Iraq and the U.S. Economy

During the fall of 2002, the Bush administration was busy developing plans for an invasion of Iraq. As a part of this effort, the Treasury Department was directed to study the possible economic impact of a Middle East war. The briefing was not intended for the president, however, but for Vice President Cheney, who was coordinating Iraq policy. Treasury's research resulted in a September 11, 2002, memo to Secretary O'Neill preparing him for his meeting with Cheney. The document, written by assistant secretary Richard Clarida, found that a war was unlikely to "derail the expansion," but it did project a worst-case scenario that could reduce GDP growth by 0.9 percent, raise unemployment by three-tenths of a point, and increase inflation. Clarida's forecast, however, deals only with the impact from fluctuations in the price of oil. Not until the last two paragraphs of the four-page memo does he acknowledge that the economic impact of war might not be limited to rising oil prices. War could have unpredictable consequences for the American economy. Consumer confidence and financial markets, he writes, might also fall at the outbreak of hostilities. "For large declines in confidence," he wrote, "it seems likely that consumer spending would be affected over and above what is shown in the previous table. Likewise, the effects on equity markets, corporate credit markets and currency markets are hard to project but could be important." Indeed, they would be important. Starting in the mid-summer of 2002, when the administration began to build its public case for war, investor and consumer "confidence" -- that ineffable quotient that drives the U.S. economy -- has been linked to the situation in Iraq. It some ways, it still is.