A Middle East Scenario Jude Wanniski February 11, 2002

A Middle East Scenario, August 28, 1990

Memo To: Sen. Bob Graham [D-Fla]
From: Jude Wanniski
Re: Looking Back

I was certainly happy to see you step back from certain war with Iraq, which made me think it might be good for the Republicans to lose the Senate this year. It’s nice to see such intelligence in the chairman of the Senate Intelligence Committee. The ranking Republican on the committee who appeared with you on Meet the Press on Sunday, Sen. Richard Shelby, left no doubt he wants to start bombing Baghdad ASAP, with good reason or not, with or without an international coalition behind us. I’m sending you a Polyconomics client letter I wrote in late August 1990, when it still seemed possible we could avoid a war with Iraq. So much time has gone by that we forget all the opportunities there were for a diplomatic solution which would have avoided the Gulf War. As you see, I was wary of U.S. intervention until Egypt and Saudi Arabia decided to invite us in to oust Saddam Hussein from Kuwait. It was Israel’s friends in the Pentagon who argued against diplomacy back then, the same fellows who are urging President George W. Bush to “finish the job” his father began. They have the same attitude as Senator Shelby, that we proceed with or without a coalition. It is interesting to see that they now hesitate, only because Israel has signaled it considers Iran more of a danger than Iraq. In any case, it should be apparent that Iraq is no danger to us or to Israel and would be even less a danger if Russia could broker a deal which would permit the UN inspectors to return. It would be more of a danger to us if the Republicans pushed the President into “finishing the job” with no support from the rest of the world. Crushing Iraq would be no problem for our military. Going it alone would lead to an unremitting wave of terrorism against us here at home.

Here is the 1990 letter. Please note as well the last paragraph on the economy.

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August 28, 1990
A MIDDLE EAST SCENARIO

At the moment, President Bush deserves all the praise he's getting for his masterful leadership in the Middle East. The threat of a shooting war has receded now that Saddam Hussein clearly sees that the world in general and the Arab world in particular are ready to use force against his adventurism. Our concern that Bush had miscalculated preceded the August 8 vote of the Arab League to send troops to Saudi Arabia to stand beside our Marines, specifically Egyptians, Moroccans and Syrians. If Egypt's Hosni Mubarak had been unsuccessful in winning support of the poor Arab nations for Iraqi containment, the U.S. intervention would have been a political disaster. In the post-Cold War world, the United States has to distinguish between regional and global conflicts. In my mind, the best way to decide such issues is to rely on the people of the region. If they are willing to shed their blood with ours to contain a problem, it's a good chance it's sufficiently global for us to play world policeman. In this instance, President Bush took a tremendous gamble, but this is the essence of leadership, and we now applaud what we worried could have been a costly blunder.

The question that is now emerging is under what circumstances will the U.S. troops be brought home. The best scenario from my point of view would conform to the above-stated principle: If Saudi Arabia invited us in, to defend against Saddam, the final act before we depart would be an invitation from the Saudis that we leave. That is, when the moderate Arab states, led by Egypt, have been persuaded that Saddam is a changed man, who realizes he has miscalculated, the problem reverts from a global to a regional one. President Bush is now setting conditions by which he will be satisfied the conflict has been settled by diplomatic means. To get to my scenario, the President has to gradually introduce the idea that he will be satisfied with an outcome negotiated by the moderate Arab states. Specifically, Saddam has to be seen as coming to terms with Mubarak.

This kind of approach will be resisted by Israel, which prefers to think that Saddam cannot be pacified and that no scenario that leaves him in power is in its interests. Israel prefers to see the shooting start, which would wipe out Saddam and his nuclear and chemical works with U.S. air strikes. A unilateral use of U.S. force against Iraq would destroy the U.S. standing in the Arab world at this point, but clearly Israel would not mind. It had been increasingly alarmed at the growing warmth of the relationship between the moderate Arab states and the Bush Administration, particularly with Secretary of State James Baker. In the last few days we have been given reason to hope that Saddam is already a different man than he was a month ago, that he had to be sobered by this experience, and that Mubarak can negotiate a diplomatic solution with him. Saddam betrayed Mubarak when he thought it easy to do so. Now Mubarak has the weight of the world behind him, morally and militarily. Senator Sam Nunn of Georgia is now insisting that Mubarak increase the number of Egyptian troops committed to Saudi Arabia. It would be preferable to encourage overtures toward a Saddam-Mubarak meeting.

Insofar as this is a regional conflict, the one legitimate question that Saddam has brought to the forefront is who shall speak for the Arab poor? His invasion of Kuwait was driven and rationalized by financial pressures, as Iraq struggled to rebuild from a war with Iran while servicing a $60 billion foreign debt. It seems well established that Kuwait had been driving down the oil price by cheating on its OPEC production commitments, and perhaps it had been "stealing" Iraqi oil as Saddam had asserted. In any event, his alternative to relieving these pressures by economizing on military outlays was to grab Kuwait by asserting historic claim to the emirate. In seeking the status quo ante in Kuwait, Mubarak seems to have room to maneuver with Saddam by throwing open these questions in a way that the United States could not. Mubarak could also settle the issue of the hostages as a precondition for meetings with Saddam, in a way the U.S. could not.

Broadly, an accommodation would include addressing the questions of Iraq's debt and its grievances on oil as Iraq withdraws from Kuwait. In exchange, in recognition of the new world realities, Saddam would agree to verified chemical and nuclear non-proliferation. An accommodation in this realm, whatever it is, should satisfy Washington and the United Nations, as long as it satisfies the Arab world. Saddam would survive, but with a different calculus, seeing the post-Cold War environment will no longer permit this kind of behavior. In the Cold War, of course, all regional conflicts were global and political miscreants like Saddam and Qaddafi and Arafat could thrive.

The implications for the U.S. economy and financial markets on which scenario unfolds favor a diplomatic over a military solution, of course. In Italy the last two weeks, while I watched the U.S. stock market and dollar slide, it struck me that conflict would push the White House and Treasury even further into an austerity mode than they have been. I could see President Bush bear the full brunt of asking for higher taxes and getting them, even dropping altogether a call for a tax cut on capital gains "for the rich," at a time when American casualties were being taken in the desert.

A negotiated solution, on the other hand, strengthens the President's hand enormously in dealing with the Democrats in Congress. He could get practically anything he wanted out of it to produce economic expansion. Capgains would be in the bag.

At the moment, though, the White House continues to puts its emphasis on a budget agreement to suit the tastes of Richard Darman and Nicholas Brady. The Administration also continues to posture for easier money, showing complete indifference to the decline of the dollar that inevitably flows from market expectations of U.S. policy. It's disheartening, even incredible, that nobody around the President can make the intellectual connections between their talking down the dollar and the climb in interest rates.

House Minority Whip Newt Gingrich, fortunately, has at last made the connection, and has formally announced he no longer supports the Darman budget strategy and Fed bashing. Months ago, I suggested that Gingrich was the man on the margin, that until he abandoned the Darman strategy there was no chance of seeing a change. When Congress returns after Labor Day, Gingrich will have plenty of opportunity to pull the GOP back into a political mode, calling for tax cuts instead of increases as the November elections approach. If he succeeds, and probably only if he succeeds, can we expect to see the dollar turn around on the foreign exchange markets.

Which is to say, President Bush can be enormously successful in playing his foreign policy cards, and still watch his popularity melt away in an end to prosperity and self-induced stagflation.


Jude Wanniski