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JAMES FLANIGAN

When Gulf Bill Comes Due, Who Will Pay?

January 23, 1991|JAMES FLANIGAN

So, the Bush Administration won't hit Americans with extra taxes to pay for the Gulf War. Yet the bills are mounting--at least $500 million a day--and somebody will have to pay.

The Congressional Budget Office figures that even a short war will leave a bill of $27 billion, to be paid during the next two years.

Much larger Defense Department estimates run as high as $100 billion, but they mix normal budget expenditures in with special Gulf War accounts.

Who's going to pay those bills, and how? An excellent question, because in the answers are insights into where the war goes from here, the economic outlook and subtler matters besides.

The first insight is that the war could go on for a while. Lawrence Meyer & Associates, a St. Louis economic consulting firm that contributed to the Congressional Budget estimate, assumed four months' duration in its calculations. That's good news, not bad. It means time will be allowed for aerial bombardment to soften up Iraqi ground forces before engaging them; it means fewer U.S. and allied casualties.

Second, the money costs may be less than we suspect. The ultimate bill is a matter of accounting because, in business terms, the war is being fought from inventory. The million-dollar Patriot and Tomahawk missiles being fired in Iraq today were paid for years ago when they were produced. Thus, their price is not being included in Gulf War costs. But the cost of replacing the used weapons will be included, says Chris Varvares vice president of Meyer Associates.

Roughly $20 billion of the projected war costs are in this payment-pending category. And how many weapons actually get replaced depends on the postwar world situation.

The war cost also is very dependent on the price of oil; high oil prices drain the world economy. But oil prices are not high. Prewar fears that Saudi Arabia's giant oil fields would be damaged are fading. On Tuesday, oil stayed under $25 a barrel even though Kuwait's smaller oil fields were on fire.

Still, make no mistake: War is costly; keeping armies going is expensive. "There are three ways to finance an army," says one witty businessman: "squeezing the civilians, looting and pillage, and borrowing."

Saddam Hussein, for example, financed his army first by squeezing civilians; his country took in $20 billion a year from oil, but he spent more than half of it on weapons and military. Recently, he resorted to looting and pillage of Kuwait--which got him into war.

In the U.S. case, the Bush Administration has decided not to squeeze civilians directly by taxing them.

But war traditionally squeezes the civilian economy indirectly, through inflation. The government prints money to pay for the war; increased expenditure in defense production is not matched by increased output of goods that people wish to consume. Korea and Vietnam spurred inflationary spirals in the U.S. economy. Whether the Gulf War does likewise remains an open question.

There are factors reducing the burden on U.S. civilians. Saudi Arabia, for example, is paying for the food, fuel and water that the U.S. armed forces are using. And the food--$4.2 million worth per day--is produced in the United States. Kuwait has contributed $2.5 billion to Desert Storm so far. And the Saudis and Kuwaitis have troops in the field.

The United States is also trying to tap the civilians of Japan and Germany. Japan reportedly has been asked for $6 billion to $10 billion. So far, according to the Defense Department, Japan has contributed $634 million.

Ultimately, the United States will probably turn to borrowing, selling Treasury bonds to U.S. and foreign investors. But there is a danger in foreign creditors securing a stream of income from the U.S. war effort. It could create resentment, as the complex system of debts and repayments among allies and former foes after World War I became--in the words of economist John Maynard Keynes--"a constant source of international friction and ill-will. A debtor nation does not love its creditor."

A better idea, suggests economist William Niskanen, an adviser to the Reagan Administration and now head of Washington's Cato Institute, would be that "each major nation in the New World Order would make a contribution proportionate to the size of its economy.

"The United States, having contributed flesh and blood, shouldn't need to contribute money," he adds. But if it does, the U.S. proportional contribution to the hypothetical $27-billion cost of a short war would be $8 billion, and Japan's would be $5 billion.

What do such calculations say about the U.S. economic outlook? Watch the financial markets during the next few weeks. If inflation is in the offing, bond markets will be in turmoil with interest rates rising and prices falling--and stocks will fall as well.

Yet the opposite is happening today. Short-term interest rates are falling--Treasury bills are only a shade over 6%. Longer-term, five and 10-year Treasury bonds remain over 8%, but soon mutual funds will start buying them and rates will come down. Also, the Federal Reserve is easing up on money in an attempt to boost the economy.

The upshot: Many will share the cost of the war. But clearly, the financial cost does not have to be crippling.

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