Iraq War Will Cost
More-than-$2-Trillion
Two scholars, one a Nobel Prize winner, revisit their estimate
of the true cost of the Iraq war – and find that $2 trillion was
too low. They consider not only the current and future budgetary
costs, but the economic impact of lives lost, jobs interrupted
and oil prices driven higher by political uncertainty in the
Middle East.
By Linda Bilmes
linda_bilmes@harvard.edu
and Joseph E. Stiglitz
jes322@columbia.edu
11/03/06 "Milken Institute Review"
-- -- In January,
we estimated that the true cost of the Iraq war could reach
$2 trillion, a figure that seemed shockingly high. But since
that time, the cost of the war – in both blood and money – has
risen even faster than our projections anticipated. More than
2,500 American troops have died and close to 20,000 have been
wounded since Operation Iraqi Freedom began. And the $2 trillion
number – the sum of the current and future budgetary costs along
with the economic impact of lives lost, jobs interrupted and oil
prices driven higher by political uncertainty in the Middle East
– now seems low.
One source of
difficulty in getting an accurate picture of the direct cost of
prosecuting the war is the way the government does its
accounting. With “cash accounting,” income and expenses are
recorded when payments are actually made – for example, what you
pay
off on your credit card today – not the amount outstanding. By
contrast, with “accrual accounting,” income and expenses are
recorded when the commitment is made. But, as Representative Jim
Cooper, Democrat of Tennessee, notes, “The budget of the United
States uses cash accounting, and only the tiniest businesses in
America are even allowed to use cash accounting. Why?
Because it gives you a very distorted picture.”
The distortion is
particularly acute in the case of the Iraq war. The cash costs
of feeding, housing, transporting and equipping U.S. troops,
paying for reconstruction costs, repairs and replacement parts
and training Iraqi forces are just the tip of an enormous
iceberg. Costs incurred, but not yet paid, dwarf what is being
spent now – even when future anticipated outlays are converted
back into 2006 dollars.
Our Debt to Veterans
A major contributor to
this long-term cost is the medical care and disability benefits
provided to veterans. More than one million U.S. troops have now
served in Iraq. And once they leave, each is entitled to a long
list of benefits for the remainder of his or her life. Veterans
can apply for compensation for any disabling injury or disease
(physical or mental) that occurred on active duty or any
existing condition that was made worse by military service.
Benefits are based on the extent of the disability, ranging from
10 percent to 100 percent. And, because some medical problems do
not become apparent right away, claims are likely to be filed
for years after the war is over.
There are 2.6 million
veterans currently receiving disability pay, including a
sobering 40 percent of the soldiers who served during the
four-week-long Gulf War in 1991. Accrued liabilities for U.S.
federal employees’ and veterans’ benefits now total $4.5
trillion. Indeed, our debt for veterans’ health and disability
payments has risen by $228 billion in the past year alone.
These numbers are
unlikely to fall. More than half of the troops in Iraq have
served two or three tours of duty under grueling conditions.
Moreover, depleted uranium, used in armor-piercing artillery
shells because it is hard, heavy and cheap, was implicated in
many of the medical claims by soldiers from the first Gulf War.
And the same radioactive material was used in the toppling of
Saddam Hussein.
Note, too, that
improvements in body armor mean that an unusually high number of
soldiers are surviving major injuries, but ending up disabled.
About 20 percent of survivors have suffered major head or spinal
injuries, 18 percent incurred serious wounds and an additional 6
percent are amputees. The estimated 7,000 veterans with severe
brain, spinal, amputation and other serious injuries will
require a lifetime of round-the-clock care.
Government medical
facilities are currently overwhelmed by the needs of soldiers
injured in Iraq. Some 144,000 of them sought care from the VA in
the first quarter of 2006 – 23 percent more than the Bush
administration had estimated for the entire year! Similarly, the
government projected that 18,000 returning soldiers would seek
treatment for posttraumatic stress disorder in 2006 – but the VA
treated 20,638 Iraqi war veterans for PTSD in the first quarter
alone. All told, in the past year, the VA has added 250,000 new
beneficiaries and still has a backlog of more than 400,000
pending claims.
