War with Iraq seems inevitable, with or without the support of the UN. The economic costs of such a war could be huge, both in direct American outlays for war and its aftermath, and in the indirect spillovers on the world economy. This war would take place against a background of weak economic conditions globally, and would exacerbate those weaknesses, perhaps throwing the world economy into recession. The economic outcome of war could well depend on the diplomatic context. If America acts alone, the likely costs of war to the world economy will be higher than if it has the backing of the UN.
The costs of war must be balanced against the costs of alternative actions. A high cost of war is certainly not a case for inaction, especially in the face of a serious risk that Iraq could obtain, and eventually use, weapons of mass destruction. Yet pursuing war where diplomatic means - weapons inspections, threats of retaliation in the face of Iraqi aggression, readiness of the UN to act if dangers from Iraq become imminent - might suffice could result in huge and avoidable economic (as well as other) costs.
The traditional textbook view of war is that war stimulates an economy, at least in the short term. But that simple view of wartime economics is too narrow to describe the possible effects of an Iraqi war. We must also recognize that a war with Iraq, even a limited war, could profoundly disrupt the international flow of goods, services, and investments upon which our global economy now rests.
These disruptive effects would not only dampen production, but would undermine investor and consumer confidence and thereby limit both private investment and consumer spending. The direct macroeconomic stimulus that could arise from military spending may be overwhelmed by the uncertainties and disruptions that would accompany military conflict.