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December 8, 2002
David Warsh, Proprietor


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On Guard!

(Economic Principals is traveling, messed up, regrets the late post.)

“The Bush Administration’s economic team apparently will remain intact — for now,” That was Economic Principals’ view just two weeks ago. “An economic team shakeup may not be imminent. But it looms.”

It stopped looming and turned imminent Thursday afternoon. That was when the administration’s economic point man, Vice President Dick Cheney, gave the word to his old friend Treasury Secretary Paul O’Neill that he was out.

The next morning O’Neill released a fifty-word, four-sentence letter of resignation, met briefly with his senior staff, then got in his car and drove home to Pittsburgh. Only slightly less abrupt was the departure of National Economic Council director Lawrence Lindsey.

It is easy enough to understand why President Bush was determined to avoid the mistake his father made in 1991, when the elder Bush failed to shake up his bitterly divided cabinet. His wait-and-see approach to the sputtering economy almost certainly cost him the election.

The impression of decisive action now is likely to produce a vibrant international economy in the autumn of 2004, when Bush almost certainly will stand for re-election.

But the fact remains that with O’Neill, the administration gas lost its most thoughtful spokesman for financial responsibility. He instinctively opposed tax cuts for America’s richest citizens, warned against excessive stimulus, quietly urged that global warming be taken seriously, toured Africa with rock star Bono to call attention to global underdevelopment and the AIDS epidemic, and otherwise enraged the rightwing populists who are among the administration’s loudest rubberneckers. The Washington press corps didn’t like him much either.

It will be easy enough to quickly appoint a forceful, market-savvy Treasury chief. But the danger has increased that the administration will drift off its long-term course.

* * *

The United Airlines bankruptcy demonstrates how important it is to have a running narrative of the deregulation movement. Daily stories stress the ins-and-outs of the filing itself — after all, what is more political than a bankruptcy? But the really interesting question is how the United story fits into the ongoing saga of the airline industry, whose restructuring began 25 years ago.

It is a turning point, according to Michael Levine. Former airline executive, government regulator, now law professor at Yale, Levine is among the industry’s shrewdest students.

The discount airlines have moved in after deregulation, just the way they were supposed to. The big old airlines survived the competition of the 1980s by converting their east-west or north-south routes to more economical hub-and-spoke operations.

American, United, Continental, Delta, Northwest and US Airways then spent the overheated 1990s hoping that something would turn up that would permit them to continue to honor their costly commitments to employers and airplane makers.

It didn’t. Meanwhile, discount airlines such as JetBlue, Frontier, Southwest moved in to exploit the fringes of the new hub-and-spoke system.

“What the Air Transportation Stability Board recognized — but United did not — is that even when business improves, the old fare structure isn’t coming back.” United, for example, still pays its pilots $200,00 for 50 hours a month of flying.

If they can reduce their labor and equipment costs to more reasonable levels, says Levine, old airlines including United, America, Delta and Northwest can prosper once again. But “only actions like the Airline Transportation Stability Board will force these airlines, and their workers, to accept reality.” He made his argument last week in an op-ed article the New York Times (registration required.)

* * *

A very interesting table has been prepared by Yale economist William Nordhaus in the process of making the most elaborate back-of-the-envelope calculations yet about the possible cost of a war with Iraq.

Using a statistical summary of America’s major wars from the Commerce Department’s Historical Statistics of the United States, Nordhaus calculated their cost as a percentage of annual GDP at the time they were fought.

Revolutionary Wars (1775-1783)

63 percent

War of 1812 (1812-1815)

13 percent

Mexican War (1846-1848)

3 percent

Civil War (1861-1865)

Union

84 percent

Confederate

169 percent

Combined

104 percent

Spanish American War (1898)

3 percent

World War I (1917-1918)

24 percent

World War II (1941-1945)

130 percent

Korea (1950-1953)

15 percent

Vietnam (1964-1972)

12 percent

First Gulf War (1990-1991)

1 percent

Nordhaus estimated direct military spending for two possible scenarios, as well as attendant expenses for occupation and peace-keeping, reconstruction and nation-building, humanitarian aid and macroeconomic impacts (mainly in the form of oil shocks.)

He reckoned that a short war with a favorable outcome might cost as little as $99 billion, or less than 1 percent of GDP. A protracted struggle with an unfavorable outcome, on the other hand, might cost as much as $1.94 trillion, or around 20 percent of GDP.

(His results, published last week by the National Bureau of Economic Research, can be found on his webpage. A non-technical version can be found in the December 5 issue of the New York Review of Books.)

Not surprisingly, Nordhaus made no attempt to calculate the respective benefits of each war, or whether the same results could have been had some other way. That’s a topic to fuel many a conversation in the years to come.

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