Rebuilding the
Post-Iraq Military
Another big future
obligation is the cost to “reset” the military – that is, to
restore U.S. forces to their strength and preparedness prior to
Iraq. This will require a major capital investment to replace
military equipment depleted or destroyed by the war. The capital
cost is in addition to the operating costs for repairs,
ammunition, spare parts and fuel. For example, the United States
now has 37,000 light military trucks in Iraq accumulating
mileage at up to six times the peacetime rate. And while there
may be no good time to replace the weapons, vehicles, medical
equipment and the like that will be used up, it’s clear the bill
will come due at a particularly bad time – that is, in the
decades during which Americans will be wrestling with the
question of how to pay for the pensions and medical care of
retired baby boomers.
Budgetary Cost of
the War
Congress has already
appropriated approximately $430 billion for military operations,
reconstruction and related programs in Iraq and Afghanistan. And
these cash outlays have been rising as the war has progressed.
In fiscal year 2003, the average monthly cost of operations was
$4.4 billion, while today operations are running about $10
billion a month.
Of the million troops
who have served in Operation Iraqi Freedom, some 400,000 are
reservists or members of the National Guard – which adds an
additional layer of costs. Reservists are expensive to activate
because the military needs to start paying them full-time
salaries (instead of paying for one weekend a month). By
contrast, regular forces receive full-time salary in war or
peace. Most reservists are older and have families, so they are
paid additional compensation while on active duty. Moreover, if
they are killed, their dependents are entitled to compensation
and benefits including housing, education loans and job
training.
The escalating costs
also reflect the vast sums that the Defense Department has been
spending to recruit soldiers. In the past two years, the armed
forces have nearly doubled the number of recruiters, increased
bonuses to as much as $40,000 for new enlistees, and paid
special bonuses and other benefits worth as much as $150,000 for
members of the Special Forces who re-enlist. The Defense
Department has also relied on contractors to support the war
effort, which has proved to be a very expensive way to keep the
troop count down. In many contracts, security costs represent 25
to 30 percent of the total outlay. The Pentagon has managed some
savings – such as no longer needing to police the “no-fly” zone
that protected the Kurds before Saddam was ousted. But on
balance, the Defense Department has increased spending by
several billion dollars annually for war-related expenses that
are over and above the sums going directly to combat operations.
While economists don’t
generally include interest on extra budget deficits as a cost of
the war – interest payments can be viewed as transfer payments
to creditors – the budgetary reality is very different, and thus
interest costs are worth considering here. With rising interest
rates (themselves partly due to the war, as central banks around
the world work to combat the inflation brought on by high oil
prices), these costs are soaring. The Congressional Budget
Office estimates that the interest payments on the money
borrowed to finance the Iraq war will total $264 billion to $308
billion.
We have used the CBO’s
two scenarios for expected troop deployment to make a reasonable
projection of the likely underlying costs of operations, and
then adjusted these numbers to an accrual basis in order to
reflect future costs outlined above. Looking purely at direct
costs to taxpayers, we estimate that the total cost of the Iraq
war will be in the $1 billion to $1.4 billion range under the
CBO’s core assumption that the U.S. maintains a small presence
in Iraq through 2016. Even under a more optimistic scenario –
that all U.S. troops are home by 2010, the budgetary cost of the
Iraq operation will reach nearly $1 trillion.
Economic Costs of
the War
Economic costs differ
from budgetary costs in three ways. First, some costs are borne
by individuals and families or by non-federal-government
agencies, and thus do not show up in federal accounts. Second,
the prices paid by the government do not reflect the market
value of the services purchased. Third, economic costs do not
include interest payments (which from an economic perspective
can be viewed as transfer payments), but do include long-run
impacts on the growth of the economy. Here, we have focused only
on a few of these additional costs: the loss of productive
capacity of the young Americans killed or seriously wounded in
Iraq, the loss of civilian wages that would have been earned by
those called back to duty in the Reserves, and the macroeconomic
effects that reduce output.
