Predicting the cost of war

Posted: Dec 24, 2002 12:00 AM
Numerous press reports have cited the dismissal of White House National Economic Council Director Lawrence Lindsey in part to an estimate he made in September that war with Iraq would cost between $100 billion and $200 billion. If that it true, it's too bad because the American people deserve an open and honest discussion of the costs -- and benefits -- of war before the die is cast. Lindsey has never offered any supporting evidence for his calculation. It appears that he may have simply been speculating that an Iraq war would cost between 1 percent and 2 percent of the gross domestic product. Given a GDP of about $10 trillion, that yields the figures cited. Based on the cost of comparable wars, such as the Gulf War or the Spanish-American War, Lindsey's estimate is reasonable. In the meantime, several serious efforts have been made to measure the cost of an Iraq war based on detailed calculations. The first was done by the Democratic staff of the House Budget Committee. Based mainly on the Gulf War experience, this study came up with figures slightly more optimistic than Lindsey's, reckoning the immediate military cost at between $48 billion and $93 billion. An even more detailed study followed from the Congressional Budget Office in September. It figured that the incremental cost of deploying forces to the Persian Gulf would be between $9 billion and $13 billion, plus another $6 billion to $9 billion per month for as long as the war is prosecuted. Returning our troops home after the end of hostilities would cost between $5 billion and $7 billion, with another $1 billion to $4 billion per month required for occupation forces. In the CBO calculations, the ultimate cost of war is mainly a function of how long it goes on. A brief war like the Gulf War, therefore, would cost relatively little. But a long, protracted conflict like the Vietnam War would be very costly indeed. Postwar costs could also be substantial. In addition to the cost of occupation, the United States will be obliged to provide significant humanitarian assistance for the people of Iraq. We may also be forced to give the country long-term aid to help ensure a peaceful and prosperous Iraq in the post-Saddam era. As important as the direct out-of-pocket costs of war may be, however, they represent only a small part of the overall cost of war. The broader costs include those on the economy as a whole. For example, if the price of oil skyrockets as the result of war, it would not only cost consumers dearly but could possibly trigger another recession. Thus the total economic cost could be a multiple of the budgetary cost. Economist William Nordhaus of Yale has tried to add up the potential economic and budgetary costs of war in a new paper for the National Bureau of Economic Research. He figures that the total cost of a war with Iraq over 10 years could vary between $99 billion and $1.9 trillion. The biggest variable in the Nordhaus estimate is for oil. If Saddam thoroughly destroys Iraq's oil producing facilities, it could take many years before that production comes back on line. If OPEC fails to compensate with higher production, the price of oil might rise to $80 per barrel and stay there for some time. In a worst-case scenario, higher oil prices and slower growth resulting from them will cost Americans $1.2 trillion. As large as the potential costs of war may be, however, it is important to keep in mind that we cannot necessarily avoid them by doing nothing. The fear of terrorist attack imposes a very real cost on the economy now. And if Saddam Hussein has weapons of mass destruction and uses them, the cost of doing nothing could be much greater than the cost of a pre-emptive strike. Calculating the costs of war also should not cause us to completely ignore the potential benefits. Once Iraq's oil facilities are rebuilt, its production should increase sharply over what it is now. At present, Iraqi production is held down by UN sanctions that limit oil sales. In the end, oil prices in the future could be lower than they might otherwise be. Removal of Iraq's weapons of mass destruction and its support for world terrorism will also bring an economic and financial benefit. As Stuart Sweet of Capitol Analysts Network puts it, "If the hawks are right, America would be a safer and more profitable country after Hussein is forced out." Thus war may lead to higher stock prices. Of course, the ultimate justification for war is that Iraq threatens our physical safety and those of our allies. One really can't put a price on that.