Middle East Economic Survey

VOL. XLIX

No 6

6-February-2006

IRAQ

The  Economic Costs Of The Iraq War: An Appraisal Three Years After The Beginning Of The Conflict

By Linda Bilmes And Joseph E  Stiglitz

The following is an abstract from a paper prepared by Linda Bilmes, Kennedy School, Harvard University, and Joseph E Stiglitz, University Professor, Columbia University, for presentation at the ASSA meetings, Boston, January 2006. The views expressed here are solely those of the authors, and do not represent those of any institution with which they are currently affiliated, or with which they have been affiliated in the past. The following extract is published in MEES with the kind consent of the authors.

Three years ago, as America was preparing to go to war in Iraq, there were few discussions of the likely costs. When Larry Lindsey, President Bush‘s economic adviser, suggested that they might reach $200bn, there was a quick response from the White House: that number was a gross overestimation.¹ Deputy Defense Secretary Paul Wolfowitz claimed that Iraq could “really finance its own reconstruction,” apparently both underestimating what was required and the debt burden facing the country. Lindsey went on to say that “The successful prosecution of the war would be good for the economy.”²

Many aspects of the Iraq venture have turned out differently from what was purported before the war: there were no weapons of mass destruction, no clear link between Al-Qa'ida and Iraq, no imminent danger that would warrant a pre-emptive war. Whether Americans were greeted as liberators or not, there is evidence that they are now viewed as occupiers. Stability has not been established.  Clearly, the benefits of the War have been markedly different from those claimed. 

So too for the costs.  It now appears that Lindsey was indeed wrong–by grossly underestimating the costs. Congress has already appropriated approximately $357bn for military operations, reconstruction, embassy costs, enhanced security at US bases and foreign aid programs in Iraq and Afghanistan. This total, which covers costs through the end of November 2005, includes $251bn for military operations in Iraq, $82bn for Afghanistan and $24bn for related foreign operations, such as reconstruction, embassy safety and base security.³ These costs have been rising throughout the war. Since FY 2003, the monthly average cost of operations has risen from $4.4bn to $7.1bn – the costs of operations in Iraq have grown by nearly 20% since last year (whereas Afghanistan was 8% lower than last year).⁴ The Congressional Budget Office has now estimated that in their central, mid-range scenario, the Iraq war will cost over $266bn more in the next decade, putting the direct costs of the war in the range of $500bn.⁵

These estimates, however, underestimate the War‘s true costs to America by a wide margin. In this paper, we attempt to provide a range of estimates for what those costs have been, and are likely to be.  Even taking a conservative approach, we have been surprised at how large they are.  We can state, with some degree of confidence, that they exceed a trillion dollars.

Providing even rough order of magnitude estimates of the costs turns out to be very difficult, for a number of reasons. There are standard problems in cost allocation; there are future costs associated with the Iraq war that are not included in the current calculations; there are marked differences between social costs and prices paid by the government (and it is only the latter which traditionally get reflected in the cost estimates); and there are macro-economic costs, associated both with the increase in the price of oil and the Iraq war expenditures.

Consider, as an example, accounting for the value of the more than two thousand American soldiers who have died since the beginning of the war, and the more than sixteen thousand who have been wounded.  The military may quantify the value of a life lost as the amount it pays in death benefits and life insurance to survivors – which has recently been increased from $12,240 to $100,000 (death benefit) and from $250,000 to $500,000 (life insurance). But in other areas, such as safety and environmental regulation, the government values a life of a prime age male at around $6mn, so that the cost of the American soldiers who have already lost their lives adds up to around $12bn.⁶

The standard estimates of the death costs also omit the cost of the nearly one hundred American civilian contractors and the four American journalists that have been killed in Iraq, as well as the cost of coalition soldiers, and non-American contractors working for US firms.

Budgetary Costs To The US Government

The budgetary costs of the war reflect the huge scale of operations that are being undertaken.  For the first half of 2005, there were over 200,000 US military personnel stationed in Iraq and Kuwait (which serves as a staging ground for Iraq). To date, over 550,000 troops have served in Iraq in a combined total of approximately 1mn tours of duty.⁷

The costs of the war in Iraq that have been reported in the media have almost exclusively focused on one type of cost – the $251bn in cash that the government has spent on combat operations since the invasion of Iraq in March 2003. This is an important element of the financial cost but it is only the tip of a very deep iceberg. 

