April 7, 2003	Monday	Safar 4, 1424

As the war started on March 20, 2003, stocks rallied worldwide in the hope that the war would be a quick and a short one following which peace would be ushered in to make political climate safe and conducive for business investment and growth all over the world.

Since stocks have a tendency to sometimes respond simplistically or naively to world events, the stock market activity slowed down as soon as the realization dawned that the world was “closer to the beginning of the war than to its end” a la US Secretary of Defence Donald Rumsfeld. As the thought of a long drawn out war sent waves of anxiety across the world, an economic slowdown was soon envisaged by the analysts.

Most of this is based on the assumption of the war’s negative impact on business and investment outlook and thereby on key economic indicators. However, sordid it may sound, fuelled by defence and related production, Britain experienced full employment during the Second World War and Labour rose to prominence in national decision-making for all times to come thereafter.

Against the backdrop of current dreary world events, consumer spending would indicate a slowdown even in the USA where reportedly 70 per cent of the population is supporting President Bush currently during the state of war. This support may change depending upon the progress in war, American casualties, their resolve and patience which remains fluid and subject to a host of factors, and the war’s economic and political outcomes at another point in time. Irrespective of the level of support, war’s immediate devastation and destruction remains much more visible than its long-term ‘gains’ that their policy makers envision in the future. As the rubble and smoke impairs the ability to see into the future, people’s concern and levels of anxiety divert their attention away from routine consumption activity.

Also, prices of a crucial commodity of oil are expected to rise which will not only create pressure on household budgets directly but also indirectly as it also feeds into the cost of production thereby jacking up the prices of manufactured goods. This would then have a spill-over effect on to other interlinked markets. Consumer goods’ prices would go up due to a cost-push instead of a demand-pull effect thus depressing market-demand further. As inventories pile up, business investment is likely to remain depressed due to not just a decline in market demand but also because of bleaker predictions about the macroeconomic indicators.

President Bush sought a tax cut as the war started. This request must have been surprising to those who were worrying about how the war would be financed. A few days into the war and the US President put up a request for $75 billion to fund the war. It is yet to be determined how the war bill will be financed. However, as for the earlier request of a tax cut, the Congress allowed him half the amount in tax cuts that he had requested. To this extent, the impact would be expansionary. The net effect of this fiscal measure coupled with the manner in which the cost of war will be financed is not known yet. However, through his tax cut proposal, the President acted on both the economic and the political fronts. That is, to not only provide a fiscal stimulus but to also attempt to arrest the decline in political popularity should this begin to be the case as the war progresses? Another pre-emptive measure yet again although on the domestic politico-economic front this time around.

Given the focus of the current US establishment on pre-emption, will they attempt to pre-empt an economic downturn in the US economy which then spills over into other parts of the world? While the above-mentioned proposed tax reduction step was also a step in the above direction, economic policy would largely be a function of the disposition of economic decision-makers towards conservatism or otherwise, direction of the military policy in Iraq in particular and the Middle East in general which, in turn, will determine the politico-economic impact of the war on Iraq, the region, and the world whose assessment would be required to, in turn, determine the direction of the USA’s macroeconomic policy. The economics, the politics, and the military strategic direction are all very closely intertwined.

If USA’s federal budget, therefore, runs into fiscal deficits due to the war, a conservative view might try to balance the budget instead of the economy by raising taxes and reducing expenditures which would have a contractionary effect spilling over into other interlinked economies. For, it is well-known in the realm of economics that as America sneezes, the world catches a cold. Another view might try to stimulate the economy through an easier monetary policy while avoiding the fiscal policy route. Now, this would depend on the outlook of the Federal Reserve which is known for its independence from governmental influence most of the time.

Since the stated goal in this case is to “enhance security levels for Americans” by eliminating both the “Weapons of Mass Destruction (WMDs) and the Baath Party regime in Iraq,” the Fed might be sympathetic if they tend to agree with the sub-goals and/or the strategic direction determined to achieve the overall goal of American security. These unknowns will need to be factored in to know the direction of monetary policy. In addition, 2004 will be the Presidential election year. The government will naturally like to see an expansionary outlook in its fiscal policy and will welcome a similar outlook from the Fed in its monetary policy. This will be another consideration now for the Fed to determine the direction of its monetary policy. While their political outlook towards the Republicans and President Bush will remain concealed or shrouded in economic reasons, an independent central bank does tend to rein in the tendency of the government to seek popularity through the fiscal route.

