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Interview with Fred Bergsten

Aired October 4, 2002 - 12:25   ET


WOLF BLITZER, CNN ANCHOR: With the U.S. economy already on shaky ground, would a war make it worse?
For some insight on war and our wallets, we're joined by the Fred Bergsten. He is the author of 28 books, an international economist -- Fred, thanks for joining us, you've been busy writing books.

The short answer is a real full-scale war between the United States and Iraq, what would that do for the pocketbooks, the wallets of our viewers out there?

FRED BERGSTEN, ECONOMIST: I think it would help them a lot. I think ending the uncertainty that is now in place because of doubts about what is going to happen would encourage investors, assuming that war is promulgated quickly and effectively, I think it would eliminate a big element of uncertainty, strengthen the markets, strengthen the economy. Moreover, I think it is likely to drive down the oil price, as Desert Storm did in 1991, and therefore provide a significant real boost to both the U.S. and the world economies.

BLITZER: Well, let's talk about that. Right now, oil is going for about $30 a barrel. Gas prices are relatively high, across the United States. The expectation was it could $40 a barrel if there is a war, but you say it could bring down the price. Why?

BERGSTEN: Right. The oil price has gone up some because of the usual uncertainty as to what is going happen. An uncertainty premium is built into the market. Markets hate uncertainty, so the price goes up not knowing what is going to happen.

My point is -- not to argue the war should start tomorrow, but as soon as the war occurs, assuming it's promulgated effectively, then that uncertainty disappears, people can see the future, and almost certainly, the oil price will go down.

Moreover, remember that our own government can release oil from our own strategic stockpile. We have 600 million barrels in the strategic stockpile. The world as a whole has 1.2 billion barrels in strategic reserves. In Desert Storm, we announced that we would release from the stockpile. That, plus the air strikes, drove the price down sharply, and actually started a strong economic recovery.

BLITZER: But to taxpayers, the money that the war would actually cost, at least in the short term, could be significant. I'll put some numbers up on the screen in what is called the so-called heavy ground option, 370 ground troops, 1,500 aircraft, 800 helicopters, 800 tanks. The Congressional Budget Office estimates that could cost what? Look at this. $13 billion, just to get the war going.

BERGSTEN: $13 billion is a tiny number compared to our $10 trillion economy, and since it is new spending, it actually stimulates the economy. Now, it is not a great thing over the long run to have the budget deficit get worse, but it strengthens demand in the short run, it moves the economy upward, combined with the things I said, it adds to a positive outlook.

BLITZER: If there is -- the Congressional Budget Office says it would be $9 billion if it was the heavy air option, a lot of air power, but look at this. They say a monthly cost of prosecuting the war could be what -- between $6 and $9 billion if it goes on for any protracted period of time. If the U.S. military does not do as well as a lot experts say it will do, that could pose a potential problem.

BERGSTEN: That is true. I think the risk is that if the war is not promulgated effectively and quickly, if we got into a quagmire, if we got bogged down, then you could have the effects of the war actually broadening throughout the Middle East, other oil producers could be affected. There might even be pressure on OPEC to embargo the U.S., resist production in order to support other Arabs. That would be the risk. But if the war is executed effectively, like it was in 1991, but maybe more quickly, I think the outcome is almost surely positive for the economy.

BLITZER: Before I let you go, if it's a short war, the U.S. wins quickly, Saddam Hussein is overthrown, a new pro-U.S. regime put in place in Baghdad, the French and the Russians think that might be good for them, but I think some of the U.S. oil companies would want to get first dibs on some of those oil contracts.

BERGSTEN: Well, they would, but the main effect on all of us as consumers and Americans is that more oil would be produced, more would come on to the world market, there would be less risk in Saudi Arabia and elsewhere. World oil prices would drop, and that too would be a big boost for the world economy over the medium to longer run.

BLITZER: Fred Bergsten. He knows the international economic situation. Thanks for joining us.

BERGSTEN: Thanks, Wolf.


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