Warning that war could plunge world into deep recession

Cost of toppling Saddam Hussein may run into hundreds of billions of dollars and this time America will have to foot the bill itself

A war against Iraq could cost the United States hundreds of billions of dollars, play havoc with an already depressed domestic economy and tip the world into recession because of the adverse effect on oil prices, inflation and interest rates, an academic study has warned.

According to William Nordhaus, Sterling professor of economics at Yale University, the best-case scenario of a short, "clean" war is likely to incur costs for which no amount of increased Iraqi oil production could compensate. If the conflict becomes protracted and involves urban guerrilla fighting, the destruction of Iraq's oil fields, or the use of biological or chemical weapons, the costs of both the fighting and post-war reconstruction could multiply.

"The Bush administration has not prepared the public for the cost or the financing of what could prove to be an expensive venture,'' Professor Nordhaus said. "Perhaps the administration is fearful that a candid discussion of wartime economics will give ammunition to sceptics of the war; perhaps it worries acknowledging the costs will endanger the large future tax cuts, which are the centrepiece of its domestic policy. "None the less, the price must be paid, by raising taxes, by cutting expenditures, or by forcing the Federal Reserve do the job by raising interest rates. One way or another, Americans will pay for the war.''

Professor Nordhaus's analysis, part which was published in this week's New York Review of Books, is based on estimates from the US government as well as private research by Washington think-tanks. Although much is necessarily speculative, he quotes Keynes to say it is better to be vaguely right than precisely wrong. His research echoes a growing sense of unease in government about the military and political costs, as well as the economic fallout, of launching an invasion to topple Saddam Hussein.

Two official recent studies, one by the Democratic Party contingent of the House Budget Committee, the other by the Congressional Budget Office, both put the baseline cost of the initial military campaign at about $50bn (£31bn), a little less than the cost of the last Gulf War. That assumes a force of about 250,000 troops, which is what the latest leaks of the Pentagon's plans suggest, roughly half the number deployed in 1991.

The big difference between now and 11 years ago is that the United States will almost certainly have to foot the bill itself; in 1991, most of the effort to roll back the Iraqi invasion of Kuwait was underwritten by US allies, leaving Washington with just over $2bn to pay itself.

That $50bn does not take into account the costs of a post-war military occupation. Professor Nordhaus estimates anywhere from $75bn to $500bn (£47bn to £316bn), depending on the length and difficulty of the operation or the task of rebuilding the country and nurturing its economic development. To rebuild modestly, bringing Iraq up to the level of Iran or Egypt would cost at least $20bn ; launching an Iraqi-style Marshall Plan could cost as much as $100bn.

Professor Nordhaus noted the poor US record in standing by its postwar reconstruction promises. In Afghanistan, for example, it has spent just $10m on economic redevelopment compared with the $13bn on the bombings and Special Forces operations. But he also argued that neglect would carry its own price as a furious Middle East vents its anti-Americanism on the occupying army and on US targets around the world.

The baseline figures are a best-case scenario. A modest amount of disruption – if the Saudis refuse access to their air bases and if fighting becomes intense in the cities – could push the price of the war up to $140bn, or 1.5 per cent of US gross domestic product.

There has been much talk of renewed Iraqi oil supplies offsetting the cost of war and, to a large degree, justifying it. But Professor Nordhaus argued that the best hope, bringing Iraqi production quickly up to three million barrels a day, would yield only about $25bn a year. Most of that would be needed for food, medicine and other immediate necessities, and the rest would probably go to paying off the $300bn in unpaid claims from other countries left over from the 1991 war.

"To divert funds from vital necessities to pay the expenses of the US occupation forces would be economic and political folly," he wrote.

The effect of war on world oil prices could be devastating. George Perry, an analyst with the Brookings Institute in Washington, has drawn up three scenarios, the middle one of which suggests a tripling of prices to $75 a barrel. That would almost certainly push the world into recession.

Little of this kind of economic analysis has been debated publicly in the United States since the prospect of war against Iraq shot to the top of the Bush administration's agenda in late summer. Most talk has been about the feasibility of defeating Saddam, with some hawkish analysts suggesting superior US firepower and a diminished Iraqi military would make it a cakewalk.

Professor Nordhaus warned that even a quick military operation would have economic costs lasting years. "Although cost estimates are often ignored when war is debated," he wrote, "Most people recognise that the costs in dollars, and especially in blood, are acceptable only as long as they are low.''