The collapse of the Baker-Aziz talks in Geneva moves the United States and its shaky alliance closer to war with Iraq, but it leaves so many questions unanswered that the Bush administration can't see clearly what effect actual hostilities will have on the U.S. economy.
For the moment, officials are betting that if war happens, it will turn out to be a short, decisive one. House Armed Services Committee Chairman Les Aspin (D-Wis.), after consultations with the Pentagon, published a detailed analysis of a "limited objective agenda," meant primarily to drive Iraqi forces out of Kuwait with air power.
A survey of economists here and in New York produces a nearly unanimous view that a short war, as sketched by Aspin, would perhaps confuse and frighten consumers and financial markets briefly, with a modest negative effect on the overall economy.
While the end of such a war could generate a burst of euphoria and optimism, partially restoring consumer confidence, it would still leave the nation facing a myriad of enormous problems, notably a financial system studded with failing banks and thrift institutions.
The traditional fiscal stimulus associated with earlier wars such as World War II or Vietnam is not likely to happen this time, unless the war with Iraq lasts more than six months, resulting in a fuller mobilization of the economy -- including a military draft.
Bush administration officials face so many unknowns in how a gulf war will actually turn out that they conclude that contingency economic plans are useless. Their attitude is wait and see, and steady as we go. Their biggest economic policy concern is that the Federal Reserve Board might react either to oil-induced inflation or to the prospect of boosted defense expenditures by reversing the easier monetary policy it belatedly has set in motion to counter recession.
"To the extent that wartime means a fiscal-based expansionary impulse, the Fed will be less interested in holding rates down, and that would be adverse" for the economy, Massachusetts Institute of Technology professor Robert Solow said in an interview.
Brookings Institution economist George Perry believes that "if there is a long, drawn-out war, say, if fought for a year or more, it could have substantial fiscal effects on the private sector. If it lasted a couple of years, as it did in Korea, you could have preemptive consumer buying. But I think that's unlikely, and that you are likely to have the opposite -- that is, consumer uncertainty."
Economists note that consumers indulged in a huge volume of durable goods purchases prior to the onset of recession last summer, much of it financed by credit. They will have little incentive to renew a buying binge when faced with wartime anxieties -- including the uncertainty of further reserve call-ups or a later manpower draft.
Most analysts expect that oil prices will shoot up as war breaks out, accelerating inflation. Until now, the impact of the allied nations' embargo on Iraq has not unduly disturbed oil markets or supplies.
Harvard University professor Benjamin M. Friedman noted that at worst, oil prices have averaged only about $10 a barrel higher than pre-Kuwait invasion prices, meaning an annual added cost of about $20 billion. That was not pleasant, but was manageable in a $5 trillion economy.
But if oil prices should zoom to $45 a barrel -- or to $60, as some fear -- it would have a much more serious impact, even for a temporary period, boosting costs throughout the economy. At those levels, higher-priced oil could reduce gross national product by up to 2 percent.
Bush administration officials have consistently pressured the Fed over the past year to loosen up its monetary policy. They feel the Fed was slow off the mark last fall to counter clear signs of weakness. Another criticism -- heard here and among financial outsiders -- is that Fed Chairman Alan Greenspan has followed market trends, instead of showing leadership.
Administration officials believe that the Fed should have aggressively lowered interest rates, dropping the so-called federal funds rate, in effect forcing banks to lower their prime lending rates.
Friedman, who plans to offer bold testimony this week before the Senate Banking Committee forecasting that the nation faces -- war or no war -- a "disruption of the orderly functioning of the financial system," is highly critical of the Fed under Greenspan.
"I don't understand the Fed these days," said Friedman, a monetary specialist. "They have fallen behind the momentum of the downturn, and seem to me to be playing with the fragility of the financial system. We're skating dangerously close to the danger of a real rupture of the financial system."
Friedman charges that Greenspan and weak Fed governors have allowed themselves to be dominated by stronger regional bank presidents -- members of the policy-making Federal Open Market Committee -- who "are hawks on inflation."
Friedman also suggests that the Fed is unpredictable. It could even decide, he said, to use war -- if it comes -- as a reason to play "catch-up," dramatically easing monetary policy.
One horrific scenario -- although he says it doesn't have a high probability -- is offered by C. Fred Bergsten, director of the Institute for International Economics: "If the war turns out to be more prolonged than expected, and especially if doubts are raised about fulfilling the budget package, the dollar could fall sharply."
To stem the decline, the Group of Seven industrial nations could offer some support in exchange markets. But given Japanese and German concerns about inflation, a G-7 effort probably would fall short. In that situation, market interest rates would probably soar. Bergsten suggests that the Fed might have to push interest rates up further, thereby putting additional pressure on already weak financial institutions.
Administration officials, who in the past have urged an easier monetary policy on the Fed, are not now making any public assumptions about the probable course of Fed action in wartime. They insist that despite internal controversy, Greenspan's job -- his term as chairman expires this August -- is not at stake.
But an icy debate between Bush administration officials and the Fed looms as a good possibility if the Fed should reverse the present course of monetary policy. Even assuming a successful, short, Aspin-style war with Iraq, the nation at the end of it will still face an unsettled domestic agenda, including the problems of its weak financial institutions.