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Davis, Murphy, and Topel of the University of Chicago Graduate School of Business in "War in Iraq versus Containment", unpublished, February 15, 2006 make various estimates of the aggregate cost under different scenarios about how long the insurrection continues, the number of American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

[Zathras]

It is hardly too early, however, to conclude that the war is likely to have proved a costly failure.

We are not in the 1980s anymore, running up large annual deficits that can be made up by the savings related to the end of the Cold War and the influx of tax revenue from the technology boom of the late 1990s. Late additions to government outlays must now be assessed in the context of the vast obligations that we know are coming -- those related to the retirement of the baby boomers -- as well as those that might be coming, for example costs related to a possible confrontation with China over Taiwan.

As to the benefits of a peaceful, democratic, Iraq....well, if wishes were horses and all that. Having had no reason to think that a backward Arab culture could sustain a system of government so demanding of civic virtue as democracy, the United States has nonetheless wagered lives and vast amounts of borrowed money on the bet that it could -- because all people love liberty and so forth.

I suppose that in ten years when the verdict is known beyond all doubt, our most erudite economists will write learnedly that "of course" the Iraq war was ill-advised; only a fool would have considered the effort to seed democracy in perhaps the world's least hospitable soil and paying for it on a credit card the prudent thing for an American administration to have done. Fat lot of good that future verdict does us now. The only thing this particular erudite economist feels able to tell us now is no more than any person picked at random from the Kansas City phone book could tell us: there is the one hand, and then the other hand. Thanks a lot.

[anon]

$2 trillion cost divided by 290 million people in U.S. equals around $6,700 cost per person. I'd believe this number. War is not cheap. The psychological and mental costs are high - mental anguishment, lost productivity in U.S. because everyone watches the war on the internet and talks about the war, opportunity cost - smart people work on war and not the next amazon or amgen, etc.

However, I might not believe the rational to get to the $2 trillion number.

I believe that a higher per-barrel price of oil figured into the cost of the war is very questionable. If Stiglitz or others knew with certainty what drove commodity prices, they would be traders and endowing professorships vs. benefiting from endowments.

So, in conclusion, I lean toward agreeing with the $2 trillion price tag but may not agree with the rational to get to $2 trillion.

[Collestro]

One of the tragic consequences of realpolitic is how we abandon our loyal friends. Becker's comment about the harm this ill-thought out war hurts the people of Iraq applies to the Kurds more than anyone else.

Under the protective umbrella of Naval Air Power, the "no fly zone," the Kurds were well on the way to developing a market-based democratic society.

However, in order to appease the Turks, we are forcing the Kurds to stay in Iraq, a county invented in a London club.

[anon]

http://finance.yahoo.com/q/bc?t=5y&s=HAL&l=on&z=m&q=l&c=xom&c=%5EGSPC

Progress during Bush and Cheney - Halliburton (symbol: HAL) and ExxonMobil (symbol: XOM).

The opportunity of this may be very, very high. We have to hope we avoid some sort of dark ages or momentum-shifting defeat to some underdog in a foreign land.

[stconsultant]

The unmeasurable is not imponderable. The war has had huge costs not only to the United States and Iraq, but to other members of the Coalition, and to the rest of the world. If we could not quantify the costs and benefits to even the major stakeholders, they should at least have been given voice in the decision to go to war.

Of course, when in 2003 the White House denied its own economist's estimate of the cost of the war, it was issuing false information. The Bush Administration was not likely then or now to take kindly to estimates of the true costs of the war to others.

[Wes]

No terrorist attack has taken place in the U.S. since 9/11, including the three years after the war started.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.I would expect that carefully planned terrorist attacks on the United States motivated by the invasion of Iraq will occur five to ten years after the initial invasion. We will probably see some initial attacks arround 2008 followed by major successful attacks around 2013.

[ben]

An excellent article on what was happening in the Iraqi leadership immediately prior to the invasion, based on information from captured officials:

http://www.foreignaffairs.org/20060501faessay85301/kevin-woods-james-lacey-williamson-murray/saddam-s-delusions-the-view-from-the-inside.html

[anaxanagorenas]

I know I have said this before.

