Why War Won't End Our Jitters.(impending war and the U.S. economy)(Column)

Let's call it the "excuse du jour." For three years, we've heard serial explanations for the economy's weakness. The latest is a looming war with Iraq. Aside from increasing oil prices, the war specter (it's said) has created huge uncertainty that's causing companies and consumers to postpone big spending decisions. Once the uncertainty lifts, we'll get a decisive recovery. Don't count on it.

Since mid-2000, the U.S. economy has grown at an annual rate of 1.3 percent. Some quarters have been up, some down and some nearly stagnant (the growth rate for the last quarter of 2002 was a mere 0.7 percent). Every economic sputter inspires a new theory. The dot-com collapse. The "popping" of the stock "bubble." The trauma of September 11. Corporate scandals and shattered investor confidence. And always: a strong recovery lies just ahead.

There's a pattern here. It involves psychology more than economics. We prefer temporary explanations to a grimmer possibility: that the U.S. economy faces prolonged slow growth--or stagnation. Better to believe that, once "temporary" problems are settled, the economy will spring back. After the dot-com funerals, things will be fine. If investor confidence is shot, then we'll throw corporate crooks in jail and "reform" accounting.

The war-with-Iraq theory fits the pattern and reigns in high places. Last week, the Federal Reserve endorsed it. (In a statement, the Fed said that "aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses." An "improving economic climate" would emerge when the risks disappeared, as "most analysts expect.") But there are two problems.

First: temporary problems often aren't temporary. Accounting scandals didn't kill investor confidence. Low profits and big stock-market losses did. Maybe corporate "reforms" can cure the first. But they can't cure low profits and the resulting portfolio losses. In the third quarter of 2002, U.S. corporate profits were 10 percent below their peak in 1997, says the Commerce Department. Likewise, the dot-com collapse was more than a temporary setback. It symbolized an ongoing absence of commercially viable--and needed--innovation.

The thinking now is that a rapid victory over Iraq will mean lower oil prices and less uncertainty. Perhaps--or perhaps not. Consider a report from economists at Goldman Sachs. It says that a war could drive up oil prices by $10 to $15 a barrel, from today's price ...