Currently the US is spending about $6bn per month on operations in Iraq. However, there are additional costs to the government – over and above this number. These include disability payments to veterans over the course of their lifetimes, the cost of replacing military equipment and munitions which are being consumed at a faster-than-normal rate, the cost of medical treatment for returning Iraqi war veterans, particularly the more than 7,000 servicemen with brain, spinal, amputation and other serious injuries, and the cost of transporting returning troops back to their home bases. The Defense Department, for which expenditures not directly appropriated for Iraq have grown by more than 5% (CAGR) since the war began, has also spent a portion of this increase on support for the war in Iraq, including significantly higher recruitment costs, such as nearly doubling the number of recruiters, paying recruitment bonuses of up to $40,000 for new enlistees and paying special bonuses and other benefits, up to $150,000 for current troops that re-enlist. Another cost to the government is the interest on the money that it has borrowed to finance the war.

Although it is difficult to estimate these costs precisely, we can use current and expected troop deployment to make a reasonable projection of the likely costs. Looking purely at direct budgetary costs to the taxpayer, we estimate that the total cost of the Iraq war is in the range of $750bn to $1.2 trillion, assuming that the US begins to withdraw troops in 2006 and maintains a diminishing presence in Iraq for the next five years. We have looked at the budgetary cost both including and excluding the cost of interest on the debt.

We have also adjusted this cost for economic factors, as outlined in section two. Under any reasonable set of assumptions, the cost of the war even without considering the macroeconomic costs is more than double the current number provided by the Administration. 

We have estimated the budgetary costs using two scenarios. Both scenarios are based on the troop deployment projected by the Congressional Budget Office.⁸ Our “Conservative” scenario assumes that all troops will be withdrawn from Iraq by 2010, and that all interest on the debt borrowed to finance the war will be repaid within five years. Under this scenario we count the long-term costs of disability pay and health care for veterans over a 20-year period, even though most of the troops in Iraq are between ages 21-28 and are likely to live far longer. We have taken the present value of all cash flows at a 4% discount rate. Even under this conservative scenario, the direct costs to the government are likely to exceed $700bn. (See figure below). 

Under a second, “Moderate” scenario, we have used CBO’s assumption that a small but continuous US presence in Iraq continues through 2015. This has implications for the projected number of casualties and the length of involvement by the Defense Department. This scenario also assumes that the US budget will remain in deficit for the next 20 years. This would raise the cost of the war to over $1.2 trillion.  Both scenarios exclude the cost of operations in Afghanistan – estimated to be approximately $82bn to date and consuming $1bn per month.   

Figure 1

Budgetary Cost Of The Iraq War

($Bn)

Notes:

1.    OMB Director Mitch Daniels is reported to have said that Lindsey‘s estimates were “very, very high.” Both he and Secretary of Defense Rumsfeld estimated the costs in the range of $50-60bn, some of which they believed would be financed by other countries.

2.    Wall Street Journal, 15 September 2002.

3.    Congressional Research Service Report for Congress, “The Cost of Iraq, Afghanistan and Enhanced Base Security Since 9/11“, Amy Belasco, Defense Specialist, 7 October 2005. This covers funding in PL107-117, 107-206, 1207-115,108-7,108-11,108-106,108-199,108-287,109-13,108-447, and the recent FY 2006 Continuing Resolution (109-77) which provides $45bn for the 6-week period starting 30 September 2005. DOD will need additional funds to cover the rest of the year.

4.   Ibid.

5.   The CBO estimated costs for the period of 2005-14 under three scenarios. The estimates were $179bn, $266bn, and $392bn, respectively. We have conservatively used their middle scenario. CBO 2005.

6.   Government agencies have estimated the value of a life at $6.1m (Environmental Protection Agency), and $5.5mn (Department of Transportation). The value of a life for victims of 9/11 were estimated in a range from $2-11mn.

7.   Many troops have served two or three tours of duty.

8.   US Congressional Budget Office, Estimate of War Spending FY 2005-FY2015, 1 February 2005.