The Economics of the Iraq War--BECKER

The third anniversary of the start of the Iraqi war has brought forth several assessments of how it was conducted, what its cost has been, and what the costs will be in the future. These include analyses of whether American military leaders adequately prepared for a war of insurrection, whether economic costs were grossly underestimated, and whether the American people were prepared for the protracted nature of and heavy casualties during the insurrection period. I will concentrate mainly on attempts to measure economic costs, but these estimates include assigning costs to deaths and injuries of American military personnel. Clearly, aggregate costs to the United States have been considerable, and they will continue to rise as the insurrection persists and additional lives are lost. These costs include the military equipment lost during the war and subsequent fighting, the value placed on deaths and injuries, increased depreciation of military equipment, higher cost of attracting enlistments to the military, and reconstruction aid to Iraq. Davis, Murphy, and Topel of the University of Chicago Graduate School of Business in "War in Iraq versus Containment", unpublished, February 15, 2006 make various estimates of the aggregate cost under different scenarios about how long the insurrection continues, the number of American lives that will be lost in the future, etc. They assume a statistical value of life of about $7 million per each military death, and about seven injuries per fatality. Their median estimate of the total cost discounted back to 2003 at a 2 per cent interest rate is about $450 billion, while their "high" estimates are between $650 and $850 billion. One can quarrel with their estimates--such calculations are extremely difficult-- but they are carefully made. In any case, their results show that the cost of the war is large in some absolute sense. Estimates of the war’s cost by Bilmes and Stiglitz in "The Economic Costs of the Iraq War", have received much more publicity. Stiglitz very briefly summarizes these estimates in a short piece this month called "The High Cost of the Iraq War", in the online forum Economists' Voice. In many respects their numbers are similar to those by Davis, Murphy, and Topel, but they are larger. Their "conservative" estimate of budgetary costs that does not include additional interest on the larger federal debt due to the war is $650 billion when discounted at 4 per cent. They also have "conservative" estimates that include additional interest on government debt, but I do not understand why this should be counted since they already count military spending as a cost. They adjust the $650 billion figure to account for increased depreciation of military equipment, the value of lives lost, and additional costs due to the many injuries of military personnel. Mainly due to the assumption about increased depreciation and additional losses due to injuries, they raise their estimate to $840 billion. I believe they exaggerate how large these costs are, but the calculations are difficult to make. Even so, their total is consistent with the high end of the Davis, et al. estimates. I am much more doubtful about the additions that Bilmes and Stiglitz make to reach total costs of between $1 and $2 trillion, the numbers that have received the greatest publicity, and are cited in Stiglitz;’ Economic Voice paper. They assume that the war increased the price of oil from $5 and $10 a barrel for between 5 and 10 years. These are sheer guesses that are far from obvious. This would depend on the net reduction in Iraqi oil production, the increase in the oil supplied by other producers, and the effects of the war on demand for oil. It is not clear that there was even a net reduction when one considers the alternative of continuing containment. Assuming the scandals in the UN administered oil for food program would have been discovered anyway, might not Iraqi exports under containment been considerably reduced? About half of the increase in their estimate of costs from $1 to $2 trillion is due to their most generous assumption about the magnitude and duration of the oil price increase. The other half is due to what strikes me as highly dubious assumptions about other macroeconomic effects of the war. Since they count government spending on the war as a cost, it is a bit of a stretch (and even double counting under reasonable assumptions) to count also some of the reduced spending on other government programs. This requires assumptions about private versus public returns on spending that have little basis in hard evidence. I have similar doubts about their adjustment ($250 billion) for the effects of the war on economic growth. I tentatively conclude from these two studies that the cost of the war will amount to somewhere between $500 and $850 billion, taking account of the loss in life and injuries. These are certainly high numbers, and generally much larger than initially estimated by the administration and many outsiders. Has the war been worth its cost? The American people are increasingly expressing grave doubts about that. I do not know the answer to this question, but whether the war was justified depends on how the Iraqi situation plays out, and what would have happened had we not gone to war. The Bilmes-Stiglitz paper, along with other papers on the cost of the war, do not compare these costs with the costs of alternative policies. Davis, et al do estimate the cost of various alternative scenarios, including continuing the containment of Saddam Hussein that had been in place before the war. Their middle range scenario concludes that the present value of the cost of continuing containment would have been about $400 billion. This is lower than their estimates of the cost of the war, but how much lower depends on which war estimate is used. With their middle range estimate of war costs, the difference is not large, but the difference is considerable with the $840 billion estimate of Bilmes-Stiglitz. It is not a justification for the war but neither is it totally irrelevant to put the war's cost in perspective. The over 2000 young American men and women killed are a minor fraction of the almost 60,000 soldiers killed, and 350,000 casualties, during the Vietnam war. It is also a fraction of the 40,000 mainly young persons killed annually in automobile accidents. Consider the magnitude of the cost of the Vietnam War if it had been (and should have been!) calculated the correct way. I have not mentioned anything about the costs or benefits to the Iraqi people. Much property has been destroyed and many Iraqis killed during the insurgency, but can anyone doubt that practically all Kurds and Shiites (about 75 per cent of the total population), and some Sunnis, consider themselves better off now than under the brutal regime of Saddam? This brutality includes not only the enormous devastation to the Iraqi economy, but also the many thousands of deaths that he caused, a number that would be well in the hundreds of thousands if deaths due to the Iran invasion are included. Since Democrats as well as Republicans often mention spreading democracy, I do not see how the effects on Iraqis can be ignored. No terrorist attack has taken place in the U.S. since 9/11, including the three years after the war started. Maybe that would have happened anyway, and maybe the war even raised the probability of such attacks. Still, the circumstantial evidence would suggest that the war might have decreased the probability of attacks in the U.S. This could be because terrorists have been busy concentrating on Iraq, or because we have killed many who might have been involved in such attacks. Still, I believe the war should be assessed a bad failure if Iraq degenerates into civil war that leads before very long to another brutal dictatorial regime. On the other hand, if Iraq stabilizes reasonably soon, has a decent government, and starts to progress economically, the war would have been a success. I say this not only because the war got rid of a cruel and dangerous dictator who inflicted immense harm on his own people, and who would have used highly destructive weapons on others if he ever obtained them. In addition, a stable and progressive Iraq is likely to have beneficial effects on Syria, Saudi Arabia, and other bad regimes in the Middle East that will directly benefit the whole free world, possibly including creating a background for a peace between Israel and its Arab neighbors. It could be a decade or more before the ultimate verdict about the war is available.The future looks precarious at present, but it is too early to throw in the towel and conclude that the war was a costly failure.

