How Smart Are We?

On the heels of the CRS study that shows that we cannot "save" ourselves out of budget deficits (my comments here), is a report, The Economic Costs of the Iraq War: An Appraisal Three Years After the Beginning of the Conflict, by Linda Bilmes and Joseph E. Stiglitz. That report serves only to emphasize the impossibility of regaining our budgetary and economic footing without raising additional taxes.

In the introduction, the authors note that:

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 $200 billion, there was a quick response from the White House: that number was a gross overestimation. 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."

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 Qaeda and Iraq, no imminent danger that would warrant a pre-emptive war. Whether Americans were greeted as liberators or not, there is evidence that 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 $357 billion 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. These costs have been rising throughout the war. Since FY 2003, the monthly average cost of operations has risen from $4.4bn to $7.1 bn – the costs of operations in Iraq have grown by nearly 20% since last year (whereas Afghanistan was 8% lower than last year). The Congressional Budget Office has now estimated that in their central, mid-range scenario, the Iraq war will cost over $266 billion more in the next decade, putting the direct costs of the war in the range of $500 billion.

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.

(Footnotes omitted, emphasis added.)

The report provides a valuable corrective to the truly abominable reporting by most mass news organizations of the economic issues surrounding the war. Thus:

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 7000 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 $750 billion 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.

(Emphasis in the original.)

In concluding, the report states that:

Though we have suggested that many of the costs were within the range of what could have been anticipated, we have not sought in this paper to ascertain whether on the basis of the information available, the Administration could have made more reliable estimates. We do not address the question of whether the disparity between the predicted numbers and the actual numbers is a result of a deliberate attempt of the Administration to mislead the American people on the cost of the war, or of incompetence, going to War with information of low reliability and with best estimates that were far from the mark. In response to accusations about the existence of weapons of mass destruction and the connection with Al Qaeda, the Administration has been adamant that it did not intentional deceive the American people; it prefers charges of incompetence to those of malevolence. We have not attempted to ascertain the relative role of each in the failure to provide the American people with an accurate cost of the venture. At the very least, though, honesty would have required laying out the various scenarios, even if it attached low probabilities to those that in fact turned out to be the case.

Americans could, and should have asked, are there ways of spending that money that would have enhanced our long run well being—and perhaps even our security—more. Take the conservative estimate of a trillion dollars. Half that sum would have put social security on a firm grounding for the next seventy-five years. If we spent even a small fraction of the remainder on education and research, it is likely our economy would be in a far stronger position. If some of the money spent on research were devoted to alternative energy technologies, or to providing further incentives for conservation, we would be less dependent on oil, and thereby more secure; and the lower prices of oil that would result would have obvious implications for the financing of some of the current threats to America’s security. While we may not know what causes terrorism, clearly the desperation and despair that comes from the poverty that is rife in so much of the Third world has the potential of providing a fertile feeding ground. For sums less than the direct expenditures on the war, we could have fulfilled our commitment to provide .7% of our GDP to help developing countries—money that could have made an enormous difference, for the better, to the well being of billions today living in poverty. We could have had a Marshall Plan for the Middle East, or the developing countries, that might actually have succeeded in winning the hearts and minds of those in the Middle East.

What is clear is that the Administration's original estimates were strikingly low. Would the American people have had a different attitude towards going to war had the known the total cost? Would they have thought that there might be better ways of advancing the cause of democracy or even protecting themselves against an attack, that would cost but a fraction of these amounts? In the end, we may have decided that a trillion dollars spent on the War in Iraq was better than all of these alternatives. But at least it would have been a more informed decision than the one that was made. And recognizing the risks, we might have conducted the War in a manner different from the way we did.

(Footnotes omitted.)

Recently, the "debate" over the war in Iraq, such as it is, has focused on only two aspects of the war.

The first is the "Were we lied to?" issue. That is, did the Bush Administration intentionally cook the information books in pushing for war.

The second aspect of the debate has been the "Well we're here now, how do we play the ball as it lies?" issue. That is, Administration supporters, on one side, paint those who want to terminate U.S. involvement quickly as defeatists who want to snatch defeat from the jaws of victory. Opponents of the war, on the other hand, sound the "We're waist deep in the Big Muddy and the Big Fool tells us to push on" theme.

To say the least, the debate has been less than edifying. I have long advocated the theory that the Internet, by putting an incalculable wealth of information at our fingertips, makes us smarter. However, my theory seems to be challenged by the reality that simple facts (e.g., the discretionary portions of the federal budget do not contribute to the budget deficit in a significant way) never seem to gain a foothold in the public discourse. Really complex questions (e.g., can we justify the costs of continuing the venture in Iraq when it weakens our ability to deal with foreign policy problems such as Iran and North Korea) seem hopelessly beyond our abilities.

Hat Tip: beSpacific.