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July 29, 2007

Comment on Benefit Cost Analysis Applied to the Iraq War-Becker

Costs are usually easier to measure in modern wars than benefits. Two estimates of the past and expected future cost of the Iraq war to the United States by Davis, Murphy, and Topel, and by Bilmes and Stiglitz are discussed in my blog entry for March 19, 2006. They quantity the cost of materials and equipment used and destroyed during the war, the higher cost of attracting volunteers to the American armed forces, the cost of the many injuries to military personnel, and the cost of reconstruction aid to Iraq. They also use modern economic research on the amounts necessary to compensate individuals for taking life-threatening risks to value the cost of the number of American lives lost in the war.

The cost estimated by these two studies differs to some extent, as analyzed in my post referred to above. However, a total cost of the war to Americans in the range of $700 billion- $1.2 trillion overlaps both studies. For the purposes of my discussion, I assume the total American cost of the war will amount to $1 trillion. As Posner well discusses, some potential costs are extremely difficult to quantify, and hence they are ignored by both these studies. Such hard to quantify costs include any increased alienation of Muslims toward the United States, the experience gained by the insurgents in fighting American military power, and a potential widespread conflict between Sunnis and Shiites.

Benefits of the war are even hardier to quantify than the costs. Possible benefits would include increased skill of the American armed forces at fighting insurgencies in cities that use suicide bombers, car bombs, and other modern tactics, preventing Saddam Hussein from using the international weapons black market to acquire weapons of mass destruction, perhaps a weakening of terrorist organizations like Al-Qadda, the stabilization of the Middle East, and possibly other benefits. Since difficulties in quantifying such benefits apply to other modern wars and also to many other large-scale activities, it might seem that benefit-cost analysis is useless when applied to these kinds of issues.

Obviously it would be much easier to assess wars and other big events if benefits also could be readily quantified; maybe that will become possible some day as economists continue to make progress in finding ways to quantify various intangible benefits and costs. I say, "continue" because not that long ago economist believed that the value of life to individuals was unquantifiable. Yet advances in the theory of risk-bearing showed how the statistical value of a life could be estimated from choices individuals make in situations that increase their probability of dying, such as driving fast, or working as civilians in war zones such as Baghdad.

Still, even without direct estimates of benefits, the costs estimated for the Iraq war can be used to make a benefit-cost assessment of the war. Given a cost of the Iraq war of say $1 trillion, how big would benefits from the war have to be to exceed this amount, and is that likely? For example, $1 trillion is equivalent to a payment of a little over $10,000 by every single American family, or about twenty per cent of average family income. Would the typical family be willing to pay that much to finance the war in Iraq because they believe that they will get at least that much in benefits from the war? Almost surely the answer would be an overwhelming "no" in any poll taken about Americans' willingness to pay this amount for the war, although some people might not appreciate some long term benefits (or costs), like a possible regional stabilization or serious harm to a terrorist organization.

The estimated cost of the war can be translated into other measures that may help in determining whether or not the war is considered a success or failure. For example, if the statistical value of life is taken to be $5 million for the average young American- this magnitude is in the center of various estimates of such a value- then a $1 trillion cost of the war is equivalent to a loss of 200,000 young men and women. Since this is far greater than the actual loss of lives even in most major wars, like the Vietnam war, it is hard to believe that Americans would be willing to pay that much for the Iraq war, even if Hussein had or was likely to acquire weapons of mass destruction. To be sure, a complete translation of the total cost into a lives-lost equivalent is extreme and possibly misleading, but it does provide a way of gauging the benefits necessary to justify the huge cost of the Iraqi war.

Posted by becker at 05:57 PM | Comments (9) | TrackBack (0)

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An alternative approach might be to consider the opportunity costs to Iraqis. Would they rather have had some trillions of dollars spent on armed combat on their home territory, or would they rather have welcomed $16,000 per individual Iraqi to relocate out from under Sadam's regime? What other opportunity costs might present themselves to Iraqis in this situation?

Posted by jurisnaturalist at July 29, 2007 08:34 PM | direct link

Iraq Body Count reports that there have been between 67845 and 74334 verified civilian Iraqi deaths to date. The Lancet study published at the end of 2006 estimated the death toll among Iraqis as a result of the US-led invasion to be 655,000. Applying the dollar estimate for the value of a statistical life of $5 million, suggests that the cost in lost lives of Iraqis has been at least $0.4 trillion and as much as $3 trillion, with the high estimate being closer to the appropriate value. Thus, it is not unreasonable to estimate the economic cost of the war at $4 trillion, not including the damage to the Iraqi infrastructure. To put this value into perspective, consider that the gross domestic product of all the countries in the world is estimated at US$48 trillion. Consequently, US adventurism has, to date, consumed enormous global wealth, equal to about 8% of the yearly global economy.