Comments

[Brian Shea Murphy]

Judge Posner and Dr. Becker,

I'm a sophomore majoring in Economics at Western New England College (Springfield, MA) and have studied both of you in class but I just found your blog today. I've been going through the archives and I'm very impressed by your discussions on a wide bevy of topics. It's an invaluable resource for someone like me who wants to approach law school with a strong Economics perspective. Most of the blogs out there are angry rants, which makes your intellectual discussions refreshing. Please keep writing. I'll keep reading. All the best, gentlemen.

-BSM-

[ben]

I don't know how the $7 million value per life is calculated, I presume a hedonic wage function of some sort. I agree that assigning a dollar value per life is useful, but I think without adjustment the $7 million overstates the cost of war.

The reasoning is this: if we are going to count the net cost of a life lost in war then we should also be counting the net cost of lives not lost.

Since all personel in Iraq are there because they volunteered, an argument can be mounted that these personel enjoy a private net benefit from participating in the conflict through some combination of wages earned, prestige, personal satisfaction and achievement. Its a bit more complicated than that - some personnel may have joined the military not expecting to see combat - but on the whole our forces are there because for them military service and likely participation in a conflict was the opportunity superior to their alternatives. I believe this benefit, if it can be estimated, is legitimately deducted from the economic cost of war to America.

