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Iraq Black Hole

The $2-Trillion War

War is messy, and putting a price tag on a war that stretches over years, with consequences lasting decades longer, is a staggering task. Yet in a democratic society whose citizens expect to know what they are paying for, someone has to do it. Linda Bilmes, lecturer in public policy, began the task of toting up the fiscal outlay on the Iraq war when students in her class at the Kennedy School of Government asked about its cost and Bilmes could not find any meaningful data. “I did this because I just wanted to know,” says Bilmes, a public-finance specialist who served as assistant secretary of commerce under President Clinton. “It is very distressing that nobody came up with a good estimate. How can you weigh the benefits against costs if you don’t know what the costs are?”

Bilmes published what she found on the op-ed page of the New York Times on August 20, 2005; her article moved Joseph E. Stiglitz, University Professor at Columbia University and a 2001 Nobel laureate in economics, to ask her about expanding the analysis to include the economic effect of the war on society. Their recent paper, “The Economic Costs of the Iraq War,” presented this year at the Allied Social Science Associations meetings, concludes that projections to date vastly underestimate the extent to which the war will drain this country financially.

Before the United States invaded Iraq in 2003, Secretary of Defense Donald Rumsfeld and then-director of the Office of Management and Budget Mitchell Daniels (now governor of Indiana) put the likely costs at between $50 billion and $60 billion. Former undersecretary of defense Paul Wolfowitz (now president of the World Bank Group) claimed that increased Iraqi oil revenues would pay for the war. When President Bush’s economic adviser Lawrence Lindsey suggested that the actual costs might be closer to $100 billion or even $200 billion, the White House called those figures grossly exaggerated and swiftly fired him.

Those estimates now look Lilliputian. The Congressional Budget Office (CBO) currently projects past and future Iraq-related expenditures to surpass $500 billion, and even that figure severely underestimates the full outlay, according to Bilmes and Stiglitz, whose paper indicates that the war will eventually cost Americans in excess of $2 trillion. (A trillion is a thousand billions.) Speaking of those in Congress who agreed early on to appropriate $87 billion to finance the war, Bilmes says, “Every time someone casts a vote, they implicitly make a cost-benefit analysis. Would they have voted the same way if they knew the costs were 10 times as much as advertised?”

The researchers examine budgetary costs and economic costs. The former reflect outlays from the federal treasury; the latter include the effects of the war on the U.S. economy. In compiling their estimate, Bilmes notes, “Everything we used, except for data on the costs of caring for a brain-injured person, was from government sources.”

The true costs of war include items rarely mentioned before the bullets and missiles fly. The CBO figures, for example, include the costs of munitions and of transporting troops to Iraq, feeding and clothing them, and paying private contractors. But there are also the costs of caring for more than 17,000 wounded soldiers (to date)—25 percent of whom have crippling conditions such as brain injuries and multiple amputations and will need lifelong medical attention. Another 25 percent have suffered major injuries, including severe burns, deafness, and total or partial blindness. Then there are the medical expenditures for all veterans, borne by the Veterans Administration: one-third of those back from Iraq, for example, have required some mental-health counseling.

There are also disability payments. In the first Gulf War, 550,000 soldiers fought and 400 were wounded in a conflict that lasted only one month. Even so, 169,000 of those veterans, or about 30 percent, are still claiming veterans’ disability for various ailments, costing $2 billion annually. The researchers used an “extremely conservative” disability estimate of one-third of veterans to calculate their Iraq projections, though, as Bilmes notes, “it could become two-thirds or even all veterans. And all of these costs are there even if we pull out tomorrow. We haven’t paid it yet, but we already owe it.”

Weapons replenishment will absorb $100 billion, according to the CBO. “We are going through weapons at six times the peacetime rate,” says Bilmes, “using them faster than we make them.” Reenlistment bonuses have risen from $25,000 to as high as $150,000. “Those costs will be carried forward,” she says. “Anything like that which you put into the military—it will be hard to claw them back [down] again.” Death gratuities, paid to families of fallen soldiers, have also risen, from $12,240 to $100,000. Life-insurance settlements have jumped from $250,000 to $400,000.

Bilmes and Stiglitz used two scenarios to tote up interest on the national debt. (The government has not raised taxes to pay for war, but has borrowed instead.) One would have all U.S troops out of Iraq by 2010 ($98 billion in interest); the other projects a small force there until 2015 ($386 billion in interest). In sum, the long-term budgetary outlay for Iraq comes to about $1 trillion, even after subtracting war-related savings, such as the cessation of $12-billion worth of annual air patrols in the former no-fly zone. “Nobody seriously disputes that,” Bilmes says. “The American Legion has cited this figure in testimony before Congress.”

The economic costs of the war are more difficult to pin down, but no less dramatic. Mobilizing the National Guard and reserves, for example, means that many soldiers move from a civilian to a (lesser) military wage, and this shrinks the GNP. Currently, for example, 44 percent of America’s local police forces are missing one or more officers to Iraq. The researchers added in the “value of a statistical life” for those killed, using a standard figure of $6 million per death.

Homeland-security preparedness also suffers from tying up 600,000 troops in the Iraq effort at one time or another; 40 percent of these are National Guard and reserves—“first-responder types,” Bilmes says. During Hurricane Katrina, 7,000 Louisiana and Mississippi National Guard members were unavailable to help because they were in Iraq. “If there were a major national disaster or terrorist attack tomorrow,” Bilmes says, “we would all bear the cost.”

Oil prices have increased from $29 to $60 per barrel since the war began, and the researchers attributed $5 or $10, under different models, of that increase to the conflict, which has decreased Iraqi oil production and produced general instability in the Middle East. This has a direct macroeconomic effect: given that the United States imports 4.75 billion to 5 billion barrels annually, these models imply a transfer of resources to oil producers of $25 billion to $50 billion per year. “Americans are, in a sense, poorer by that amount,” the authors write. The oil price increase also has an indirect multiplier effect by reducing consumers’ overall purchasing power.

Other macroeconomic effects involve “counterfactuals”—what would have been the case in the absence of an Iraq war. “Say you spent $500 billion and you bought a war,” Bilmes says. “What would have happened if you had spent $500 billion and bought something else?” That money might have gone into investments—in infrastructure like roads, for example, that would have stimulated the American economy more in the short run, and would also have long-term growth benefits. In the authors’ “moderate” scenario, the combination of expenditure switching from civilian to war outlays ($200 billion) and growth impacts ($250 billion) drains $450 billion from the economy. “It’s hard to imagine any way of spending that money,” Bilmes says, “that would have a less positive impact on the U.S. economy.”

“We are not only saddling our young people with this burden,” she adds, “but we are sweeping it under the carpet and not noticing that there’s a big bump. These costs are locked in. The reality is that the government is very, very bad at budgeting for long-term costs. And one of the hardest things about teaching budgeting is that people don’t understand scale. How big is big? The highest-grossing movie ever, Titanic, took in $1.8 billion. We spend that in Iraq in one week.”

~Craig Lambert

 

Linda Bilmes e-mail address: lbilmes[at]ksg [dot] harvard [dot] edu

For text of Bilmes and Stiglitz article: http://ksgnotes1.harvard.edu/research/wpaper.nsf/rwp/rwp06-002