Wes, if you can predict things like terrorist attacks in 2013, please apply for a job at the Pentagon.

Politics is the incorrect arena for prediction. I think Prof. Becker's column ilustrates this very well. Only the outcome will seal a veredict on the costs. A much misunderstood Florentine diplomat and military advisor made this point nearly 500 years ago.

It is also reckless to predict events based on people's motivations. Why do Spanish officials keep thwarting terrorist attacks long after Spanish troops have left Iraq?

[Arun Khanna]

A lot rides on the manner of U.S. disengagement from Iraq. If U.S. hangs tough and does a gradual draw down of forces that provide the best chance possible for Iraq to stabilize, the war would be viewed as a success, otherwise not.

I am sympathetic to the view that Kurds whose just demand for an independent country, Kurdistan, was acknowledge by President Woodrow Wilson in early parts of 20th century have been shortchanged by U.S. policy tilt towards Turkey. Given that U.S. spent five decades or more nurturing Turkey as an ally and Turkey turned around and refused to help in the Iraq war, perhaps some balance between Kurdish and Turkish interests of the U.S. in needed.

[James Wilson]

I am not qualified to comment on the specific economic arguments, not being an economist myself. But this is one issue where economics is but a small part of the equation.

It may seem a little late to question the reasons for waging war, but they remain relevant to assessing its success and the wisdom of re-electing those who supported it. WMD was a red herring, or certainly proved to be. That benefit accordingly goes out the window. It is hard to see, though we can never know for sure, how the war has made mainland America safer. It certainly didn't make two principal allies, Britain and Spain, safer. And despite the lack of a homeland attack, within a year or so (unless the situation changes dramatically) the death toll amongst US servicemen and women will exceed that of the 9/11 attacks. Meanwhile the average Iraqi seems no better off than under Saddam, and quite possibly worse as the insurrection rages on.

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.

I see the following as the major adverse consequences for the US: (i) the ongoing financial costs; (ii) the damaged image of America amongst her allies; (iii) the lessening credibility of the US intelligence services at home or abroad (who is going to believe it if the US claims Iranian nuclear weapons constitute a clear and present danger); (iv) the strain on the military if Iran or North Korea does in fact become a clear and present danger; and (vi) the radicalisation amongst Muslims and hence the enhanced opportunities for terrorist recruiters. For Iraq itself, as well as the US, the war will be a failure if it becomes, as may well be the case, another Islamic theocracy.

In that sense the real irony of the war is that Saddam Hussain, in suppressing radical Islamic clerics, was actually an ally in the war on terror - which is why he was a friend of the US up until the Kuwait invasion.

[Wes]

Wes, if you can predict things like terrorist attacks in 2013, please apply for a job at the Pentagon.Past behavior indicates that the pentagon does not want accurate predictions. Instead, the pentagon wants predictions that will cause people to behave the way the pentagon wants.Politics is the incorrect arena for prediction.I'm not quite sure what is meant by this so I don't know whether I agree or disagree. A very powerful method for distinguishing between competing models of how the world works is to make pedictions based on these models and then later compare these predictions to factual observations.Only the outcome will seal a veredict on the costs.I think we agree here. In fact, my point was that we will have to wait decades in order to be able to distinguish between competing models of whether the Iraq war will increase or decrease terrorist attacks on the United States.The neo-conservative model is that terrorism will decrease. Their proposed mechanism is that terrorism results from Islamic fundamentalism and lack of "democracy" and the invasion of Iraq will eventually decrease Islamic fundamentalism and increase "democracy" in the Middle East.It will be decades before the invasion of Iraq results in a decrease in Islamic fundamentalism or more "democracy" in the Middle East generally (if that even happens at all). As a result, any decrease in terrorism that would validates their model will only be observed decades from now.The other model is that the invasion of Iraq has made huge numbers of people extremely angry and that this anger will result in terrorist attacks on the United States. Now, huge numbers of people became very angry at the time of invasion which, if terrorist attacks required no organization or planning or preparation, would imply that terrorist attacks should have begun immediately after the invasion and the lack of attacks would, at the very least, fail to support this model.Based on factual observations of the world trade center destruction, it can be concluded that terrorist attacks can occur many years after the orginal events that motivated the attack. The first attack of the world trade center occurred in 1993. Whatever events motivated the destruction of the word trade center had to have occurred occured almost a decade before the world trade center was finally destroyed in 2001.
Factual observations supporting (or failing to support) either model will not be available until at least a decade after the invasion of Iraq.