Posted by UCD Neuroscientist at July 30, 2007 12:48 AM | direct link

UCD Neuroscientist:

You make an assumption which just does not hold - the prices of US and Iraqi statistical lives are not the same. I doubt that the value of the Iraqi life is much higher than 100.000 USD, if the same methodology for determinining the value of statistical life is used in Iraq.

We may not like it, but this kind of methodology of determining the value of life is country-specific.

Posted by Marko at July 30, 2007 09:08 AM | direct link

Marko, I believe that you misunderstand the concept of the statistical life value. Granted, the average American will produce more income and will accumulate more wealth than the average Iraqi. However, this value has nothing to do with an individual's earning power. Rather, it is based on how much an individual is willing to pay to accept a small risk. Clearly, even in the US when determined under different scenarios, there are dramatic differences in the value obtained. However, the $5 million value cited is based on large experience. I see no logical reason to believe that Iraqi citizens value their own lives any less than we Americans value our own. The fallacy you express, where we assume that another individual values his or her own life less than we value our own, has allowed us to rationalize murdering more than one-half million Iraqis.

Posted by Neuroscientist at July 30, 2007 10:01 AM | direct link

I see no logical reason to believe that Iraqi citizens value their own lives any less than we Americans value our own.

Ummm, other than the fact that they have a habit of blowing themselves up?

The idea that the West has ‘murdered’ a half million Iraqis is absurd. Shia consider Sunni to be Infidels. Sunni consider Shia to be Infidels. The Americans are not killing Iraqis. The Sunni and Shia are killing each other in a religious war driven by Islamic ideology. Often with drill bits.

2:99 Disbelievers are evil people.
2:104 For disbelievers is a painful doom.
3:73 Don't believe anyone who is not a Muslim.
3:48 Don't be friends with non-Muslims. They all hate you and want to ruin you.
4:89 Have no unbelieving friends. Kill the unbelievers wherever you find them.
4:63 Oppose those who refuse to follow Muhammad.
4:101 The disbelievers are an open enemy to you.
5:51 Don't take Jews or Christians for friends. If you do, then Allah will consider you to be one of them.
5:59 Jews and Christians are evil people.
6:106 Stay away from disbelievers.
8:55 The worst beasts in Allah's sight are the disbelievers.
9:5 Slay the disbelievers wherever you find them.
9:28 Disbelievers are unclean.

Those wishing to champion compassion need to confront Islamic ideology, not those who have sacrificed to give the Iraqi people a chance at self-government.

One of the benefits of the War in Iraq that Professor Becker did not note is an ongoing lesson on the Religion of Peace.

Posted by B at July 30, 2007 01:05 PM | direct link

Neuroscientist, if you study the willingness to pay literature, you will see a strong positive relationship between income and willingness to pay.

Studies of wtp for lives saved do find lower values in developing countries than in industrial countries. It is likely that a country like Iraq (with GDP per capita one fifteenth of that in the USA in PPP terms) would have a lower value of a statistical life than in the US.

That said, I find it unlikely that any valuation on life has gone into the calculation of casualty levels in Iraq- an absence which is kind of the point of the blog thread. Your statement about rationalising half a million Iraqi deaths is just ludicrous - even if one were to accept the implausible and statistically biased Lancet study.

Posted by procrustes at July 30, 2007 05:43 PM | direct link

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Posted by drfhdxfjxdfj at August 1, 2007 03:23 AM | direct link

The problem with the argument between neuroscientist and Marko is that the value of any human life differs not only by country but by individual. There is not way to be able to idnetify the amount of an average life. Im not talking in a moral scence but in a more specific one.
Take a Iraqui company for example. Not even think that the company is caught in the line of fire. Just that 2 managers were killed when they were having lunch (caught in cross fire). In a middle size company the lost of half the managing staff can take them to near bankrupcy. That would take all employees to unemployment. That would diminish the incomes in all of its suppliers. That would have a cost in the clients benefits (they would have one option less). That would damage all stake holders (ussually medium size companys have a bigger leverage).

Depending on the size of the company and how many companies are damage by the cassualties and the rank in the companies of the killed ones this cost can be exponential. Higher delicuency. Lower education (due to the smallest income in their families). More anger that can bring more people to the jihad (think in the sons and relative of the kills that now have no income for the families).

The outcome of the killed has no probable valeu.
Have you thought about of the growth in the probability of a bomb exploiting in america and the killing a high ranking executive that this war brings??? can you value that?
I have my opinion on this war, but to stick with the subject, there in no possible way that the economics benefits justify it.

FVA

Posted by FVA at August 3, 2007 08:17 PM | direct link

Posted by drfhdxfjxdfj at August 4, 2007 02:30 AM | direct link

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