Wall Street rallied yesterday as news from the front lines seemed to confirm smooth progress of war in Iraq, with coalition troops pushing ever closer to Baghdad. Since the war began, stock markets have surged while oil prices have fallen. But it is unclear if these signs imply a blooming economy ahead right after the war.
Experts have different views on the prospects for the post-war economy and said the war’s length is one factor that could determine consumer and business spending.
“That really depends on whether right after the war is a week from now or three months from now or six months from now, or God forbid, Vietnam from now. It makes a very big difference,” said Saul Hymans, director of the University’s Research Seminar in Quantitative Economics.
Hymans laid out an economic scenario assuming that the war will last two to four months, but he said the story could change drastically in a longer war. During the first month, the economy would be loaded with uncertainty when people’s expectation of the war varies from day to day.
The current international situation’s uncertainty “clouds the way and affects the way businesses and consumers are looking at the world in front of them,” Hymans said. “Long-term decisions are being delayed.”
But in the second month, Hymans said, when people see the United States dominate the war, the economy will start to pick up.
“The stock market will improve, consumer confidence will improve, business expectations will improve,” Hymans said. “The economy being held down in an unnatural way by all sorts of uncertainties will then resume its natural course, which is economic expansion.”
Business School Prof. Richard Sloan is not as optimistic as Hymans.
“I don’t see an upside but downside of the uncertainty,” Sloan said, and added that the war creates barriers to international trade and capital flow, which would hurt the U.S. economy.
Business Emeritus Prof. Paul McCracken also said international connections are crucial while, unfortunately, the sluggish global economic situation is impacting the U.S. negatively.
“Germany and Japan are very important American markets,” McCracken said, adding that economies of both these U.S. trading partners are in bad shape.
“A nation is like a corner grocery store, it does better if its customers prosper. If your customers are having economic trouble, they are not such good customers,” McCracken said.
He added that even though he does not doubt there will be further economic growth, fundamental problems other than those caused by the war drag on the U.S. economy.
“We may not have the explosive growth that we had in the 90s, but we will have an expanding economy,” McCracken said.