[James Wilson]

Wes,

You wrote "_Iraq never had nuclear weapons and many of the chemical and biological weapons that Iraq had prior to 1991 had a sufficiently short shelf life that (even had they not been destroyed) they would not have been particularly useful as weapons at the time of invasion in 2003._"

That might true with the benefit of hindsight, but I doubt very much that Tony Blair would have spent so much time and energy trying to convince the British public that they were invading because of the threat of WMD if he'd not genuinely believed there would be some there. As I tried to explain above, I don't think that was his actual, or primary reason for invading, but he considered it was the only one on which he could sell it to the British public. He was risking looking extremely foolish (as has transpired to be the case) if it were otherwise.

[Collestro]

Rob,

"It's pretty clear that Becker has never carried an M16 ... kind of like Bush and Cheney."

It is quite fair to point out that the administration which lead us to war is headed by a coke sniffing deserter. Everyone knows our hawkish VP is a cowardly draft-dodger who was drunk enough to drive but not brave enough to serve. However, your slam against Prof. B. is bad form. His post is hardly a call to arms, but much more of a, "on the other hand" attempt to examine our current policy. Were he rattling the saber, it might be fair to point out he never held one. What he is trying to do is examine the economic basis of the war. He may never have held a gun, but he has wielded a pencil.

As a man who has taken up arms in the service of my county, and who shudders every time I hear the fascist phrase "homeland," let me ask for less heat and more light.

[Wes]

That might true with the benefit of hindsight, but I doubt very much that Tony Blair would have spent so much time and energy trying to convince the British public that they were invading because of the threat of WMD if he'd not genuinely believed there would be some there.Tony Blair's position was inconsistant. Because the invasion did not a have the approval of the international community, for it to be legal under international law (that is, not a war crime) he needed to justify the invasion as "pre-emptive" self defense. This meant that Iraq needed to have the capability and the intent to launch a major attack on Britain using WMD.On the other hand, if Tony Blair had actually thought that Iraq had the ability to retaliate for the invasion (for example, use a WMD to destroy half of London) then he most definitely would not have participated in the invasion.

[ben]

On the other hand, if Tony Blair had actually thought that Iraq had the ability to retaliate for the invasion (for example, use a WMD to destroy half of London) then he most definitely would not have participated in the invasion.

You're missing the point of pre-emption by assuming zero probability of that WMD's use on London absent invasion. It is surely possible that Blair judged the long term threat to Britain and her allies reduced by invasion i.e. that in the month between invasion and regime change Saddam would be less likely to get a WMD to a Western city than if he had stayed in power indefinitely. Your "most definitely" comment therefore doesn't stand up.

I would agree with you if Saddam had had a more credible deterrent, like a nuclear sub loaded with ICBMs parked in the Atlantic.

[mike riikola]

If it's $7 million per US life, then it is $7 million per all other lives lost, including the Iraqis. I'd subtract lives saved if and only if there were some immediate, credible, identifiable threat to American lives had the war not been fought. There is not now nor has there ever been any evidence for that; indeed, the war was justified on the novel grounds of a "grave and gathering" threat, a standard heretofore unknown to international law.

Add also the erosion of confidence in American electoral institutions as a method of governance: every stated justification for war has been proven false, thus eroding confidence in the notion of a "republican form of government" which not only leads the populace but represents its general will. Erosion of confidence results in less participation and thus by inference less "efficient" elections (i.e., most closely matched to the greatest sum of popular desires).

Add also the true opportunity costs of alternative allocations (including direct tax rebates to rich people, something GWB might agree is worthy), especially the lost value of contributions to the economy of people left undereducated by the war costs (which should be compounded, not discounted).

If it's morning, Becker and Posner rationalize the wishes of the status quo. "Service to power" is what you could call it.

[Wes]

You're missing the point of pre-emption by assuming zero probability of that WMD's use on London absent invasion.No, I am basing my argument on the fact that Iraq had not used WMD against the UK prior to the invasion. This fact allows us to conclude that Iraq lacked either the capability or the intent (or both) to attack the UK with WMD.If Tony Blair thought that the lack of a WMD attack on the UK prior to the invasion was due to a lack of capability (or both a lack of capability and a lack of intent) then he was lying to the public and furthermore he had no business claiming self defense as a justification for the invasion.On the other hand, if Tony Blair thought that the lack of attack was due (only) to lack of intent then he would have been colossally stupid to invade as that would certainly have motivated an attack.

