The Hindu Business Line : True economic costs of a war

The estimated total direct government expenditure for the Iraq war, including 2008 funding, comes to more than $600 billion. More important than the actual numbers is the methodology behind the estimate. It lays bare how an administration can underestimate the true costs of a war. This has lessons for other countries as well, says ALOK RAY.

The Iraq war has entered its sixth year on March 20, 2008 and shows no sign of ending soon. The US death toll has already crossed the 4,000 mark. The number of Iraqi (mostly civilian) deaths is 20-25 times higher.

How much has the war cost the US, in cold economic terms? Before the war started, the US administration estimated the total economic cost of the war to be around $50 billion. When Larry Lindsey, then White House economic adviser, put up a figure of $2 00 billion, Donald Rumsfeld, the then Defence Secretary, dismissed the estimate as “baloney” and Lindsey lost his job. Currently, the official estimate of the cost has gone up to $500 billion which is 10 times the original official estimate. This makes the Iraq War the second longest (after the Vietnam War) and the second costliest (after the Second World War) war in US history.

Now, two distinguished economists — Nobel Laureate Joseph Stiglitz and Linda Bilmes, an economist at Kennedy School, Harvard University — have written a book: The Three Trillion Dollar War which estimates the true cost of the Iraq war to be in the neighbourhood of $3 trillion — six times the current official figure. Mind you, this is the economic cost for US alone, not to speak of the cost on Iraq and the rest of the world.

Behind the estimate

More important than the actual numbers is the methodology behind the estimate. It lays bare how an administration can underestimate (sometimes deliberately) the true costs of a war. This has lessons for other countries as well.

The estimated total direct government expenditure for the Iraq war, including 2008 funding, comes to more than $600 billion. On top of this, the authors add a number of major costs not allowed for in the official estimate.

First, the disability compensation and medical costs of the soldiers discharged because of injury. They estimate, from the experience of the brief 1991 Gulf war, that about 40 per cent of injured soldiers will file for disability and a much larger number will require life-long medical care.

While in previous wars, the ratio of injured to fatalities was 2.5 to 1, in the Iraq war, it is 7 to 1, thanks to the huge improvement in armour and medical treatment. This means higher disability and medical costs over a much longer period. This is not to suggest that injury is worse than death. The authors are simply making a cold economic cost calculation. They estimate the future total costs (in present discounted value terms) on this count as $630 billion.

Second, even if the new president orders a quick withdrawal, the most likely scenario is that the US will maintain some presence in Iraq for at least another decade. The authors estimate the future operating costs to be about $520 billion.

Third, they add the cost of restoring the military to its pre-war strength. Though under “operational expenditures,” the ongoing amount spent on replacing ammunition, vehicles, and equipment is included, the Defence Department is not replacing equipment and supplies as fast as they are being consumed by the war effort. In this war, equipment has been used up at 6 to 10 times normal rates.

The authors estimate that the net cost of restoring the US military, including all reserve forces and the National Guard, to its pre-war strength will reach $280 billion.

Social and economic costs

Fourth, there are many social and economic costs of the war outside the budgetary ones. For instance, the official death compensation does not adequately reflect the loss in economic output that each death represents. Similarly, disability payments are usually much less than what disabled individuals would have earned had they been able to lead a normal life. In some families, someone will have to give up a job to provide care. Many from the National Guard and reserves who are called to duty have careers interrupted and family life destroyed. The authors estimate these costs as $370 billion, in addition to the budgetary costs.

Finally, the macroeconomic impact. The authors focus on two major factors. One, unlike most earlier wars, this war has been financed with deficits, and the higher deficits will impose a long-run burden on the economy — particularly for the future generations. Even a conservative estimate indicates that the war has already added some $1 trillion to national debt. Two, higher oil prices. Though the Iraq war is not the only reason behind the hike in oil prices, this has been a major contributory factor.

The authors attribute, rather conservatively, that it has added some $10 to the price of a barrel of oil. The war’s estimated macro-economic impact is put at roughly $1.9 trillion.

The opportunity cost of resources means that the war has made it more difficult for the government to spend on roads, schools, bridges, hospitals, medical research and aid to local communities. To see it in perspective, the authors note that US federal government spent $108 million last year on research into autism, a condition that affects one in 150 children. The money spent on the war could have fixed social security for the next 75 years or provided health insurance to all US children. Further, as Stiglitz argues in his testimony before the US Congress: “With a fraction of the amount spent on this war we could have had a new Marshall plan, which would have done so much to win the hearts and minds of those around the world.” The irony is that Iraq under Saddam Hussein was not involved in any terrorist activity against the US. Recent US Pentagon reports clearly establish this fact. But it has become a hot bed of terrorists after the US invasion.

Unlike the fallouts of the Iraq War, a new Marshall Plan would have improved the image of US in parts of the world which are the breeding grounds of terrorists and hatred towards America.

Who bears the costs of this war? As the authors sum it up: “Most Americans have yet to feel any of the costs of the Iraq war. The price in blood has been paid by members of the volunteer military. The price in treasure has been financed entirely by borrowing. Taxes have not been raised to pay for the war — in fact, taxes on the rich have actually fallen. Deficit spending gives the illusion that the laws of economics can be repealed. They cannot. Americans will have to pay for the war at some point — and when they do, they will be paying not the Bush markdown but the full price.”

The gainers

But, then, who are the major beneficiaries of this war?

The Iraq War has been the most privatised war where private contractors (some of them having close links to the Bush administration) have been entrusted to provide security to important US government officials in Iraq, apart from catering, transportation of Defence supplies, infrastructure building and maintenance. Clearly, the private contractors and their employees have gained, in addition to the companies manufacturing and supplying armaments and equipments to the military. As an unintended consequence, the rise in the oil price has also brought a windfall gain to oil companies and the oil-rich countries such as Saudi Arabia, Iran, UAE, Kuwait, Venezuela and Russia — not all of them can be counted as friends of the US by any stretch of imagination.

(The author, a former Professor at IIM Calcutta, is currently a Visiting Professor of Economics at the Graduate School of Public and International Affairs, University of Pittsburgh, USA. His e-mail: alokray15@yahoo.com)

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