April 13, 2006
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Articles by subject: Topics: Iraq’s troubles
UNITED STATES
Paying for Iraq
Blood and treasure
Apr 6th 2006 | CHICAGO
From The Economist print edition
The Iraq war is costing America hundreds of billions of dollars. But would containment have been much cheaper?
WHILE George Bush and his opponents argue about Iraq, the war of words is turning into a firestorm of figures. Iraq has already cost America more than $250 billion, and economists are now debating the future price tag. Estimates of the eventual cost range from just over $400 billion to more than $2 trillion. This battle of numbers is as much about politics as money.
Even if the war were not quite as expensive as some make out, many Americans would still be totally opposed to Mr Bush’s handling of Iraq. His critics say that he rushed into war, lied about his reasons, failed to plan adequately and botched the execution. Naturally enough, they view the high and rising cost of the war as evidence of those transgressions.
The predictions of Mr Bush’s team were clearly wrong. His top economic adviser at the time, Larry Lindsey, said the war would cost $100 billion-200 billion, and Democrats on the House Budget Committee agreed. Donald Rumsfeld, the defence secretary, backed an alternative guess of $50 billion-60 billion. Both sets of figures have proved too low.
How high will the price tag go? Harvard University’s Linda Bilmes and Columbia University’s Joseph Stiglitz (a Nobel laureate and chief economic adviser in Bill Clinton’s administration), reckon that the war could cost America an eye-catching $2.24 trillion through 2015*. Scott Wallsten and Katrina Kosec, in a study for the AEI-Brookings Joint Centre, predict that the war will eventually cost America $540 billion-670 billion†. (On the AEI-Brookings website, they have also posted an interactive calculator that lets visitors make their own forecasts††.) A third study, by three economists at the University of Chicago’s business school—Steven Davis, Kevin Murphy and Robert Topel—and based on what was known before the war, gives seven scenarios for it, of which the likeliest two (with some hindsight) suggest a final cost between $410 billion and $630 billion**.
Why is the Bilmes/Stiglitz estimate so high? Partly because they attribute a number of economic ills—oil prices, interest costs and foregone government projects—to the war in Iraq. These seem questionable claims. Oil prices are indeed much higher now than in early 2003, but the war’s impact on global oil supplies has been relatively small; a surging world economy has driven up demand. Including the interest payments on America’s Iraq spending is also strange. Alan Krueger, a Princeton University economist writing in the New York Times, has likened this to counting interest payments on a home mortgage as part of the purchase price. As for government projects, that estimate hinges largely on the perennial debate over whether more public investment would yield net benefits for the economy.
Stripping out these “macroeconomic effects” still leaves a forecast of between $840 billion and $1.19 trillion through 2015, much more expensive than the others. Two of the studies come up with similar tallies for soldiers’ pay, weapons, ammunition and supplies; but the estimates for these from Ms Bilmes and Mr Stiglitz are about $100 billion or so higher.
Casualties—the human half of the “blood and treasure” equation—are also a big part of the cost to America, and all three studies treat them as such. Efforts to attach dollar figures to human life offend some people, but governments and courts do it often for insurance cases, disability payments, safety regulation and so forth.
The Chicago economists treat these in a similar way to Mr Wallsten and Ms Kosec, attaching a cost to every soldier killed in Iraq of $6m-7m. Both studies assume an average cost of $1.3m for every wounded soldier. Ms Bilmes and Mr Stiglitz, again going further, add on to this another $3 billion annually that they expect the government to spend on veterans’ care over the next 20-40 years, and also add another $70 billion-110 billion to the AEI-Brookings study’s injury costs. Some economists say this is double counting; Ms Bilmes says it is not. Her paper is not clear enough to judge.
Both the Bilmes/Stiglitz and Wallsten/Kosec estimates —but not those of the University of Chicago—also assume that reservists earn less while serving in Iraq than in their civilian jobs, and count the income shortfall for those families as an economic cost. But a recent study by the Rand Corporation†††, based on payroll records for all reservists, found that those being deployed to Iraq make more money than they were earning as civilians. The popular belief that their pay drops appears to stem from flawed surveys that drew few responses—mostly, no doubt, from the minority of reservists who are losing income.
A war costing $410 billion-630 billion sounds pretty grim. But the three University of Chicago economists also evaluate a wide span of possible outcomes if America had chosen the alternative to war. Their analysis includes four pre-war scenarios for containment and a range of probabilities for various contingencies. These suggest that reining in Iraq and hoping for the best could reasonably have been expected to cost $250 billion-700 billion.
They point out that even before the September 2001 terrorist attacks, America had 28,000 troops in the region around Iraq, as well as some 30 ships and 200 aircraft enforcing no-fly zones. The trio estimate that these forces alone were costing America $11 billion-18 billion a year.
In one sense this figure is too high, since it attributes all of America’s military presence in the region to containment. On the other hand, America would probably have had to spend more on curbing Iraq after 2002, since the sanctions regime was weakening. Another cost of containment is impossible to quantify: the propaganda provided to al-Qaeda by America’s military bases in Saudi Arabia, and by the deaths of thousands of innocent Iraqis as a result of sanctions. But it is doubtful whether that propaganda weighed as heavy as America’s invasion of a sovereign (if rogue) state, and the 30,000 Iraqi civilians who have been killed since the war began.
AP
Where the real costs fall
The Chicago economists also make some rough guesses about how long Saddam Hussein or his sons would have stayed in power. They assume that, without an invasion, there was a 3% chance every year that their rule would collapse, based on studies that others have done on long-lived repressive regimes such as North Korea, Cuba and the Soviet Union. Mr Hussein’s sons, they argue, were in a strong position to succeed him.
Given what America was spending on Iraq, the authors reckon, it would have cost at least $200 billion, in present value terms, to keep containing it until it no longer posed a threat. So containment would have been pretty expensive for the United States, they argue, “even under the favourable assumption that it would be completely effective in achieving its national-security goals”.
The trio then go further. Containment would have involved a few contingencies, such as the periodic need to give the policy teeth with a show of force. So they factor those in, using a range of odds for each. Under a moderate containment scenario, they suggest a 10% chance every year of having to send troops to the region again to keep Saddam in line; a 3% probability each year of being drawn into a limited war; and a 10% chance that, sometime in the next decade, America would have been drawn into a major war with Iraq anyway.
Under these assumptions, and forgetting about any chance of WMD being used on American soil, the authors reckon that the expected cost of containment would have been around $400 billion, only a little less than the $410 billion that they now expect the war to cost. Those figures aside, their broader point is that the relative merits of war and containment hinged on various probabilities that were impossible to know in advance. Their analysis, as they claim, goes some way to explaining “the wide divergence of opinion about the wisdom of the Iraq war”.
In a way, though, that unceasing argument is beside the point. Mr Bush’s problem is what Iraq is costing now, and how far that has exceeded the almost carefree estimates made at the beginning. One example can suffice. At the start of the war, the Pentagon estimated that the cost of Iraq’s reconstruction would be $3 billion. It is now estimated at $20 billion, and still the lights are scarcely on in Baghdad.
* “The Economic Costs of the Iraq War: An Appraisal Three Years after the Beginning of the Conflict”, http://www.nber.org/papers/w12054
† see http://aei-brookings.org/admin/authorpdfs/page.php?id=1188
†† see http://aei-brookings.org/iraqcosts
** “War in Iraq versus Containment”, http://nber.org/papers/w12092
††† “Early Results on Activations and the Earnings of Reservists”, Jacob Alex Klerman, David S. Loughran, Craig Martin; www.rand.org/pubs/technical_reports/2005/RAND_TR2 74.pdf
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