Will the US now attack Iran? Or Syria or North Korea? Learned articles are being written about this, but most are based on foreign policy considerations alone. In fact decisions are taken by politicians with very private agendas.
President Bush’s main aim today is to ensure he gets re-elected next year. That event may seem distant to Indians, but campaigning for the primaries has already started in the Democratic Party. A fresh war will imperil Bush’s re-election chances. For that reason alone, do not expect a fresh war before the 2004 Presidential election.
The main risks of war are economic. George Bush Sr won the Gulf war of 1991, yet lost the following 1992 election. Why? “It’s the economy, stupid,” was the winning strategy of Bill Clinton. Although Bush Sr won the war, a recession raised US unemployment. Democratic Party car stickers carried the famous witticism, “Saddam has kept his job. Have you?” By focusing on the economy, Clinton beat Bush Sr.
George Bush Jr will not want to repeat that error. When he attacked Iraq, he took a risk. Had Saddam blown up his oil-fields (taking the price of oil to $40-50 a barrel), had the war been long and nasty, the US might have suffered a fresh recession, imperilling Bush’s re-election. But his gamble succeeded: Iraqi oil-fields were not destroyed, and the war was short. The stock markets zoomed after the victory.
Yet the US economy looks shaky. Economic stagnation and job losses look possible even if recession is avoided. Stagnation can erode jobs only slightly less than mild recession.
Since Bush Jr got elected in 2000, the US has lost a whopping 2.5 million jobs, thanks mainly to the 2001 recession. Bush hopes for rapid GDP and job growth by 2004. Yet the signs are not propitious.
Look back to the experience of Bush Sr. The US economy recovered in 1992 from the recession of 1991, yet unemployment kept rising. This is a standard feature of recessions: even after the bottom of the economic cycle is reached, lay-offs continue in the first year of recovery although GDP rises because of productivity gains. Unemployment rose from 5.3 per cent in late 1990 to almost 8 per cent in mid-1992, killing the re-election of Bush Sr.
Today again, job trends in the US are grim. The economy has shed workers for eight quarters in a row. Unemployment, which reached a trough of 3.8 per cent in 2000, has increased to 6.1 per cent. The increase is almost as much as in 1992. GDP growth was only 1.6 per cent in the latest quarter, too slow to create new jobs. Bush’s tax cuts last year yielded only slow growth, and this year’s tax cuts may fare no better.
Why? The excesses of the last boom have not yet been fully liquidated. The stock market remains overvalued. The US current account deficit has increased to a record 5 per cent of GDP, very unusual after a recession. Rising consumer spending has been the driver of growth, but is based mainly on a housing boom that now looks like a bubble that could burst. A recent IMF survey suggests that property busts are even more damaging than stock market busts.
Possibly the most important reason for slow economic growth today is high energy prices. The US price of oil crossed $30 a barrel early in 2003 in expectation of a Gulf War, and an ultra-cold winter drove natural gas prices to a new high. The quick Iraq victory fuelled hopes that oil and gas prices would crash. That happened only temporarily. Today oil has again risen to $31 a barrel. Natural gas has crossed $6 per thousand BTU in summer, something unprecedented.
Why? For years, natural gas discoveries in the US have been less than the depletion of old fields, so scarcity has arisen. Many chemical industries based on gas may simply close down and shift to the Gulf, Malaysia or Australia. Fed Chairman Greenspan thinks high gas prices will continue, discouraging economic recovery. The high price of oil also seems now to represent genuine scarcity, a consequence of slow exploration in the low-price era of the 1990s. Iraq will restart production in a few months, but OPEC is likely to cut production when that happens. So oil could remain at $30 per barrel, which historically has heralded recession.
Bush Jr faces major economic risks in his re-election. Fresh military adventures, in Iran or North Korea, will greatly increase the risk of recession and unemployment. His political strategists will almost certainly advise him to win the election first and consider foreign adventures later. For now, Teheran and Pyongyang can relax.