[keith yeung]

For United State, the only benefit from Iraq war is deferring the economic depression due to 9/11 attack.

[Anonymous]

all great comments. i just wanted to add that the american academy of arts and sciences published a 90-page document BEFORE the war entitled "War with Iraq: Costs, Consequences, and Alternatives." William Nordhaus (MIT Prof. known for his seminal work on the relationship between inventor and society) wrote the chapter on the economics. The work is very thorough: historical costs from the Revolutionary War on up, publicized government estimates since the Civil War, direct military costs, casualities, followed by a section on indirect costs (oil price, macros like employment etc.). This paper, published in 2002, gives two scenarios: Low Cost (short and favorable war) 99 billion bucks; High (protracted and unfavorable: two trillion smackaroos. These prices are all-inclusive - direct military spending and follow-on costs i.e. occupation and peacekeeping, reconstruction and nation-building, humanitarian assistance, impact on oil markets, and macroeconomic impact. What do you all think - can Nordhaus spell it out or what!?
_________________

[Lewis]

Judge Posner, you write, "Much property has been destroyed and many Iraqis killed during the insurgency." This Why do you not consider Iraqi deaths and property damage caused by the American, British and allied forces? Your willingness to consider deaths in purely economic terms is belied somewhat by your apparent reluctance to assess the full cost in light of all Iraqi deaths, injuries and losses. Isn't the number of Iraqis killed during the invasion and by coalition forces subsequently well over 100,000? In this vein, your references to the costs of leaving Saddam in power focuses on his insanely destructive war against Iran, but makes no estimate of the harm he would have caused his people had he remained in power these past three years. To put the point briefly but, admittedly, partially: would even Saddam have killed and maimed as many of his own people in the past three years as the United States and its allies have?

[anon]

"WMD was a red herring, or certainly proved to be. That benefit accordingly goes out the window."

Someone told me that we (U.S.) know Iraq had WMD because the U.S. gave WMD to Iraq back in the 1980s.

So I do not think WMD was a red herring or goes out the window. The govt knows stuff we do not know. This may be why Dems went along with the Iraq war at inception.

It may be a shell game. The WMD may have been moved.

I lean toward discontinuation of guessing where the WMD may be. I lean away from continued invasions of other countries on the basis of WMD.

We had better keep track of submarines from the former Soviet Union.

[anaxanagorenas]

Wes,
Thank you for your reply.

I found your comment on the Pentagon very funny. To be precise and fair to our military establishment, we are both referring to the civilian arm of the Pentagon.

You provide a good answer to my comment on politics and prediction. I agree fully with what you have to say concerning the importance of competing models of prediction and would only add that it is very difficult to make an accurate prediction based on the motivations of Islamic terrorists.

I see no problems with your math concerning the motivation and timing of terrorist attacks. I would only note that there are other, perhaps stronger motivators of terrorism than the invasion of Iraq. In particular, I am thinking of unemployment, political repression, and culture, among others.

If you are interested in filling in the gaps to your calculations and fine tuning an assessment of motivations, I recommend you read an excellent book called ÔøΩal-QaedaÔøΩ by Jason Burke. He provides a good analysis of the wealth of different motivations behind Islamic terrorism.

[joe]

OT: if one wanted to, say, print out posts from the Becker-Posner blog and read them on the bus, they would be disappointed as this blog's posts don't print well. To be specific: posts on this blog only print one page when printed normall and the rest of the text is cut off... here's an example:

http://josephhall.org/tmp/bpblog_ex.pdf

[Rob]

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

[T]

Social choices as to war frequently don't make overall conventional cost-benefit sense retrospectively in an open society. But that leaves out attachments of the decisive set to respective social-capital* networks, a kind of wealth. It also leaves out the uncertainty of the outcome, asymmetric information, and differences in social networks making it likely that some will not survive. The latter contingency might be one for which human beings, or its decisive sets in populations, were selected. One reason for war is seeming myopia. But if the social-capital network is sufficiently depleted by expansion of another group's social capital, what looks like myopia & an ill-considered spasm response might instead be characterized as an implicit calculation that war would shorten the conflict, lower the long-term cost, and avert replacement of the social network. Then some seeming myopia might have survival value. The applicability of that contingency and for whom in the present conflict may play out in the next few years.
* On which see Prof. Becker's "Preferences and Values" in Accounting for Tastes. (Revised from a misplaced posting.)

