Ex-Fed official warns of Iraq war effects

WASHINGTON, March 6 (UPI) -- War against Iraq will only aggravate the already fragile U.S. economy, a former Federal Reserve vice chairwoman cautioned Thursday.

Alice Rivlin also argued that it was premature for the Bush administration to press ahead with more tax cuts, given the anticipated strains on government spending in coming years, notwithstanding a war in the Gulf region.

"International tension ... could spin the United States into recession ... with severe repercussions for the world economy," Rivlin said. "There would be an epidemic of sudden caution ... anxiety that's not quantifiable," she added, pointing out that worries about geopolitical risks will keep investors away from financial markets.

But what concerned Rivlin the most was not the downside risk of engaging in war with Iraq, but rising expenditures on the one hand and a steady decrease in revenue, both at the federal and state levels.

"I think we've gone too far already" with tax cuts over the past two years, Rivlin told economists at a briefing, adding that the government deficit for this year is likely to exceed $400 billion.

The White House estimates that the federal budget deficit will balloon to $304 billion this fiscal year, but has not yet given any forecast of the costs of a war to topple Saddam Hussein's regime and establish a democratic government in Iraq. Off-the-cuff estimates from administration officials have ranged as wide as $50 billion to $200 billion for the actual attack alone, but so far, there has been no official forecast of what the war could actually cost U.S. taxpayers.

Still, it's not the war against Iraq that would be the most harmful to economic growth prospects, nor is it an increase in the budget deficit, Rivlin said. Rather, she argued that pursuing more tax cuts when there was no clear means of compensating for the loss of revenue was particularly damaging.

While the Bush administration has repeatedly said that tax cuts, most notably the end to the double-taxation of dividends, would ignite the economic engine and eventually lead to more growth and a greater tax revenue base. However, the White House's economic stimulus package, which will lead to $1.3 trillion in tax cuts over the next 10 years, has been criticized for benefiting the highest income earners rather than lower-income households, which have been particularly hard hit by the continued economic doldrums.

Yet, Rivlin pointed out that both Republicans and Democrats agree more money will be needed to look after the rapidly aging population. As a result, she said, it was "dangerous and irresponsible" for the government to ignore longer-term needs that were clearly on the horizon, without taking into account how those expenditures were to be met.

Rivlin served as deputy to Federal Reserve Bank Chairman Alan Greenspan from 1996 to 1999, under the Clinton administration.