. government and private corporations are also looking to develop American petroleum interests in west Africa. All of these positives are helping sink oil futures.

Will the budget-cost of war pose a problem? Hardly. A recent study by Democratic staff on the House Budget Committee concluded that a war lasting 30 to 60 days could run between $48 billion and $93 billion. This assumes a U.S. force structure of one-quarter to one-half the size of the Persian Gulf War force, or up to 250,000 troops.

With U.S. GDP now standing at $10.6 trillion, even a $100 billion war is a drop in the bucket, capturing only 0.9% of national income. As economic recovery gathers force (with lower tax rates kicking in over the next four years), the war-cost share of GDP will slip to virtually nil. As the stock market recovers in the years ahead, trillions of dollars of newly-created wealth will render the so-called “war cost” to a level of statistical insignificance.

Above all, a just war to defend security and freedom is not the only critical factor regarding our long-term economic prospects. Economic policy is equally important. During the Vietnam period monetary policy was inflationary and tax policy was contractionary, giving birth to ugly stagflation. Many blamed the battle against the spread of communism in southeast Asia for the economic woes at home, but the mistaken application of liberal Keynesian fine-tuning was the culprit.

During the 1980s, President Ronald Reagan delivered the final coup de grace to Soviet communism with tax-cutting policies to re-ignite economic growth, and large-scale military-spending policies to restore the superiority American defense. The economy soared. At the end of the day, the Soviets lost because they couldn’t keep pace with American production. Free-market capitalism imposed the ultimate defeat on state-planning communism.

In the first decade of the new century, as President Bush sets a course of regime change and open-society pluralism in the Middle East, the only thing we have to fear is bad economic policy at home. Provided that tax-rates are held down, regulatory costs are minimized, stable money and prices are maintained, and trade expansion is kept intact, the economic consequences of the war on terror will remain benign as freedom and democracy spread to the darkest corners of the world.



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