Thursday, March 6, 2008

Bear Any Burden? The U.S. Can Afford Iraq

There's increasing buzz on Joseph Stiglitz and Linda Bilmes' new book, The Three Trillion Dollar War.

Here's
a Houston Chronicle synopsis:

When U.S. troops invaded Iraq in March 2003, the Bush administration predicted that the war would be self-financing and rebuilding the nation would cost less than $2 billion.

Coming up on the five-year anniversary of the invasion, a new estimate from a Nobel laureate puts the cost of the wars in Iraq and Afghanistan at more than $3 trillion.

That estimate from Nobel Prize-winning economist Joseph Stiglitz also serves as the title of his new book, The Three Trillion Dollar War, which hit store shelves Friday.

The book, co-authored with Harvard University professor Linda Bilmes, builds on previous research published in January 2006. The two argued then and now that the cost to America of the wars in Iraq and Afghanistan is wildly underestimated.

When other factors are added — such as interest on debt, future borrowing for war expenses, continued military presence in Iraq and lifetime health care and counseling for veterans — they think that the wars' costs range from $5 trillion to $7 trillion.

"I think we really have learned that the long-term costs of taking care of the wounded and injured in this war and the long-term costs of rebuilding the military to its previous strength is going to far eclipse the cost of waging this war," Bilmes said in an interview.
The Chronicle article suggests the Stiglitz/Bilmes claims are controversial in Washington. The article also reviews how the administration allegedly underestimated the "social costs" of the conflict.

Stiglitz and Bilmes summarize their work in
this piece from the Times of London:

The Bush Administration was wrong about the benefits of the war and it was wrong about the costs of the war. The president and his advisers expected a quick, inexpensive conflict. Instead, we have a war that is costing more than anyone could have imagined.

The cost of direct US military operations - not even including long-term costs such as taking care of wounded veterans - already exceeds the cost of the 12-year war in Vietnam and is more than double the cost of the Korean War.

And, even in the best case scenario, these costs are projected to be almost ten times the cost of the first Gulf War, almost a third more than the cost of the Vietnam War, and twice that of the First World War. The only war in our history which cost more was the Second World War, when 16.3 million U.S. troops fought in a campaign lasting four years, at a total cost (in 2007 dollars, after adjusting for inflation) of about $5 trillion (that's $5 million million, or £2.5 million million). With virtually the entire armed forces committed to fighting the Germans and Japanese, the cost per troop (in today's dollars) was less than $100,000 in 2007 dollars. By contrast, the Iraq war is costing upward of $400,000 per troop.

Most Americans have yet to feel these costs. The price in blood has been paid by our voluntary military and by hired contractors. The price in treasure has, in a sense, been financed entirely by borrowing. Taxes have not been raised to pay for it - in fact, taxes on the rich have actually fallen. Deficit spending gives the illusion that the laws of economics can be repealed, that we can have both guns and butter. But of course the laws are not repealed. The costs of the war are real even if they have been deferred, possibly to another generation.
The war is expensive, however, Stiglitz and Blimes' analysis lacks comparative and historical rigor. As Amity Shlaes argues, it's just not the case that the U.S. cannot afford to fight this war:

In their best-case scenario, under which the U.S. presence in Iraq drops to 55,000 non-combat troops by 2012, the total budgetary costs for the conflict add up to $1.7 trillion. They posit that a more realistic figure would be $2.65 trillion.

When a U.S. soldier dies, the authors write, the Pentagon pays something like $500,000 to families in insurance and death benefits. Stiglitz and Bilmes claim that a more accurate price would be $7 million -- the Pentagon fails to consider the lifetime earning and spending power lost when a soldier dies.

``Instead of paying for the war in Iraq, we could have fixed the Social Security problem for the next half-century,'' the authors say, and America would have had ``a smaller mountain of debt.''

In their best-case scenario, under which the U.S. presence in Iraq drops to 55,000 non-combat troops by 2012, the total budgetary costs for the conflict add up to $1.7 trillion. They posit that a more realistic figure would be $2.65 trillion.

When a U.S. soldier dies, the authors write, the Pentagon pays something like $500,000 to families in insurance and death benefits. Stiglitz and Bilmes claim that a more accurate price would be $7 million -- the Pentagon fails to consider the lifetime earning and spending power lost when a soldier dies.

``Instead of paying for the war in Iraq, we could have fixed the Social Security problem for the next half-century,'' the authors say, and America would have had ``a smaller mountain of debt.''

`Vast and Huge' Cost

Non-budgetary and interest costs are an important part of the Stiglitz calculation. The authors worry about the deficit. The conflict's costs, they say, ``are certain to be vast and huge and will continue for generations.''

The rebuttal to this argument starts with oil. Professor Steven J. Davis of the University of Chicago Graduate School of Business challenges as ``unwarranted'' their argument that even $5-$10 of the per barrel increase is because of the war.

The 2003 drop in oil production by Iraq accounted for less than 1 percent of world production. Overall, world oil output went up from 2002 to 2006.

The authors' description of the war's cost as ``vast'' or ``huge,'' conjures images of unprecedented financial sacrifice. But by the standard method of calculating costs of wars, defense spending as a share of gross domestic product, Iraq's price is improbably modest.

Back in 1986, the year before Ronald Reagan threw out his ``tear down this wall'' challenge to Mikhail Gorbachev, defense spending was 6.2 percent of the U.S. economy, according to the Congressional Budget Office. In 1968, the year of the Tet Offensive in Vietnam, it was 9.5 percent.

`Peace Dividend'

In 2005, 2006, and 2007, defense spending was about 4 percent of GDP -- as low as during the early 1990s, when the U.S. was enjoying the ``peace dividend'' after the Soviet Union's collapse.

As for the budget deficit, it is likely to range between 2 percent and 3 percent of GDP this year, a humdrum level nothing like the heroic 30 percent deficit Washington ran as it prepared for D-Day.

Yet it is the Stiglitz-Bilmes ``what-would-have-been'' argument that will prove most contentious. Back in 2006, Davis and two colleagues made their own counterfactual case, seeking to analyze the costs of the theoretical alternative to war against Iraq: containment of Saddam.

Davis found that the costs of containment in Iraq would have been big. In certain situations, they even would have been ``in the same ballpark as the likely costs of the Iraq intervention.''

Good News

In a phone request for an update of his paper this week, Davis said sending additional U.S. troops last year, the ``surge,'' increased costs enough to make the war yet more expensive -- but not by trillions of dollars.

And where in the ``Three Trillion'' calculus does the new good news fit in, such as the International Monetary Fund's prediction that Iraq's GDP will increase by 7 percent this year?

The message of this book is that the war can be blamed for America's failure to reform domestically. If this is true, then Washington would have used the period of 1991 to 2001 to rewrite Social Security and Medicare. It didn't.

Democrats and Republicans will both find the Iraq-as- budget-buster argument convenient. That doesn't make it compelling. It is also disingenuous. There are a number of reasons to oppose the war in Iraq. Just don't say we can't afford it.
Stiglitz and Bilmes' research will likely get huge play, as Shlaes suggests, but their work's not to be trusted.

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