[ben]

Wes, think for a moment about what you are saying. Iraq's failure to attack a particular target does not on its own rule out the possibility it will. Using your logic in July 1990, we would conclude Iraq either lacked intent or capability (or both) to invade Kuwait because it had not already done so. By 2003 any number of unseen internal factors could have moved Iraq's policy towards aggression.

Nothing you have said rules out the possibility that there was both intent and capability to attack and planning was under way to achieve that.

[ben]

Mike Rikola

I'm not talking about lives saved. That's separate and additional.

[Wes]

Using your logic in July 1990, we would conclude Iraq either lacked intent or capability (or both) to invade Kuwait because it had not already done so.Actually, Kuwait is a good illustration of my point which is that, in cases where pre-emption could be justifed as self defense, it is not actually a good idea.Specifically, Iraq had the capability to invade Kuwait for many years but prior to 1990 it did not have the intent. Kuwait could have acted "pre-emptively" and invaded first but all that would have done is discourage the international community from coming to the aid of Kuwait after the inevitable defeat and occupation of Kuwait by Iraq.Getting back to my point about Tony Blair, if Iraq had had enough WMD capability and intent to justify Tony Blair's decisions to invade as self defense then it would not have been in Britain's interest to invade pre-emptively anyway.

[anaxanagorenas]

Wes: "Kuwait could have acted "pre-emptively" and invaded first but all that would have done is discourage the international community from coming to the aid of Kuwait after the inevitable defeat and occupation of Kuwait by Iraq."

So it is better to wait until the enemy invades your territory in order to avoid discouraging uninvolved third parties from hypothetically coming to your aid?

Wes, you will have to explain yourself a little more. Though there are several arguments to be leveled against the ancient doctrine of pre-emption, surely this is not one of them. Please elaborate!

[James Wilson]

Wes,

The threat that Blair was continually alluding to was not the possibility of a direct attack by Iraqi forces on London - by super scuds or jets or whatever - but passing biological or chemical weapons to terrorists and having them set off in a clandestine attack. There was the infamous "45 minute" claim about Iraq being able directly to attack British bases in Cyprus, but that wasn't the main focus. Moreover, he wasn't just suggesting that WMD constituted a direct threat to Britain but also a breach of UN Security Council resolutions, which he was desperately trying to establish in order to legitimise the invasion and attract more allies.

One of the most dramatic domestic episodes in Britain was the suicide of the weapons expert Dr David Kelly, who couldn't face being named as the source who had slipped information to the BBC which the BBC broadcast as insider information suggesting the government was misleading the people about WMD. Ironically Kelly himself said that we'd never find the truth about what stocks of WMD remained in Iraq without military intervention.

I stand by what I said at the beginning: Blair invaded for other reasons, but believed genuinely that there were WMD. He risked looking (as has transpired) like a fool or a liar if there weren't. He only obtained Parliament's approval because of the WMD story - and has survived politically because enough of the major opposition party believed the same story.

[ben]

Wes, your arguments that pre-emption raises the threat of attack contradicts your earlier claim from above. You wrote:

Major terrorist attacks take a long time to develop. First, an event happens that makes certain individuals decide to take (terrorist) action. Then it takes a couple years for them to organize into a group of like minded individuals. Then it takes another few years to plan and prepare for the attack.

Please explain how the 5+ years of planning for an attack can be compressed into three weeks between invasion and the fall of Baghdad.

Even if invasion raised the incentives for terrorism, your own reasoning indicates there was no time to do anything about it.

