The most important things in life like life itself are priceless. But that doesn’t mean that
issues involving the preservation of life (or a way of life), like defense, should not be
subjected to cool, hard economic analysis.
Shortly before the current Iraq war, when Bush administration economist Larry Lindsey
suggested that the costs might range between $100 and $200 billion, other officials
quickly demurred. For example, Office of Management and Budget Director Mitch
Daniels put the number at $60 billion. It now appears that Lindsey’s numbers were a
gross underestimate.
Concerned that the Bush administration might be misleading everyone about the Iraq
war’s costs, just as it had about Iraq’s weapons of mass destruction and connection with
Al Qaida, I teamed up with Linda Bilmes, a budget expert at Harvard, to examine the
issue. Even we, as opponents of the war, were staggered by what we found, with
conservative to moderate estimates ranging from slightly less than a trillion dollars to
more than $2 trillion.
Our analysis starts with the $500 billion that the Congressional Budget Office openly
talks about, which is still ten times higher than what the administration said the war
would cost. Its estimate falls so far short because the reported numbers do not even
include the full budgetary costs to the government. And the budgetary costs are but a
fraction of the costs to the economy as a whole.
For example, the Bush administration has been doing everything it can to hide the huge
number of returning veterans who are severely wounded – 16,000 so far, including
roughly 20% with serious brain and head injuries. So it is no surprise that its figure of
$500 billion ignores the lifetime disability and healthcare costs that the government will
have to pay for years to come.
Nor does the administration want to face up to the military’s recruiting and retention
problems. The result is large re-enlistment bonuses, improved benefits, and higher
recruiting costs – up 20% just from 2003 to 2005. Moreover, the war is extremely
wearing on equipment, some of which will have to be replaced.
These budgetary costs (exclusive of interest) amount to $652 billion in our conservative
estimate and $799 billion in our moderate estimate. Arguably, since the government has
not reined in other expenditures or increased taxes, the expenditures have been debt
financed, and the interest costs on this debt add another $98 billion (conservative) to
$385 billion (moderate) to the budgetary costs.
Of course, the brunt of the costs of injury and death is borne by soldiers and their
families. But the military pays disability benefits that are markedly lower than the value
of lost earnings. Similarly, payments for those who are killed amount to only $500,000,
which is far less than standard estimates of the lifetime economic cost of a death,
sometimes referred to as the statistical value of a life ($6.1 to $6.5 million).
But the costs don’t stop there. The Bush administration once claimed that the Iraq war
would be good for the economy, with one spokesperson even suggesting that it was the
best way to ensure low oil prices. As in so many other ways, things have turned out
differently: the oil companies are the big winners, while the American and global
economies are losers. Being extremely conservative, we estimate the overall effect on the
economy if only $5 or $10 of the increase is attributed to the war.
At the same time, money spent on the war could have been spent elsewhere. We estimate
that if a proportion of that money had been allocated to domestic investment in roads,
schools, and research, the American economy would have been stimulated more in the
short run, and its growth would have been enhanced in the long run.
There are a number of other costs, some potentially quite large, although quantifying
them is problematic. For instance, Americans pay some $300 billion annually for the
“option value” of military preparedness – being able to fight wherever needed. That
Americans are willing to pay this suggests that the option value exceeds the costs. But
there is little doubt that the option value has been greatly impaired and will likely remain
so for several years.
In short, even our “moderate” estimate may significantly underestimate the cost of
America’s involvement in Iraq. And our estimate does not include any of the costs
implied by the enormous loss of life and property in Iraq itself.
We do not attempt to explain whether the American people were deliberately misled
regarding the war’s costs, or whether the Bush administration’s gross underestimate
should be attributed to incompetence, as it vehemently argues is true in the case of
weapons of mass destruction.
Nor do we attempt to assess whether there were more cost-effective ways of waging the
war. Recent evidence that deaths and injuries would have been greatly reduced had better
body armor been provided to troops suggests how short-run frugality can lead to long-run
costs. Certainly, when a war’s timing is a matter of choice, as in this case, inadequate
preparation is even less justifiable.
But such considerations appear to be beyond the Bush administration’s reckoning.
Elaborate cost-benefit analyses of major projects have been standard practice in the
defense department and elsewhere in government for almost a half-century. The Iraq war
was an immense “project,” yet it now appears that the analysis of its benefits was greatly
flawed and that of its costs virtually absent.
One cannot help but wonder: were there alternative ways of spending a fraction of the
war’s $1-$2 trillion in costs that would have better strengthened security, boosted
prosperity, and promoted democracy?
Joseph E. Stiglitz, a Nobel laureate in economics, is Professor of Economics at
Columbia University and was Chairman of the Council of Economic Advisers to
President Clinton and Chief Economist and Senior Vice President at the World Bank.
Copyright: Project Syndicate, 2006.
www.project-syndicate.org
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