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The Economics of Regime Change in Iraq By: Irwin Stelzer
FrontPageMagazine.com | Tuesday, September 17, 2002

Now that America has had a long, anguished look back at September 11, 2001, it is starting to focus on the key question of “what next”? The answer, as America’s president and Britain’s prime minister have made clear, is regime change in Iraq. Since Saddam Hussein is unlikely to opt for retirement among friends in a cave in Afghanistan, that means war—if not immediately, eventually. Which has policymakers rushing to do their sums.

Britain’s treasury minister, Gordon Brown, who can find unlimited amounts to throw at the unreformed public service providers, is said to be horrified at the prospect of coming up with £2 billion to cover the cost of an effort to separate Saddam from his weapons of mass destruction. So far as is known, he has made no estimate of the benefits. The Australians are more inclined to balance benefits against any wartime costs. They have already decided that the sacrifice of tens of millions of dollars in lost wheat sales to Iraq is a price worth paying to unseat Saddam and to remain loyal to a historic ally.

In America, the president’s opponents, looking for a defensible basis on which to make a stand against military action, are now citing the costs of antagonizing Saddam Hussein. Oil prices will rise, triggering a recession in an already fragile world economy. Retaliatory strikes by terrorists will permanently cripple the cities of America and its allies. Surely, economic considerations demand that Bush stay his hand.

Well, no. Start with oil prices. At current levels of around $30 per barrel, prices already contain something like an $8 “war premium.” So when Bush gives the military the go-ahead to arrange regime change in Iraq, any further increase should be short-lived, especially if the Saudis keep their word and tap their immediately available excess capacity to make up for any cutbacks in the amount of oil now flowing from Iraq.

There is a danger, of course, that an attempt by the Saudi regime to honor its pledge will trigger an uprising by the many Saudi followers of Osama bin Laden, in which case oil prices will indeed shoot up, and remain high until non-Arab countries begin pumping more oil, something that will take a not inconsiderable amount of time. Unless, of course, America intervenes to keep the Saudi fields in friendly hands, which would be the most likely outcome of any move by America’s enemies to take over that 25 percent of the world’s oil reserves. Remember Kuwait: Bush the elder sent half-a-million men to war to make sure that its much smaller reserves did not fall into the hands of an American enemy. Bush the younger would do no less. And in the longer run, an Iraq open to Western investment would add several million barrels a day to world supplies, putting downward pressure on oil prices.

Which brings us to the possible permanent economic effect of any terrorist attack on New York, London, or Sydney. The destruction of the World Trade Center is estimated to have cost the New York City economy some $95 billion. That ain’t chicken feed, as any New Yorker will tell you. But it is offset by about $21 billion in federal aid and $70 billion in likely insurance payments. Besides, the loss is the equivalent of only two months worth of the goods and services produced in the city.

That may be one reason why two Columbia University economics professors have concluded that “New York will come back.” Their just-released study of the effects of massively destructive bombing on 114 Japanese cities during World War II concludes, “In the aftermath even of gargantuan shocks, a city recovers not only its population and its share of aggregate manufacturing, but even the specific industries it had before.”

The findings of the Columbia economists are supported by a Harvard University study of the impact of terrorism on urban areas. Professors Edward Glaeser and Jesse Shapiro, although doubting that downtown New York City will or should be completely rebuilt, nevertheless conclude that “New York City itself is likely to be quite robust” in the future.

But what about the widely reported flight of businesses from the skyscrapers of Manhattan to the swamps of New Jersey, and the rolling hills of nearby Westchester County? It turns out not to be such a massive exodus after all.

The Wall Street Journal reports that 80 percent of the 100,000 jobs that left lower Manhattan after the twin towers collapsed have remained in the city, some in midtown, some in Brooklyn. Some 70 percent of the office space destroyed in the terror attack has been replaced by space in midtown Manhattan. And the Wall Street area is recovering. American Express is moving its 4,000 employees back to the Financial Center. Merrill Lynch has returned. So has the Wall Street Journal. Real estate developer Edward Minskoff, aided by subsidies, will break ground on a 37-storey office tower two blocks north of Ground Zero early next year.

That certainly doesn’t mean that New York is problem-free. But those problems pre-dated the terror attacks. The budget is woefully out of balance. The school system can’t educate the city’s poor and minority students. The key financial services industries are shrinking, and bonus-bereft investment bankers can no longer offer unlimited sums for swank apartments.

But New Yorkers have seen all of this before. They know that in the end that great student of the history of cities, Lewis Mumford, had it right when he wrote over forty years ago, that “cities [are] where all the original feelings of awe, reverence, pride, and joy . . . [are] further magnified by art, and multiplied by the number of responsive participants. . . . Our elaborate rituals of mechanization cannot take the place of the human dialogue, the drama, the living circle of mates and associates, the society of friends.”

The cities Saddam and bin Laden think they can obliterate will be around long after these destroyers are gone. And commuters will be driving to them in cars fueled with gasoline at prices unaffected by the fleeting presence of these thugs on the world stage.

Irwin Stelzer is a Senior Fellow and Director of Regulatory Studies for the Hudson Institute.

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