Military Fatalities,
Serious Casualties and Reserves Wage Differential
Although it is
problematic to translate the value of a life into monetary
terms, economists and private insurance firms commonly determine
the “value of a statistical life” (VSL) by inferring how much
workers demand to perform hazardous jobs (think mining or
firefighting) or how much consumers are willing to pay to reduce
risk (think mammograms or smoke alarms). In non-military areas,
such as safety and environmental regulation, the federal
government values the life of a young adult male at around $6.5
million.
One could argue that
the true cost of death and disability for an all-volunteer army
is already reflected in military pay premiums for hazardous
duty. But we think this greatly underestimates the real cost.
First, recruits, many of whom are too young to buy a beer
legally, have little information about the likelihood of being
killed or injured, or how much they will come to value their own
safety later in their lives. Second, many of the soldiers in
Iraq are not really volunteers. The majority serving there are
either reservists or Guard members who never expected to go to
war, or regular army personnel ordered by the Pentagon to serve
far beyond their scheduled length of deployment.
Hence, we would argue
that very little of the true cost of the deaths of American
soldiers is reflected in the budget. Using a VSL estimate of
$6.5 million, the economic cost of the American soldiers and
contractors who have already lost their lives adds up to $16.9
billion. (We have not included the cost of the estimated 40,000
to 100,000 Iraqis killed in the conflict.)
By the same reasoning,
the budgetary expenditures also underestimate the true economic
costs to the soldiers wounded because the outlays do not include
adequate compensation for what tort law calls pain and
suffering, or additional health care expenditures by the
soldiers’ families and non-federal-government agencies. We
believe veterans, and their families, receiving full disability
payments bear costs equal to those who die in combat, and
therefore we should assign each case a non-budgetary cost of
$6.5 million (the value of a statistical life). We assign a
modest 20 percent of that figure to those who are wounded less
seriously.
There is also an
economic cost in the difference between civilian and military
wages for reservists. This difference is a cost borne by the
economy and shows up as lower productivity. In their study of
the economic costs of the war published by the AEI/Brookings
Joint Center in 2005, Scott Wallsten and Katrina Kosec
calculated that the “opportunity cost” of using Reserve troops
at current levels is $3.9 billion to date.
Note, moreover, that a
disproportionate number of these reservists work in critical
“first-responder” jobs back home – as fire-fighters, police and
emergency medical personnel. Nearly half the police forces in
the United States now have some of their ranks deployed in Iraq,
and the average length of Guard mobilization is 480 days. It is
difficult to measure the cost of this deployment in purely
economic terms because there is a large unquantifiable
“insurance” value of having trained first responders available
for domestic emergencies. Consider, for example, the losses
associated with Hurricane Katrina that might have been avoided
if the 7,000 Louisiana and Mississippi Guardsmen in Iraq had
been home to help.
Macroeconomic
Effects of the War
As large as the direct
costs are, the indirect impact on total economic output may be
several times larger. Consider just two sources of macroeconomic
cost.
Oil Prices
The price of oil is
significantly higher today than it was before the war in Iraq.
But to even begin to assign a macroeconomic cost to this, we
need to know what the price would have been if there had been no
war.
Commodity futures
markets provide some insight. Before the war, they were
implicitly forecasting that oil prices would remain in the range
that they had been – $20 to $30 a barrel – in spite of other,
more predictable factors affecting prices, such as strong
economic growth in China and India. Today, by contrast, the oil
futures markets predict prices will be in the mid-$60-per-barrel
range during 2006 and 2007, and fall no earlier than the year
2008.
One explanation is that
the instability in the Middle East brought about by the Iraq war
has increased the risk of investing in the region. But because
costs of extraction are so much lower in the Middle East, high
oil prices have not stimulated a commensurate supply response
elsewhere. If political stability is restored, the reasoning
goes, prices will fall and investments in high-cost liquid fuels
elsewhere in the world – think heavy oil in Venezuela or tar
sands in Canada – will prove to be losing ventures.