[ben]

James Wilson

An assessment of leadership has to occur in view of the information they had at the time of their decisions. Accordingly, it is literally irrelevant to that assessment that WMDs were not found, for example. What matters is how credible pre-invasion information on WMDs was, and how it was used by the leadership. There is evidence that even the Iraqi leadership did not know if it possessed WMDs (see the link I posted above). Holding leadership accountable for information it did not have, though common, is unhelpful.

[James Wilson]

Ben,

Thank you for your response. If you trace the history of the intelligence dossiers etc, the evidence of WMD was always pretty flimsy - two British cabinet ministers resigned as a result, prior to the war. IMO Blair, at least, genuinely believed there were WMD - after all, Iraq certainly did have them at some point (including those sold by the US).

But I don't think it was Blair's reason for going to war. He did it because (imo) he believed that, ultimately, Britain's security would depend or at least would benefit from being allies with America. Bush, on the other hand, wanted a show of strength after 9/11, had a bone to pick with Saddam (true of his advisors such as Cheney as well) and was frustrated that Bin Laden was proving hard to catch. He may also have believed that America could democratize the Middle East as a result, or at least start the process, and put pressure on other rogue regimes. The latter seems to have been achieved with Libya, and possibly to an extent with Syria (why doesn't the media ever accept the success in Libya denouncing terrorism?) In all of this I still think WMD was a red herring, and we were misled by statements that it was the casus belli. If it were, they could have left the UN inspectors for longer.

[Wes]

...WMD - after all, Iraq certainly did have them at some point (including those sold by the US).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.

[dennet]

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.

Remember the first terrorist attack on the World Trade Center in 1993. No attcks for 8 years. Why?

[anon]

If the cost of this war does end up exceeding the benefit, there are already efforts at foot to absolve Bush and Cheney and Powell and Rumsfeld and Rice and Hastert and Frist and Rehnquist.

----------------------------------------------

THE†ISRAEL†LOBBY†AND†U.S.†FOREIGN†POLICY†

John†J.†Mearsheimer†
Department†of†Political†Science†
University†of†Chicago†
†
Stephen†M.†Walt†
John†F.†Kennedy†School†of†Government†
Harvard†University†

Excerpt (page 32):
That†help†arrived†with†9/11.††Specifically,†the†events†of†that†fateful†day†led†Bush†and†Cheney†to†reverse†course†and†become†strong†proponents†of†a†preventive†war†to†toppl†Saddam.††Neoconservatives in†the†Lobbyómost†notably†Scooter†Libby,†Paul†Wolfowitz,†and†Princeton†historian†Bernard†Lewisóplayed†especially†critical†roles†in†persuading†the†President†and†VicePresident†to†favor†war.
†
...

Meanwhile,†other†neoconservatives†were†at†work†within†the†corridors†of†power.††We†do†not†have†the†full†story†yet,†but†scholars†like†Lewis†and†Fouad†Ajami†of†John†Hopkins†University†reportedly†played†key†roles†in†convincing†Vice†President†Chney†to†favor†the†war.161††Cheneyís†views†were†also†heavily†influenced†by†the†neoconservatives†on†his†staff,†especially†Eric†Edelman,†John†Hannah,†and†chief†of†staff†Libby,†one†of†the†most†powerful†individuals†in†the†Administration.162††The†Vice†Presidentís†influence†helped†convince†President†Bush†by†early†2002.††With†Bush†and†Cheney†on†board,†the die†for†war†was†cast."
†

[anon]

http://ksgnotes1.harvard.edu/Research/wpaper.nsf/rwp/RWP06-011/$File/rwp_06_011_walt.pdf