[David]

Squatterblog #13
Just realized that the only way to get everything done on a to do list is to only put one thing on at a time, get it done, and move on. A bit selfhelpish, but that's what I'm thiking about this morning.
-------------------------------------------------
SQUATTERBLOG: David's Blog in the comment sections of other folks Blogs
#12 http://piequeen.blogspot.com/2006/03/blueberry-mountain.html#comments
#11 http://www.hypnagogica.com/2006_02_01_hypnagogica_archive.php#'114021838171707388'
#10 http://www.cake-club.com/emily/2005/10/four_words_i_lo.html
#9 http://storiesfromtheroad.com/blog/juli/2005/10/epic-night-in-new-york-city.php
#8 too http://sassyass.net/archives/000877.html
#8 http://www.zephoria.org/thoughts/archives/2005/04/18/its_real.html
#7 Evicted from http://www.kotke.org
#6 Evicted from http://www.phoblographer.com
#5 Page lost http://www.caterinafake.com
#4 Evicted from http://www.superherodesigns.com
#3 http://www.owlmonkey.com/halfshell/archive/00000062.html#comments
#2 http://www.zephoria.org/thoughts/archives/2003/07/29/monkey_vs_robot.html
#1 http://www.hypnagogica.com/2003_07_01_archive.php#105881872826773568

[Wes]

Please explain how the 5+ years of planning for an attack can be compressed into three weeks between invasion and the fall of Baghdad.By the time a pre-emptive invasion can be justified as self-defense, the planning and preparation have already taken place.Suppose that Tony Blair thought that Iraq had a 55 gallon drum of sarin and had the connections to deliver it to terrorists who had the capability to use it to flood a few blocks in London with poison gas. If Tony Blair invaded Iraq, he would remove an remaining deterrents to Iraq giving the sarin to the terrorists and the ensuing chaos would actually make it easier for Iraq to complete the transfer and for the terrorist to smuggle the sarin out of Iraq (think of Bin Laden in Afghanistan).Now, if Tony Blair did absolutely nothing, then it is possible that Iraq would use the sarin at a later date anyway. On the other hand, the whole neo-conservative premise on which the invasion was founded is that threat of invasion is an effective deterrent. If Tony Blair got a clear statement from the international community that use of the sarin would result in invasion and occupation then it is hard to imagine that Saddam Hussein would go ahead with the attack anyway. Furthermore, the reality was that the international community was opposed to Iraq possessing WMD and that, in fact, they had instituted policies that were effective in that regard.

[Wes]

Moreover, he wasn't just suggesting that WMD constituted a direct threat to Britain but also a breach of UN Security Council resolutions, which he was desperately trying to establish in order to legitimise the invasion and attract more allies.There are two ways the invasion would have been legal under international law - either with the approval of the UN (for any number of reasons but most likely relating to disarmanent requirements) or unilaterally, without UN approval, as part of a country's inherent right to self-defense.With respect to UN approval of the invasion, it didn't matter what Tony Blair thought, it mattered what the UN thought and, at the time of invasion, the the UN did not approve of the invasion.With respect to unilateral self defense, if Tony Blair really thought that Iraq was a direct threat to Britain then he either engaged in very sloppy thinking or very convoluted thinking to conclude the pre-emptive invasion was the best course of action.I stand by what I said at the beginning: Blair invaded for other reasons, but believed genuinely that there were WMD. He risked looking (as has transpired) like a fool or a liar if there weren't.He risked more than that. If he really believed that Iraq had the capability to carry out a major attack on Britain then he valued imposing democracy on Iraq more than the lives of his own people.Then again, Republican seem to like that kind of thing. Ronald Reagan is a hero because he valued hastening the economic collapse of the Soviet Union (whatever that was worth) more than he valued preventing the total annihilation of the United States in an all out nuclear war.

[Muppy]

Iraq war costs United States more than it was expected, but we knew that war was really uncertain thing before the Iraq war.

I think that we could do better to minimize the risk of uncertainty if government could contract with private insurance companies or if government provided high return assets which lose its value if the cost of war exceeds the certain cutoff points (like a bond).

Could insurance be a solution for cost problem in Iraq war?

[ben]

By the time a pre-emptive invasion can be justified as self-defense, the planning and preparation have already taken place.

You surely do not mean that pre-emptive invasion can be justified only once planning is complete and the WMD is in London and ready to go. By what morality do you permit terrorist states to act with such impunity?

