TheIraqi assault on Kuwait and the united global response isolating Saddam Hussein completely alters economic prospects for the United States and other major countries -- but it could have been much worse.
What if the Israelis had not bombed the Osirak nuclear reactor in Iraq in 1981, saving Saudi Arabia or other targets Saddam might choose, from the immediate danger of atomic holocaust?
What if the Soviet Union were still by definition the "evil empire" pumping arms into Iraq, instead of moving a destroyer toward the Persian Gulf, to help out its new ally, the United States?
What if President Bush had followed the advice of the Japan-bashers and pushed Prime Minister Kaifu into a retaliatory mood instead of cementing strong and supportive international relationships?
What if OPEC's two prior oil shocks in 1973 and 1979 had not forced the consuming world to conserve energy, develop other sources of oil and led to the establishment in this country of a Strategic Petroleum Reserve, capable of giving us six to 12 months of breathing space?
Clearly, the world is in better shape to meet the test of containing a fanatic like Saddam than it might have been. Yet the adverse economic impact on the American economy is going to be severe, whether or not the Persian Gulf crisis erupts into a full-scale war. Ironically, the setback to prospects of enduring peace comes just as it seemed that a phase-down of Cold War military expenditures would produce a "dividend" for civilian purposes.
The immediate effects on the American economy are these:
We face a new burst of inflation triggered by higher oil prices, posing a dilemma for the Federal Reserve Board. Even before Saddam's invasion of Kuwait, the United States was tipping into recession, needing a monetary transfusion in the form of lower interest rates. In the wake of a bulge in the jobless rate last month to 5.5 percent and weakening real-estate markets, the economy might have gotten some help from the Fed. Now, as oil prices boom, the Fed has to move more cautiously.
The deficit-reduction package is in jeopardy. Higher oil prices are the equivalent of a tax increase for business and consumers, with the revenue going to oil producers, not the U.S. Treasury. There are second thoughts about the wisdom of a new tax increase and further sharp cuts in the defense budget. The talk on Capitol Hill veers instead toward new tax breaks to stimulate domestic oil production.
For the near term, the hysteria about oil prices and supply should be put into perspective. Ample oil stocks in commercial hands and the Strategic Reserve mean that there is no excuse for this week's gouging at the oil pumps -- and the Department of Justice should join with various states in quick action to identify and punish the profiteers.
For the longer term, if a protracted stalemate or war in the Middle East sharply reduces oil supplies, the Bush administration must have a contingency plan for rationing gasoline and heating oils. There is no middle ground, but free-market ideologues around Bush are likely to temporize. Meanwhile, Sen. Bill Bradley (D-N.J.) and others are right to bring pressure on those in the Bush administration who hesitate to tap the Reserve for fear of depressing domestic oil prices.
Much depends on how tightly the nations united against Saddam twist the economic noose they're shaping with a naval blockade, a trade embargo and a freeze of financial assets. There were good signs yesterday: Turkey shut down the Iraqi vital pipeline link to the Mediterranean, and the flow of oil slowed through another Iraqi pipeline, in Saudi Arabia, to the Red Sea. Other oil producers, such as Venezuela, must be encouraged to boost supplies.
The new, growing economic power of Europe and Japan means they will have a greater share in and responsibility for establishing the dimensions of the global economic response. So far, there has been remarkable unity among the Big Three. But much of the power behind economic sanctions resides in the strength of Europe and Japan, which were much more subservient to the oil weapon during the first two oil shocks.
It is significant, says New York economic guru Henry Kaufman, that the dollar did not soar as it usually does during the first stages of a global crisis until there was news of troop movements yesterday. The market expects that Europe and Japan will boost interest rates sharply in the next few weeks, while the United States is not able to do so because of the threat of recession. This is another indication that Europe and Japan are better situated than we are to absorb the economic blows ahead and might come out of the current crisis with even more relative strength than they now enjoy.
It is harder to see the twists and turns if there is an actual military explosion in the Middle East. Much will depend on who seizes the initiative: whether Saddam moves on Saudi Arabia or the united powers take him out first. The Saudi's acceptance of a U.S. military force on their soil is a good beginning.