However, if the political goals rein supreme which in this case is the issue of American security, even monetary policy can be influenced by politico-economic and not mere economic factors. A worst case scenario would be a divergent view on the political and military strategies in which case the incumbent government’s re-election prospects could also be adversely affected by a tight monetary policy which may, however, be couched in pure economic terms. An interesting structural equations model appears to be coming up for those who have the time, inclination, and the resources to work on it further.

As for the fiscal expansion that President Bush may seek to fund the war, to prop up his political popularity if it tends to sag, and to ensure an economically happier electorate before re-elections, a great deal will depend upon how the Congress chooses to vote. The “American security” issue is not likely to be resolved any time in the near future. Depending upon the state and gravity of the issue, both Republicans and Democrats will vote accordingly. There have been times when even Democratic members of the Congress have chosen to stand behind a Republican President depending upon the image of the nation they wish to present to the world in times of grave crises. They will then determine their position on the fiscal policy direction after carefully weighing national interests against the prospects of a Republican candidate’s re-election. While the congressmen tend to bicker amongst themselves in times of peace, they tend to present a united front in times of crises such as those involving American security interests. A great deal will then depend upon the direction in which the USA’s military and political strategy will have moved by then to secure their “security” interests.

However much we may dispute, the core issue is one of global security. It is unfortunate though that the major powers on earth, of USA and UK, view it as an issue of their own security in isolation with that of the world. This outlook is actually going to be compounding the issue of global security further. In an insecure world, the security issues of nations cannot be mutually exclusive. So, Americans cannot be secure in a world that is made more insecure by poor decisions and poor judgment of the powers-that-be of the world. What the USA dealt with in Afghanistan was a major symptom of the core issue. After addressing that symptom only partially, or better still, having dislodged that symptom from Afghanistan into the neighbourhood or other places in the region, a wise people ought to have next diverted their attention to the core issues in Palestine and Kashmir. This would not be. Instead, there would be another symptomatic pursuit to Iraq and then to Syria, Iran, and who knows who after these? Iraq’s Republican Guards and members of Baath Party, even if defeated, might re-emerge in informal formations.

And, so might be defeated other militarily weak countries. As countries are conquered, the informal formations might stand reinforced. And, these would not be concentrated in a territory as their skill would be in hit-and-run or hit-and-die operations. Their major source of strength would be a certain “idea” that they share. They rally around the cause of the oppressed in Palestine and Kashmir. If this rally is to be busted, then the Palestinian and Kashmiri causes will need to be addressed to win the hearts and the minds of those engaged in terror activities as it is a battle of ideas, emotions, and sentiments. If terrorism goes on even after that, then the world will be united in fighting it.

If, after the experience in Iraq, the Congress’ members begin to rethink their strategy for American security and redirect it for a struggle through ideas instead of military power, their macroeconomic policy support for President Bush would be thought through accordingly. If the US Congress continues to think that American security is independent of world security and can be achieved primarily through military means, then the defence budget is likely to increase. In the case of Iraq, as Rumsfeld insists on a leaner, high-tech operation, the field forces are demanding an increase in troops and supplies which would be required if the test also includes staying power. Doused in the issue of American security, public support for a military operation is not likely to wane unless a substitute strategy based on ideas is thrown up forcefully on the American policy agenda or the American public itself begins to see alternative solutions to the issue of their security. For as long as alternatives are not thought in the superpower country which is both paranoid and highly agitated over the issue of security, the militarist approach will continue to be pushed. And, US congressional support will either be reflected in their fiscal policy or the fiscal policy issues may compel them to rethink their security strategy. So, what appears like a primacy of politics and security might be supported or opposed through economic policy or outcomes. And, what appears like a primacy of economics to some might either be achieved or hindered due to political reasons.

If it is the militarist route that the US remains convinced about despite initial difficulties, then the message for the countries at the receiving end is loud and clear. That is, the target countries should be addressing the issue of informal warfare, launched from their home ground, themselves before the USA gets to them wrecking both political and economic havoc. This would tantamount to communicating a message loud and clear that the symptomatic response from the third world is not effective enough to induce a desired response on the core issues of Palestine and Kashmir. A further part of the message is that damage will also be inflicted on the countries that tend to host these issues in a manner that impairs the security of other people and nations.

A strategic response from the weaker nations would be to avert the threat by not only rethinking their political disposition domestically and internationally but to also strengthen themselves through socio-economic development that would also help them make a stronger case of their political concerns on the world stage. Also, the nations of the world-strong and weak—need a collective rethink of their foreign policies if the burning political issues are to be resolved in an economically safe manner that each and every one in the world remains equally jittery about.