At the end of December, the White House Office of Management and Budget estimated the cost of the war could range between $50 billion and $60 billion. A higher-end estimate of up to $200 billion is also floating around Washington, endorsed by, among others, Larry Lindsey, President Bush's former senior economic adviser.
Doom spinners point to these numbers and prophesy ruin.
Relax. Even the higher estimates would have no significant economic impact. There are two ways that government budget deficits impact the economy: inflation and higher interest rates. Fortunately, we have little to fear right now. Inflation (hovering at about 2.2%, according to the consumer-price index) is not a threat, and not only are interest rates historically low, they are unlikely to rise significantly even with a $200 billion war bill.
Why? Partly because the economy is slow. With business still working off the excess capital investments of the technology boom, private-sector demand for credit is relatively soft. Short term, there is room for more government debt in the money markets. And war with Iraq is a one-time expense -- an expense, incidentally, that even at $200 billion will increase our $6.3 trillion national debt only about 3%. Raising the permanent level of government spending by $200 billion a year could reignite inflation and would certainly force interest rates up; a temporary increase does not pose the same kind of threat.
Moreover, the high-end estimates are probably wrong. The Bush Administration has so far surprised critics by its ability to build international support for its policy in Iraq. Even Syria joined in the unanimous vote on the U.N. Security Council's tough Resolution 1441 mandating renewed and expanded arms inspections in Iraq. If allies don't pay for the cost of the military campaign, Iraq -- and the United States -- can expect much more help with reconstruction costs. "Iraqi postwar reconstruction will not solely be an American enterprise," says a well-placed U.S. government official. "Although the sale of Iraqi oil will help offset almost all of the reconstruction costs, United Nations member states have made preliminary preparations to provide the necessary funds for the humanitarian, economic, and physical costs of rebuilding Iraq."
Some small companies face real threats from war with Iraq. They are not macro-threats like recession, inflation, and rising interest rates, but are more localized. Businesses that operate in communities near military bases will suffer as U.S. forces are deployed overseas and local economies are stressed. National Guard call-ups are another potential worry for employers. Key workers could be asked to report to duty for prolonged and unpredictable periods. Somewhere between 100,000 to 200,000 reservists from the National Guard may be used either to help the war effort in Iraq or to replace the vacancies left by deployed active-duty officers at home. Although no official plan has been released by the Bush Administration, using more National Guard reservists for occupation and reconstruction duty in postwar Iraq would enable full-time army forces to concentrate on domestic security and other global issues -- such as any confrontation with North Korea. Small companies are much more vulnerable to the loss of key employees than large corporations; providing relief for small businesses impacted by any long-term National Guard call-up could be a priority issue for politicians in both parties when facing the 2004 campaign.
Those are the costs of war, but there are benefits too. There will be a flood of new orders to small companies connected with military operations and reconstruction spending in Iraq. The first Gulf War taught the federal government a valuable lesson: American prowess in 21st-century combat depends largely on small-company high-tech products. And high- tech products provided by small companies were often significantly better designed and better priced than large-company goods.
The pace of innovation is faster in small companies as well. Small companies produce almost two and a half times as many innovations per employee as large companies, according to a 1990 study by economists Zoltan Acs and David Audretsch. As a result, the military has been able to improve submarine sonar-processing equipment, update satellite and radar components, increase the speed and accuracy of target-recognition munitions, and protect missile silos from nuclear shocks.
Appreciation for the technical potential of small companies has led to two federally funded programs to enhance small-business access at the Pentagon: the Small Business Innovation Research (SBIR) program and the Small Business Technology Transfer (STTR) program. With $773 million in funding last year from the Pentagon, SBIR assists early-stage R&D projects at small technology companies, while STTR (funded by the Pentagon at $42 million) fosters cooperative R&D projects between small companies and research institutions.
The increased federal interest in small-business technology encourages small outfits to find commercial applications for their military innovations. The result is success stories like the one at Savi Technology in Sunnyvale, Calif. This company recently developed the SaviTag, a radio computer tag that can be attached to military cargo containers to track the containers' location and contents.
The SaviTag was created with $2.5 million in SBIR funding, but Savi Technology has since received military contracts totaling more than $185 million. According to the Pentagon, use of the SaviTag would have saved approximately $2 billion if it had been available during the Gulf War. Savi Technology has also been able to market the SaviTag in the private sector, specifically in the commercial trucking, rail, and shipping industries. Savi's private-sector sales (half of all sales) are estimated to reach up to $20 million by the end of the year.
A new war with Iraq will provide further opportunities for small-business products to prove themselves in combat and lead to large restocking orders for small businesses involved in producing items such as components for joint direct attack munitions (JDAMs), ballistic-missile targeting systems, meals ready to eat (MREs), and contamination suits.
War Economies: During the past five decades, for the most part, the gross domestic product has not shown any consistent drag during periods of conflict. But GDP did dip at the time of Gulf War I.
It may not be politically correct to say so, but historically wars have more often helped American business than hurt it. The two world wars and the Civil War ended up boosting the economy; arguably the Gulf War, which paved the way for low energy prices throughout the 1990s, had a similar impact. Even the cost of the long war in Vietnam didn't hurt the economy as much as Lyndon Johnson's tax policies did.
