Opinion: The Elusive Costs of War.(Cover Story)

Byline: Jeffrey E. Garten, Garten is dean of the Yale School of Management.

As America's occupation of Iraq takes a turn for the worse, there is a risk of widening collateral damage. A growing quagmire could roil politics throughout the Persian Gulf and broader Islamic world. It could further strain U.S. relation ships with its partners in the G7 industrial countries. It could embolden terrorists everywhere. Scenarios like these are obvious. But should we also be worried about the war's spillover to the global economy?

The relationship between war and economic prospects has never been straightforward. A case can be made that it was World War II, with its impact on manufacturing production, that pulled the United States out of the Great Depression. The requirements for supplying U.N. forces during the Korean War gave Japan the boost it needed to recover from total devastation in 1945. On the other hand, the Vietnam War had a number of negative effects, having ushered in a decade of both high inflation and economic stagnation in most of the Western world.

As a market, Iraq is small potatoes in a $30 trillion dollar world economy. True, it has huge oil reserves, but since the country has been under international trade sanctions for the last decade, its absence as a major petroleum exporter will not have significant impact on global markets for awhile. If the war delays Iraqi reconstruction, that, too, would cause barely a ripple in the much larger arena of international trade and investment.

The bigger danger of a long and difficult war is what it would do to politics and economics in the major industrial countries. In the United States, for example, escalating military costs will add to serious fiscal strains that already exist. Washington will have to spend hundreds of millions more dollars on the war and on homeland security. In order to get such funds appropriated by Congress, however, the Bush administration will need to buy off critics of the war by funding domestic social programs dear to them.

Widening U.S. deficits would require more financing from abroad. At the same time they could lead to a weakening dollar and possibly higher interest rates to keep foreign money flowing in. Escalating rates would undermine U.S. and global economic growth. They could also cause a withdrawal of funds from emerging markets as investors in Asia and Latin America seek higher returns on Wall Street.

The ...