What Is the War Going to Cost Us?
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Before launching the war in Iraq the Bush Administration was, to say the least, circumspect about the projected cost. After the bombs began to fall they announced that our initial tab would be $75 billion. But these expenditures are just the first installment; they do not include reconstruction of the Iraqi infrastructure or that illusory concept, nation-building. Thus the billion-dollar question remains how much will George and Donald's big adventure cost us?
In December, Yale economist William Nordhaus, writing in The New York Review of Books, described an analytical framework for calculating the cost of this war. Nordhaus considered two general categories of costs: direct military spending such as the salaries of troops and the costs of their weapons, and follow-on costs. In the latter category he included "occupation and peacekeeping", "reconstruction and nation-building", "humanitarian assistance", "impact on the oil markets", and a catch all category "macroeconomic impact" -- that is, what impact a scenario would have on the U.S. economy in general (for example, a protracted war could possibly trigger a recession).
The Yale economist used his framework to prepare a low-end war-cost estimate of $121 billion and a high-end estimate of $1.595 trillion. Each extreme was the result of a specific scenario: the low estimate assumed a short war with no complications, whereas $1.6 trillion would be the result of a protracted war with many complications.
Mercifully, it appears that major combat in Iraq has ended after roughly six weeks. Thus, the Nordhaus' more favorable estimates are the ones that should be considered first -- those that put the cost of the war in the $121 billion range. Nordhaus comes up with an estimate of $50 billion for the direct military expenditures associated with a short war, which should be accurate if there are no unanticipated military "problems" -- such as an invasion of Syria or an extended Intifada-type campaign which ties of tens of thousands of troops.
Nordhaus estimates the total cost of the occupation as $75 to $500 billion over ten years. Since it appears only United States and British forces will be involved in peacekeeping, the true cost to the United States is likely to be in the mid-range -- $30 billion per year. He estimates that reconstruction of the Iraqi infrastructure will cost from $25 to $100 billion and the Council on Foreign Relations predicts that this will cost $20 billion per year.
As the Iraqi petroleum industry comes to life, some of the funds generated from petroleum exports could go towards reconstruction; the yearly value of these exports will be in the $15-20 billion range but it will be several years before they reach that level. Thus, in the first five years, the U.S. yearly cost for reconstruction will likely be at least $20 billion per year. (This, of course, assumes that the U.S. will actually pay for this; so far the Bush administration indicates that American taxpayers will foot his bill, as they regard Iraqi reconstruction as an opportunity to funnel money to some of their largest contributors, such as the Bechtel Corporation.)
The United Nations and international relief agencies will probably provide humanitarian assistance, so our costs here may be as low as $1 billion. Because most of Iraq's oil infrastructure is intact, Nordhaus predicts a reduction in world oil prices and, thereby, a positive benefit to the U.S. economy of $3 billion per year. With regard to "macroeconomic" effects, since this has been a short war there is unlikely to be any disruption of the economy.
The combination of all these factors results in a projected cost of $286 billion over five years (with roughly $100 billion expended in the first twelve months). These figures are consistent with other estimates. In April, UC Berkeley economics professor, and former chair of the president's council of Economic Advisors, Janet Yellen estimated that the direct costs of the war were likely to be in the "$100-150 billion range" and the total cost approximately "$500 billion over the next decade."
The Bush Administration would have us believe that $100 billion in the first year, and $286 billion over five years, is a small price to pay for the liberation of Iraq, and an indeterminate modicum of safety from terrorism. But, even for those of us jaded by annual budget deficits in the $300 billion range, these are big numbers.
For example, $100 billion is the funding required to bail out the states this year, to cover their combined revenue shortfall. $100 billion would provide health care for all the uninsured children in the United States for at least five years. President Bush has been touting his tax cut plan as a jobs program, claiming that it will create 1.4 million jobs; at $50,000 per job, $100 billion would create 2 million jobs in the first year.
The total cost of the war amounts to, in effect, an extra year of budget deficits - the 2003 deficit is expected to be $304 billion, and the shortfalls for 2004 and 2005 are projected as $307 and $208 billion respectively. $286 billion will raise the five-year cumulative deficit to approximately $1.5 trillion -- a 26% increase. This is a huge debt, one that will inevitably worsen the living conditions for the average U.S. citizen.
This deterioration will have two faces. The first is an increase in interest rates. The United States is a debtor nation -- dependent upon outsiders to support our economy. The ugly reality is that we consume more than we produce and this means that we are highly dependent upon the largesse of overseas investors.
As our national debt increases, our creditors will not be as willing to finance our debt by investing in our securities and, instead, will begin to eye competitive investments such as Euro bonds. This change will inevitably cause the Federal Reserve Board to raise interest rates -- in an effort to make our bonds more attractive. This action will further stifle the economy by making it more expensive for businesses and consumers to borrow money.
The second ugly face of our growing national debt will be to provide the Bush administration -- compassionate conservatism and all -- with a justification for a decrease in the amount of Federal expenditures on social programs such as education and health. Reduction of entitlement programs was one of the planks in Bush's platform for campaign 2000.
As the Federal debt increases, progressively larger amounts of the Federal budget will have to be devoted to interest payments, which will rise to more than $40 billion annually by 2008. Republicans will seize on this as an excuse to reduce Federal spending. But, of course, they won't cut the military -- which already amounts to half the discretionary spending -- they will cut the programs that serve the neediest among us.
What's the cost of the war in Iraq? In dollars it will be at least $286 billion. In terms of our economy and the welfare of our citizens it will feed the recession and will have prolonged negative impacts that all of us will feel. The Bush administration made a choice between "guns and butter;" the military got the guns and, as a result, the average citizen will have to give up "butter" for years to come.
Bob Burnett is a journalist in Berkeley. He is the former publisher of In These Times magazine.