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Davis, Murphy, and Topel of the University of Chicago Graduate School of Business in "War in Iraq versus Containment", unpublished, February 15, 2006 make various estimates of the aggregate cost under different scenarios about how long the insurrection continues, the number of American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

[2slugbaits]

"The US military has no doubt learned valuable lessons for future conflict" ............................................................................................................................ Perhaps, but I think it's more likely that the military will have forgotten those lessons long before they will have another opportunity to put those hard learned lesson to use again. Just as in Vietnam, the debacle of this war could cause the US military to retreat into itself for another generation. "No more Iraqs" will be the watchword. A whole new generation of officers will be trained in how to fight budget battles instead of real battles. Career paths will come out of service in G8 (budget & resources) rather than G3 (operations). The real Pentagon battles won't be against terrorists, it will be with politicians who are going to have find a way to pay for this war once all those bills start coming in. And one of the effects of the war could be that military planners become even more seduced by the allure of pie-in-the-sky weapon systems that harken back to the good old days when generals fantasized about tanks rolling across the Fulda Gap. That was the kind of war in which the enemy played fair! You can expect the military to shun future Iraqs and future peacekeeping missions. I wouldn't mind the former, but the latter would be irresponsible (think of Darfur). Maybe Messrs. Becker and Posner should have included the costs of future inaction in their analysis. Being gun shy about future military adventures if things went badly was a predictable (and predicted) cost.

[Ronny Max]

"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."

As an independent voter, I'm confunded by President Bush attempts to define victory in Iraq, and the statement above is the first reasonable - and devoid of partisan blobs - attempt to define what should be our goals in iraq. I hope you can expand on this theme.

[James Wilson]

2slugbaits

The 'valuable lessons' to which I referred were more on the operational level rather than the strategic level. I agree that one result of Iraq is that America will be very reluctant to commit to another major foreign operation, which is a bad thing: future operations need to be judged on their own terms, and not avoided simply because people have bad memories of what might have been a very different experience. I meant on the ground level: the US is learning the hard way about the dangers of RPGs and IODs, as well as the more subtle business of winning of hearts and mind. Those were all things that could have been learned in Afghanistan if America hadn't become disinterested. And I don't think they're learning about hearts and minds either. One problem was the fear of casualties at the start. A British colonial governor would have rooted out the trouble makers before they started and hanged them in the town square. One contemporary British officer, Col. Collins (whose moving pre-battle speech was hung in President Bush's office), with decades of experience in Northern Ireland (a much closer parallel than Vietman), ran his province in Iraq in 2003 with an iron fist and experienced no trouble, using the sort of tactics found to succeed in Ireland.

In reply to Prof Becker, whether the average Iraqi is better off is a tough call. He has greater freedom (for now), but not greater economic prosperity and now faces the threat of terrorist attacks every day. Security is under severe strain. Although the Iraqis supported the overthrow of Saddam at the time, the worsening conditions mean that their view now might be different. That said, I accept that nation building takes years, and did so even in Germany and Japan after WWII.

Wes,

Blair was trying to convince the UN that Saddam was in breach of UN resolutions and therefore another resolution should be passed authorising the war. When that wasn't forthcoming, he wanted everyone to believe that the alleged breaches justified war without a further resolution. I know it didn't matter what he thought, that's the whole point about why he was trying to gain UN endorsement.

As to the threat from WMD, I repeat what I said before - it was not a threat of direct attack but that, at some point, Saddam might pass WMD stocks to terrorists who would use them in Britain. Invading could recover those stocks before that happened, hence it was not the case that Blair would not have invaded had he known Saddam possessed WMD.

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