Looking at these opening statements as an opportunity to lay the groundwork for further discussion, I thought that I’d sketch out an admittedly starkly pessimistic view of economic picture. This isn’t much of a stretch for me because it has been my expectation that, after the tech/NASDAQ mania, our economy was going to encounter a period of some difficulty. So, while the so-called "geopolitical uncertainties" surely haven’t helped, even without 9/11 and the ensuing worries about terrorism and war, it seems likely that the economy would have struggled.

Long before war and oil prices became a focus for the comparison, I saw the "jobless recovery" of the early 1990s as an interesting parallel for the recent period. To be sure, there are obvious differences between the two episodes. For one thing, as has been so often noted, the overinvestment of the 1980s was centered on long-lived structures. It was commonly argued that we would be better off this time because a lot of the overinvestment of the late1990s involved equipment for which physical wear or technological obsolescence would mandate early replacement. It’s fair to say that people have learned that it isn’t that simple-as replacement cycles have proven extendable because of the lack of demanding new applications or because of financial necessity.

Another difference is that we have not in this cycle experienced the same financial sector problems we did in the early 1990s. A better capitalized and less exposed depository system hasn’t encountered the stresses that led to the "credit crunch" of that prior episode. But, that is not to say that there have been no strains this time around. The corporate bond markets almost broke down last summer, and credit losses have taken a considerable toll of many institutional balance sheets and reduced the willingness and ability to those institutions to assume risk.

Meanwhile, the bursting of the stock market bubble has taken a big bite out of the wealth of households, overexposed DB pension plans, and many annuity issuers, to mention a few victims. And the risk is that the market is still overvalued and that further share price erosion will exacerbate the ongoing drags on household and business spending.

Tack onto that an overvalued dollar that has intensified pressures on our tradable goods sector-another legacy of the bubble period--and the obvious question is, how is it that we’ve experienced any GDP growth at all?

Well, the obvious answer is that we’ve had an extraordinary boost from monetary and fiscal policy since the beginning of 2001. The Fed learned the lessons of past speculative bubbles and slashed interest rates. The Bush Administration let pass no political opportunity for tax cutting, and provided a large and well-timed boost to aggregate demand in 2001 and 2002. And, of course, federal spending has risen steeply, with national security programs playing a major part.

Which brings us up to the minute. What can we say about the war and the economy going forward?

First, we should take heed of the President’s assertion that this isn’t a war against Iraq, it’s a war against terrorism and undemocratic regimes throughout the world. I recognize that I am in the Belly of the Neocon, Preemptive Action Beast here at AEI, but I’ll nonetheless venture the comment that this image of the US policy doesn’t leave one feeling like "geopolitical uncertainty" is going to disappear when Saddam has been deposed. Indeed, as the quick, clean military victory has proven elusive, the probability has increased that there will be some unpleasant consequences flowing from this enterprise.

Second, the elimination of the "war risk" premium hasn’t dropped oil prices back to the levels--$20-25 per barrel--that some experts predicted. Perhaps we’ll get there when Iraqi oil is flowing again and the war-reality premium disappears, but there are also some other problems weighing on energy markets at least in the short run. Hopefully, a war-related enhancement of tensions in the Arab and Islamic worlds will not be a source of greater volatility over the longer haul.

Third, one can imagine that concerns about the climate for international business have been elevated by the sense that the war and the desire in some circles to curb US power could poison attitudes against the US. We’re all aware of the worries that have been expressed about adverse effects on trade negotiations. The problem is that, even if the geopolitical outlook brightens, it could still take some time for the corporate sector to get up the nerve to increase investment and hiring. One could imagine that, after making so many mega-errors of business strategy during the late 1990s, executives might be lacking in confidence about how to create value; moreover, the perception is that if the market and shareholders don’t penalize you for your mistakes, which are now more difficult to cover up with creative accounting, "Sarbanes Oxley" will.

Fourth, the consumer has, at least up to now, seemingly shrugged off the geopolitical uncertainties and taken advantage of what they’ve perceived to be bargain basement interest rates. Perhaps they will continue to maintain their spending propensities after a brief CNN-effect break, but a less than rousing victory might contribute to a sobering reassessment of whether their living styles are consistent with their diminished net worth.

Finally, the state and local sector also faces a day of reckoning. There’s no longer so much room to avoid spending cuts and tax hikes by resorting to rainy day funds, etc., to cover prospective budget gaps. And, there appears not to be much hope of help from Uncle Sam; rather, there seem to be ever-increasing unfunded mandates for homeland security and other programs.

All told, a picture emerges that suggests the possibility that the end of the fighting in Iraq will leave us facing a still weak economy. As for policy responses, at this point, there doesn’t appear to be much impetus for a federal program aimed at short-term stimulus. Having discouraged quick fiscal action, Chairman Greenspan may feel an extra burden of responsibility for providing that stimulus; thus it is that, with the federal funds rate already down to 1.25%, the Fed is talking more about so-called "unconventional" approaches to monetary policy.