We believe,
accordingly, that the best estimate of the impact of Iraq on oil
prices is a large proportion of the $45-a-barrel increase since
the war began. Nonetheless, we offer a conservative calculation
based on the assumption that only a small fraction of that
amount – $5 to $10 – is due to Iraq. Given U.S. imports of
roughly five billion barrels a year, a $10-per-barrel increase
translates into an extra expenditure of approximately $50
billion. Americans are poorer by that amount. If merely a $5
price increase persists for five years, this generates a
conservative estimate of $125 billion in costs. More plausibly,
if we base our estimates on a $10 price increase, and assume (as
futures markets believe) it extends for at least six years, the
cost is $300 billion.
Most macroanalyses
assume that one must reckon with more than just these direct
supply-side effects if the economy is prone to operating below
full capacity. The increase in oil prices means Americans have
that much less to spend on other goods – including goods made in
the United States. This in turn leads to a reduction in
aggregate demand, and the reduction leads to lower economic
output. Standard macroeconomic models suggest an “oil
multiplier” of around 1.5 (achieved over two years). Thus,
assuming that the economy remains below its potential, our cost
estimate rises to $450 billion.
Budget Reallocation
The macroeconomic costs
associated with the increased expenditure on the war are more
difficult to estimate. If we were not spending the money on
Iraq, would we be spending it on something else? Would we have
had the same deficit, but just more tax cuts? Would the Federal
Reserve have stopped raising interest rates sooner if it wasn’t
worried about the inflationary effects of higher oil prices –
and thereby made recession in 2006 less likely?
Here, we offer a very
conservative estimate of these macroeconomic effects using an
“expenditure-switching” model. Spending money to hire, say,
Nepalese workers in Iraq provides little indirect stimulation to
the American economy – far less than would have been provided if
the money had been spent on investments in schools or roads (or,
for that matter, on houses and cars) in the United States. In
estimates presented last January, we put the cost of budgetary
impacts (including expenditure switching and the impact on
future productivity) at $450 billion.
$2 Trillion and
Counting
The total costs of the
war, including the budgetary, social and macroeconomic costs,
are likely to exceed $2 trillion. As large as these costs are,
an equally large set of costs have been omitted. We have not
included the costs borne by other countries, either directly (as
a result of military expenditures) or indirectly (as a result of
the increase in the price of oil.) Then there are the intangible
costs – the cost of our reduced capability to respond to
national security threats elsewhere in the world, and the cost
of rising anti-American sentiment in Europe and the Middle East.
Americans have long taken pride in fighting for human rights.
But our credentials have been badly tarnished by the Iraq war,
leading to a sharp decline in America’s “soft power.” On issues
from trade negotiations to global warming to the international
criminal justice system, this decline will have a continuing
impact on the United States’ ability to have its point of view
prevail.
Last Thoughts
In responding to
cost-based criticisms of the invasion and occupation of Iraq,
the Bush Administration argues that one does not go to war on
the basis of calculations by bean counters. After all, Franklin
Roosevelt did not wait to respond to Pearl Harbor until his
budget analysts could assay the costs and benefits. But, with
Iraq, America had a choice of whether and when to attack. If
there ever was a “project” that should have been subject to
careful scrutiny from all perspectives – including the economics
– this was it.
Just as going to war
was a matter of choice, staying in Iraq is also a matter of
choice. There may be costs associated with leaving. But there
will be costs associated with staying. Every day we stay in Iraq
we accrue costs that will be reflected in budget outlays, lost
productivity and individual pain and suffering for decades to
come. We need to ask: are they outweighed by the benefits?
Linda Bilmes teaches
public finance at the Kennedy School of Government at Harvard. -
E-mail:
linda_bilmes@harvard.edu
Joseph Stiglitz, a former chairman of the Council of Economic
Advisors and chief economist at the World Bank, teaches at
Columbia University. He was awarded the Nobel Prize in economics
in 2001. - E-mail:
jes322@columbia.edu
This article originally
appeared in the December 2006 issue of the
Milken Institute Review.
© 2006 by the President and Fellows of Harvard College
