The True Cost of the Iraq War: $3 Trillion and Beyond

Published on
by
The Washington Post

The True Cost of the Iraq War: $3 Trillion and Beyond

by
Joseph E. Stiglitz and Linda J. Bilmes

Former US Defense Secretary Donald Rumsfeld is seen in Washington, DC, two days before resigning. At the outset of the Iraq war Rumsfeld said the operation would cost in the region of 50 billion dollars, with the then defense secretary dismissing higher estimates as "baloney."(AFP/File/Mandel Ngan)

Writing in these pages
in early 2008, we put the total cost to the United States of the Iraq
war at $3 trillion. This price tag dwarfed previous estimates, including
the Bush administration's 2003 projections of a $50 billion to $60
billion war.

But today, as the United States ends combat in Iraq,
it appears that our $3 trillion estimate (which accounted for both
government expenses and the war's broader impact on the U.S. economy)
was, if anything, too low. For example, the cost of diagnosing, treating
and compensating disabled veterans has proved higher than we expected.

Moreover, two years on, it has become clear to us that our estimate did
not capture what may have been the conflict's most sobering expenses:
those in the category of "might have beens," or what economists call
opportunity costs. For instance, many have wondered aloud whether,
absent the Iraq invasion, we would still be stuck in Afghanistan. And
this is not the only "what if" worth contemplating. We might also ask:
If not for the war in Iraq, would oil prices have risen so rapidly?
Would the federal debt be so high? Would the economic crisis have been
so severe?

The answer to all four of these questions is probably no. The central
lesson of economics is that resources -- including both money and
attention -- are scarce. What was devoted to one theater, Iraq, was not
available elsewhere.

Afghanistan

The Iraq invasion diverted our attention from the Afghan war, now
entering its 10th year. While "success" in Afghanistan might always have
been elusive, we would probably have been able to assert more control
over the Taliban, and suffered fewer casualties, if we had not been
sidetracked. In 2003 -- the year we invaded Iraq -- the United States
cut spending in Afghanistan to $14.7 billion (down from more than $20
billion in 2002), while we poured $53 billion into Iraq. In 2004, 2005
and 2006, we spent at least four times as much money in Iraq as in
Afghanistan.

It is hard to believe that we would be embroiled in a bloody conflict in
Afghanistan today if we had devoted the resources there that we instead
deployed in Iraq. A troop surge in 2003 -- before the warlords and the
Taliban reestablished control -- would have been much more effective
than a surge in 2010.

Oil

When the United States went to war in Iraq, the price of oil was less
than $25 a barrel, and futures markets expected it to remain around that
level. With the war, prices started to soar, reaching $140 a barrel by
2008. We believe that the war and its impact on the Middle East, the
largest supplier of oil in the world, were major factors. Not only was
Iraqi production interrupted, but the instability the war brought to the
Middle East dampened investment in the region.

In calculating our $3 trillion estimate two years ago, we blamed the war
for a $5-per-barrel oil price increase. We now believe that a more
realistic (if still conservative) estimate of the war's impact on prices
works out to at least $10 per barrel. That would add at least $250
billion in direct costs to our original assessment of the war's price
tag. But the cost of this increase doesn't stop there: Higher oil prices
had a devastating effect on the economy.

Federal debt

There is no question that the Iraq war added substantially to the
federal debt. This was the first time in American history that the
government cut taxes as it went to war. The result: a war completely
funded by borrowing. U.S. debt soared from $6.4 trillion in March 2003
to $10 trillion in 2008 (before the financial crisis); at least a
quarter of that increase is directly attributable to the war. And that
doesn't include future health care and disability payments for veterans,
which will add another half-trillion dollars to the debt.

As a result of two costly wars funded by debt, our fiscal house was in
dismal shape even before the financial crisis -- and those fiscal woes
compounded the downturn.

The financial crisis

The global financial crisis was due, at least in part, to the war.
Higher oil prices meant that money spent buying oil abroad was money not
being spent at home. Meanwhile, war spending provided less of an
economic boost than other forms of spending would have. Paying foreign
contractors working in Iraq was neither an effective short-term stimulus
(not compared with spending on education, infrastructure or technology)
nor a basis for long-term growth.

Instead, loose monetary policy and lax regulations kept the economy
going -- right up until the housing bubble burst, bringing on the
economic freefall.

Saying what might have been is always difficult, especially with
something as complex as the global financial crisis, which had many
contributing factors. Perhaps the crisis would have happened in any
case. But almost surely, with more spending at home, and without the
need for such low interest rates and such soft regulation to keep the
economy going in its absence, the bubble would have been smaller, and
the consequences of its breaking therefore less severe. To put it more
bluntly: The war contributed indirectly to disastrous monetary policy
and regulations.

The Iraq war didn't just contribute to the severity of the financial
crisis, though; it also kept us from responding to it effectively.
Increased indebtedness meant that the government had far less room to
maneuver than it otherwise would have had. More specifically, worries
about the (war-inflated) debt and deficit constrained the size of the
stimulus, and they continue to hamper our ability to respond to the
recession. With the unemployment rate remaining stubbornly high, the
country needs a second stimulus. But mounting government debt means
support for this is low. The result is that the recession will be
longer, output lower, unemployment higher and deficits larger than they
would have been absent the war.

* * *

Reimagining history is a perilous exercise. Nonetheless, it seems clear
that without this war, not only would America's standing in the world be
higher, our economy would be stronger. The question today is: Can we
learn from this costly mistake?

Joseph E. Stiglitz, a professor at Columbia University, was chairman
of President Bill Clinton's Council of Economic Advisers and winner of
the Nobel Prize in economics in 2001. Linda J. Bilmes is the Daniel
Patrick Moynihan senior lecturer in public policy at Harvard University.
They are co-authors of "The Three Trillion Dollar War: The True Cost of
the Iraq Conflict."

 

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