As long as you admit the mere possibility that planning of a terrorist attack by Iraq on a Western city was not within three weeks of completion, then you must admit the possibility that invasion lowered the threat of WMD use by Iraq. Accordingly, your clever theory about Blair's paradoxical rationale can be, and may well be, circumvented.

As you note above, use of WMD by Iraq would guarantee Saddam's fall. Given this, a pre-requisite for activating a WMD is certainty (in the opinion of the Iraqi leadership) of Iraqi regime change. But Saddam was convinced that Iraq would win the war even after the invasion had begun, and continued to believe this until only a few days before invaders reached Baghdad. This is why Saddam did not blow the oil wells or burst dams in the south of Iraq - he need these to maintain power and survive internal uprisings after he had repelled the invaders. In effect, the time during which Saddam believed his defeat was likely or certain - the time in which he might activate a WMD - was only a few days.

[ben]

Ronald Reagan is a hero because he valued hastening the economic collapse of the Soviet Union (whatever that was worth) more than he valued preventing the total annihilation of the United States in an all out nuclear war.

Ummm...Wes, the economic collapse of the Soviet Union and the end of Cold War wasn't a coincidence.

[Wes]

Ummm...Wes, the economic collapse of the Soviet Union and the end of Cold War wasn't a coincidence.Maybe it wasn't a coincidence and maybe it was but, even if it wasn't a coincidence, is it really worth going to the brink of total nuclear annihilation to hasten something that is going to happen anyway? My answer is no.Interestingly, that seems to be a theme in this discussion of Iraq: whether it is preferable to have a high risk for a short time or a low risk over a longer time.

[2slugbaits]

As someone who does this for a living, I have to correct some of the claims by Becker and Posner in their NBER paper on this subject. First, their estimate of deployment costs, which they infer from some Congressional data, is way off the mark...WAY off the mark. Basically Becker and Posner have confused total costs and marginal costs. Most of the costs that they attribute to extended deployments to support containment are really fixed costs that would apply even if the forces were in CONUS. They claimed that they were not aware of any formal cost models within DoD. The DoD cost analysis folks use a Contingency Operation Support Tool (COST) and Army folks use a FORCES model. They also assume that the "containment" costs would have gone away had the war gone as Bush had hoped. There is no evidence for this at all. For example, all of the Navy and Air Force deployments would have stayed in the area even if Iraq magically became Sweden. The no fly zone flights should really be thought of as training flights. And the real intent of those no fly zone patrols was to provoke a response by Saddam, not to "contain" him. The Army troops in the region rarely exceeded a brigade. In fact, Kuwait was treated as an alternative training site for Ft. Irwin. Bottom line is that the containment costs that Becker and Posner used were really fixed costs and did not depend on Saddam. So scratch those as contingent costs of the containment policy. That argument is a red herring. There is also an assumption that the real costs were a complete surprise to analysts at the Pentagon. That's not how I remember things. Posner and Becker also use the old device of presenting a false choice. They claim that there were only two plausible options: continuing containment or war. Those may have been the only choices in President Bush's mind, but more creative policymakers could have come up with other possibilities. For example, a two-thirds solution that left a rump Sunni state was something that could have been done at almost anytime and at very little cost. Not a perfect solution, but in hindsight (as I would also argue in foresight) that two-thirds solution looks pretty good right now.

[Arun Khanna]

Rob said: "It's pretty clear that Becker has never carried an M16 ... kind of like Bush and Cheney."

What is pertinent to Professor Becker's analysis is his logic and economic arguments not whether he has carried an M16. Though now that you mention 16 I am reasonably sure Becker's IQ is 60 points above yours, Rob.

[nate]

Off-topic:

-Any input on Google Finance? (in "Beta" stage)

-What do you think of "Take-Off from Bath Tub" in bottom-right-corner at site below?

http://finance.google.com/finance?q=uaua

[Dennis]

The US military has no doubt learned valuable lessons for future conflict, but then it was already committed to a war in Afghanistan where much of the same lessons were learned.That's true.