THE ECONOMIC COSTS OF THE IRAQ WAR

Linda BilmesKennedy School of Government, Harvard UniversityandJoseph E. StiglitzUniversity Professor, Columbia University

March 2004

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Before the Iraq War….

Costs of the War were estimated by Mitch Daniels and Rumsfeld at $60bn

Lindsay predicted $100-$200 billion

CBO now projects past and future expenditures to exceed $500 billion

Even this grossly underestimates full economic and budgetary costs

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Costs to date

Congress has appropriated $357Bn for Iraq and Afghanistan military operations, reconstruction, enhanced security at US bases and foreign aid programs $251bn for military operations in Iraq

Since FY 2003 the monthly average cost of operations has risen from $4.4bn to $7.1 bn – largely due to Iraq.

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Objective of Our Paper

Provide estimates of full costs of the Iraq war, including: Full budgetary costs, including long-term

expenditures not included in current budget True social costs of expenditures Macro-economic effects

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Two Scenarios

“Conservative” scenario: Assumes all US troops withdrawn by 2010

“Moderate” scenario Small but continuous US presence through 2015

Both scenarios Use 4% discount rate Use troop deployments based on projections by the

Congressional Budget Office Exclude Afghanistan Exclude costs by other countries Ignore important costs which are not easily quantifiable

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Large Future Budgetary Expenses Incurred

1. Continuing operations2. Veterans costs3. Increased defense spending4. Demobilization 5. Interest: large cumulative debt

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LT Veterans Costs for Iraq war

Medical care and related costs (rehabilitation,retraining,prothetics)

Medicare care treatment for brain injuries So far 3,213 troops -- 20% of those injured in

Iraq -- have brain/spinal injuries that require lifetime care costing $600,000-$5million

Disability Pay based on analysis of 1st Gulf War

patterns

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Increased defense expenditures attributable to Iraq (1)

Since 2002, annual appropriations for DoD have risen from $310bn to $420bn Total cumulative increase: $325bn.

Costs of replacing military hardware have risen Iraqi operations wearing out equipment 4-5

times faster than normal (climate, usage) CBO estimates military will require some $100bn

in replacement hardware

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Increased defense expenditures attributable to war in Iraq (2) Additional recruitment costs

Military facing severe hiring challenges Recruitment cost per military recruit has

increased from $14,500 in 2003 to $17,500 in 2005

Additional costs of higher wages, combat pay, pensions, contractor costs, death benefits, life insurance, benefits packages

We conservatively attribute only 30% of increased DoD costs to Iraq

And then subtract DoD savings from no longer enforcing the no-fly zone in Iraq

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Budgetary Costs of the Iraq War($Bn)

Conservative Moderate1 Spent to date 251 251 2 Future spending on operations 200 271 3 VA costs 40 57 4 Cost for Brain injuries 14 35 5 Veterans disability payments 37 122 6 Demobilization costs 6 8 7 Increased defense spending 104 139 8 Interest on debt 98 386

Total 750 1,269

Figure 1: Budgetary Cost of War ($BN)

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True social costs (1) Focuses on differences between true

economic costs and expenditures Economic Cost of Reserves

Reserves’ pay is less than their opportunity cost Does not directly measure the economic and

budgetary costs arising from reduction in first responder capabilities

Economic Cost of Military Fatalities Death benefit understates “economic value of

life” used by government in other areas Economic cost of contractor fatalities

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True Social Costs (2)

Economic cost of the seriously injured Disability compensation less than

reduction in productive capacities Does not include measure of pain and

suffering Accelerated depreciation of military

hardware In excess of actual replacement

expenditures

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Adjustments to Budgetary Numbers to Account for Economic/Social Costs

Conservative Moderate1 Spent to Date 3 8 2 Economic Cost of Reserves 3 9 3 Economic Cost of Fatalities 23 29 4 Loss due to Brain Injuries 34 48 5 Loss due to Other Serious Injuries 30 64 6 Loss due to Other Injuries 18 26 7 Less veterans disability payments (12) (28)

8 Increased depreciation of military hardware 89 149 Net Adjustment 187 305

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Direct Budgetary and Economic Costs of the Iraq War ($Bn)

Scenario Budgetary cost without interest

Budgetary Cost (including interest)

Cost with Economic Adjustments

Conservative 652 750 839

Moderate 884 1269 1189

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Macro-economic effects (1) Increased price of oil

Instability in Middle East a major reason for failure of normal supply response

Conservative estimate attributes $5 of increase to Iraq war, Moderate $10

Direct impact—transfer of resources to oil producers

Multiplier effect—reduced purchasing power (in periods in which economy had excess capacity)

Global general equilibrium effects—as incomes in Europe and Japan also reduced (not included in analysis)

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Macro-economic effects (2) Incidence analysis of expenditures

Counterfactual—what would otherwise have been the case

Money could have been spent on investments Would have stimulated the economy more in

short run First round “leakage” larger, e.g. for hiring

foreign workers in Iraq Investment would have had long term growth

benefits Included in “moderate” scenario only

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Macroeconomic effects

Impact Conservative Moderate 

Oil price increase   

Transfer (supply side) effect 125[1] 300

Aggregate demand[2] 62 150

Global General Equilibrium   150

 

Budgetary impacts   

Expenditure switching   200

Growth impacts (PDV)   250

 

Total 

187 

1050

[1] conservative: $5 barrel for 5 years;moderate: $10 barrel for 6 years

[2] conservative: (multi-year) multiplier of 1.5; moderate: (multi-year) multiplier of 2

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Total Economic Costs of the War in Iraq

Scenario Conservative Moderate

Direct costs 839 1189

Macroeconomic 187 1050

 

1026 2239TOTAL COSTS

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OMITTED COSTS (1) Costs of risks borne by individuals

Health care costs not borne by the government All costs borne by other countries, including Iraq

Military costs Destruction of property Loss of life

All costs of increased insecurity Increased costs of cross border flows Reduced Private investment Value of reduced capability of responding to national

security threats elsewhere in the world Value of reduced capability of responding to domestic

situations in which the National Guard or the Reserves might have been called upon (as in New Orleans)

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OMITTED COSTS (2) Indirect aggregate demand effects

Reduced incomes in trading partners Anti-American sentiment

Consequences of tighter monetary policy as a result of increased inflation

Costs of oil price volatility Investment, Bankruptcy

Losses in asset values (arising from increase in oil prices or otherwise Equity market Housing

Indirect consequences of worsening fiscal position Increased government expenditures on oil Increased expenditures on the war

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Unanswered Questions Why were costs were so vastly underestimated?

Incompetent analysis Historical error – wars usually cost more than

expected, in both money and lives Would different decisions have been made if we

had estimated costs more accurately? Could long-run costs have been avoided if the war

had been conducted differently? Body armor provided earlier

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What is clear…

Costs were vastly underestimated More realistic assessment of risks

(costs) could have led to the war being conducted differently

There is a high opportunity cost Could we have had a stronger economy And a more secure countryHad it been spent in a different way?