How the geezers cashed in on the Gulf War; and why you'll pay for it

Washington Monthly, Nov, 1991 by Edward Ericson

And why you'll pay for it

Even if General H. Norman Schwarzkopf couldn't

count on $50,000 speaker's fees or his reported E$5 million book deal, the retired four-star would do just fine. As a general who maxed the pay grade, Schwarzkopf will take home 1,028,953 in federal retirement in the next decade alone. If he had quit the service before the Gulf war, however, he'd be taking home thousands of dollars less-not because of his service there, but thanks to a little-noticed statistical fillip created by George Bush's blind faith in the free market. Of course, Schwarzkopf isn't the only one cashing in. As a direct result of Bush's oil policy preceding Operation Desert Storm, the U.S. government will spend billions of extra dollars in the next decade upping the pensions of federal workers from the general on down to the lowliest GS-2.

Each year, all 3,700,000 military and federal civil service pensioners receive an annual cost-of-living adjustment (COLA). Even under ordinary circumstances, the bill for all these pension checks is staggering. Payouts this year alone are estimated at $56.5 billion, up three billion from two years ago. "I think it has something to do with inflation," a public information officer at the Pentagon offers helpfully. Problem is, inflation doesn't just happen. This time, George Bush helped hike it up.

Market forces are a complex product of popular mood and government action-or inaction, as in this case. Last August, oil prices shot up in the wake of Iraq's invasion of Kuwait, and fears of gas lines began to fuel a new national resolve to fight a war. At the same time, the Consumer Price Index, the government's main inflation barometer and the key indicator for the year's cost-of-living adjustment, shot up .8 percent, the biggest rise since the previous January. The oil price alone was responsible for about half of that increase.

But the oil shock did not last. A month later, President Bush opened the nation's strategic oil reserves, world oil prices plummeted to below pre-invasion levels, and inflation for the rest of the year retreated to a modest .3 percent. But by that time, irrevocable damage had been done. By failing to open the reserves sooner, Bush made himself responsible for $226 million in increased pension expenditures this year alone. Thanks to compounded COLAS, the outlay resulting from this brief increase in the inflation rate will probably reach $3 billion by 2001-money that might otherwise have been spent providing balanced meals for 3.7 million poor pregnant women or treating 790,000 little kids to Head Start.

The lesson here is both particular and general. First, extreme, short-term inflation that can be stopped through reasonable market intervention should be-and quickly-to protect the American economy from unnecessary long-term costs. But more importantly, the consequences of Bush's inaction highlight the larger folly of across-the-board government COLAS. Designed to protect the widow's mite against the scourge of inflation, COLAs have evolved into an annual windfall for millions and millions of people who don't need them. In general, they're a dreadful strain on the Treasury. And on occasion-as in the case of Bush's preparation for the Gulf war-they're just billions of dollars down the drain.

COLA wars

To the public, the oil shock might have seemed inevitable: Saddam invades Kuwait, 6 percent of the world's oil supply is taken off the market, and Exxon Super Premium starts to levitate. It wasn't. The Strategic Petroleum Reserve, created in 1975 in the wake of the Arab oil embargo, was designed for times just like these. The day of the invasion, 600 million barrels of crude oil-enough to replace Iraqi and Kuwaiti imports for nearly two and a half years -were tucked in caverns throughout Louisiana and Texas, ready to stave off oil panic and keep prices stable when called upon by the president. But George Bush just kept saying no.

Despite the fact that U.S. oil companies were holding more crude in their inventories than at any time in the eighties, oil executives gleefully seized the moment. Within days of the invasion, they began ratcheting up their prices in the face of grumbling from oil experts, congressional leaders, and the press. "Open the reserves!" screamed The New York Times and The Washington Post. "Act now!" advised oil analysts from Daniel Yergin to Philip Verleger. But while the president demurred that he would "explore whether and when we and our allies should draw down reserves," his policy was unequivocal: As he and his spokesmen patiently explained, mere price increases were no reason for a drawdown. Only "physical shortages"-bone-dry tanks at Exxon-would justify the move. The result? In July 1990, a barrel of crude oil was selling for less than $18. By September, the price had doubled.

As the crisis deepened and the economic costs escalated, Bush faithfully toed the free-market line. It was not until October, when the price of oil had sky-rocketed to a decade high of $40, that Bush began to comprehend the economic damage being wreaked by rampant oil speculation. Finally, he responded to common sense. He opened the reserves-a day late, $3 billion short.