The hidden costs of war
By David Isenberg
What would be the cost of a war with Iraq? More than we think, according to a new analysis. In fact, we may not be able to see the macro forest for the micro trees, according to William Nordhaus, an economics professor at Yale University.
In an article in the December 5 New York Review of Books, he notes that the Bush administration has not produced any official estimates of the cost of a war. While that is due in part to the inherent uncertainty of war (the first rule of which states that no battle plan survives first contact with reality), it may also be recognition that the costs are likely to be much larger and last much longer than commonly assumed.
The article, which is a shortened version of a longer study, details many costs not normally factored into estimates. First among them is the need for a substantial occupation and peacekeeping force in Iraq. The cost of such an operation is substantial. Nordhaus cites Congressional Budget Office estimates that occupation could cost between US$17-45 billion per year, which actually might be low. If the post-war environment is hostile, like Afghanistan, the cost could be higher.
And that annual cost might continue for years. According to Nordhaus "it is difficult to see how a successful occupation of Iraq could be less than five years, and it might easily extend for two decades. Thus a minimum cost could range from $75-500 billion."
Then there are the reconstruction and nation-building activities. These could range from (mere) "regime change", to more ambitious efforts akin to the installation of Western-style democracies in Germany and Japan after World War II, with a possible Iraqi Marshall plan thrown in for good measure.
Nordhaus estimates that if the goal is to just attain a per capita GNP equal to Iran or Egypt, and if one half of the capital stock requires rebuilding, which is not unreasonable considering the effects of over 10 years of sanctions and air strikes, the cost would run to about $800 per capita, or a total of $20 billion. However, that is conservative. In the longer study from which the article is derived, Nordhaus estimates that $30 billion in reconstruction costs would be a reasonable estimate.
If a Marshall-style plan is attempted, the costs rise substantially. The original Marshall plan cost $13.2 billion over a four-year period. At today’s income levels that would equal $2,000 per person total (or $500 per person annually), over twice the $800 per capita cited above.
But such a figure is still low because it does not take into account that the Western European recipients of the original Marshall plan had undertaken much of the reconstruction on their own and had considerable infrastructure in place before World War II. Iraq would have considerably less. Thus the effort would require six, instead of four years, for a total of $75 billion. Together, the costs for reconstruction and nation building could range from a minimum of $25 billion to as much as $100 billion.
Then there is humanitarian assistance - taking care of the sick, the wounded and refugees, both in Iraq and possibly in neighboring countries. While it cannot be said with certainty, given the variables involved, Nordhaus estimates that between 1 and 5 million people would require assistance. Depending on duration, say one to four years, the cost could range from $1 to $10 billion.
Can the money be found to pay for all that? It is unlikely. Even if Iraqi oil revenues could be increased to 3 million barrels a day, it would yield only $25 billion annually, or about $10,000 per capita. And much of that would be required for imports of food and medicine. Plus, Iraq still has war claims against it by other nations totaling over $300 billion, little of which has been paid off. All of these claims take nominal priority over the cost of paying for a US occupation. And, unlike Desert Storm, there is little likelihood of other nations helping to pay the bill.
As for the United States actually being willing to foot the bill, that seems improbable. Nordhaus write "In virtually every country where the US intervened militarily over the last four decades, it has followed a "hit and run" philosophy by which bombing runs have seldom been followed by construction crews. The latest war in Afghanistan is a striking example. In the year ending September 2002, the US spent $13 billion on the war effort. By contrast, the total Pentagon effort committed to civil works or humanitarian aid has totaled only $10 million."
Finally, there are the global costs. Most important, a war might produce big shocks in the oil markets. For example, Iraqi forces could destroy much of their oil fields, as they did in Kuwait in 1991, or even contaminate them with chemical or biological weapons. Or OPEC countries might engage in a coordinated cut in oil production, especially if Israel is involved in the war.
In the worst-case scenario, oil production could be cut 25 percent, and oil prices could triple to about $75 per barrel, with gas rising to almost $3 per gallon. The cost of oil imports would increase to $200 billion per year in the US, and the resulting shock and inflation would likely set off a recession.
Although most pundits envision a quick war there are no guarantees. If it goes badly, at least in the beginning, the macro impact could quickly turn bad. The economic consequences might resemble the economic decline following the 1990-91 war, which was at least partially responsible for the loss by the first president Bush to Bill Clinton, or the sharp drop after the September 11, 2001, attacks. Nordhaus believes that "a plausible outcome would be an average recession set off by a protracted conflict, with output losses in the range of 2 to 5 percent of GDP [$200 billion to $500 billion in today’s dollars]."
All together, in a simplified worst-case scenario, which does not include the worst-case oil shocks or the use of biological or chemical weapons, where the US suffers reverses during or after the war, the outcome could reach $1.6 trillion. Admittedly, that is less likely. But even a best-case scenario costs around $120 billion, which is about twice as much as the 1991 war. And other countries financed most of that.
In conclusion, Nordhaus finds that while the US may be militarily prepared, it is not economically prepared. Since Bush took office, the annual federal budget surplus of $360 billion has been eliminated and the country is facing budget deficits again. In short, the "Bush administration has not prepared the public for the cost of financing of what could prove to be an expensive venture. Perhaps the administration is fearful that a candid discussion of wartime economics will give ammunition to skeptics of the war: perhaps it worries that acknowledging the costs will endanger the large future tax cuts, which are the centerpiece of its domestic policy."
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