By Peter Katel
Two major events in American life intersected in March 2008. A major Wall Street investment bank collapsed. And the country marked the five-year anniversary of the U.S.-led invasion of Iraq.
The demise of Bear Stearns came amid a national mortgage crisis that has helped precipitate an economic slowdown and rising joblessness. And the war’s anniversary prompted a grim accounting: more than 4,000 Americans killed, tens of thousands wounded (plus millions of Iraqis killed or forced to flee their homes) and some $700 billion in taxpayer money spent so far.
Experts differ on the eventual total cost of the conflict, but several projections approach or exceed $2 trillion.
As both parties gear up for the November presidential election, foes of the George W. Bush administration are insisting on a direct linkage between the big issues of the political season. “There are not two concerns in this coming election. There is one,” says economist Joseph E. Stiglitz of Columbia University in a conference call with reporters. “The war is very much related to the weakness of the economy.”
In a best-selling new book, Stiglitz, winner of the 2001 Nobel Prize in economics, lays out the most detailed and sustained economic case against the Iraq intervention, which he and co-author Linda J. Bilmes calculate will cost the United States upwards of $3 trillion.
President Bush summarily rejects the war-economy link. “I think the economy is down because we’ve built too many houses,” he told the NBC “Today Show.”
Even some Bush administration critics share that opinion. The war “didn’t have much effect on the housing market or on the willingness or unwillingness of banks or others to provide credit,” says Robert D. Hormats, vice chairman of Goldman, Sachs (International), a Wall Street firm.
Still, the Democratic contenders for the presidential nomination, New York Sen. Hillary Rodham Clinton and Illinois Sen. Barack Obama, are starting to echo some of the Stiglitz-Bilmes critique. And some of their fellow lawmakers, Republicans included, are taking up the simpler argument that the United States is spending money that the Iraqi government – a major oil producer – ought to be paying for defense and rebuilding.
“Isn’t it time for the Iraqis to start bearing more of those expenses, particularly in light of the windfall in revenues due to the high price of oil?” Sen. Susan Collins, R-Maine, asked Ambassador Ryan Crocker, the U.S. envoy to Iraq, during an April 8 hearing of the Senate Armed Services Committee.
“Senator, it is,” Crocker replied. He and Gen. David H. Petraeus, the top military commander in Iraq, said the Iraqi government has agreed to channel $300 million to U.S. authorities for reconstruction projects.
The presumptive Republican presidential nominee, Sen. John McCain, R-Ariz., a vocal supporter of the Iraq intervention, endorses that approach. “The Iraqis . . . need to move a portion of their growing budget surpluses into job-creation programs,” he said at the same hearing, “and look for other ways to take on more of the financial burdens currently borne by American taxpayers.
President Bush had already signaled a shift toward insisting that the Iraqi government lessen financial dependence on the United States.
“The Iraqi government is stepping up on reconstruction projects,” Bush said in a March 27 speech at the National Museum of the United States Air Force in Dayton, Ohio. “Soon we expect the Iraqis will cover 100 percent of those expenses. The same is true when it comes to security spending. Initially, the United States paid for most of the costs of training and equipping the Iraqi security forces. Now Iraq’s budget covers three-quarters of the cost of its security forces, which is a total of more than $9 billion in 2008.”
But Stiglitz and Bilmes calculate that the United States spends more than that – $12 billion – in just one month on Iraq operations. Their overall estimate of $3 trillion includes interest payments on the entirely borrowed funds for the war, and takes in the cost of Iraq (and Afghanistan) operations since 2001 – when the Global War on Terrorism was launched, the Afghanistan intervention began and pre-invasion planning for the Iraq conflict started up – through 2017. The Democratic staff of the Congressional Joint Economic Committee produced a nearly identical estimate of $2.8 trillion. And the nonpartisan Congressional Budget Office (CBO) came up with an estimate of $1.2 trillion to $1.7 trillion. The CBO’s total could rise to as much as $2.4 trillion if future interest payments on borrowed money are added. Scott Wallsten, a former economist at the World Bank and the American Enterprise Institute who has been tracking Iraq costs for years, told the congressional Joint Economic Committee that Iraq expenses would reach close to $2 trillion.
None of these estimates are easily compared with one another because the underlying calculations were based on different methodologies and time horizons; some also do not account for oil-price fluctuations, debt interest payments and the effects of inflation. Some of these contrasts are apparent in projections on the costs of veterans’ care.
In any event, however much the United States spends in the future, there’s no question that it already has spent far more than the administration ever projected. The closest thing to an official cost estimate ran to $60 billion tops, by Mitchell E. Daniels, then the head of the Office of Management and Budget, in December 2002. And a White House adviser, Lawrence B. Lindsey, then director of the administration’s National Economic Council, who in 2002 gave an unofficial projection of up to $200 billion, was fired shortly after that.
The administration’s projections “presupposed a relatively short conflict that would have had us out of there in a matter of months,” says Dov Zakheim, who was assistant secretary of Defense and the Pentagon’s budget chief in 2001-2004. Instead, “The war became a lot more intense than people anticipated, and the thing has gone on a lot longer than people anticipated.” Zakheim is now a vice president of Booz Allen Hamilton, a McLean, Va.-based consulting firm.
Cost figures and economic theories notwithstanding, the Iraq-costs debate ultimately turns on issues of national security policy.
“We’re supporting a vital national interest, which is a stable Middle East,” says James Jay Carafano, a retired U.S. Army lieutenant-colonel and a military affairs and foreign policy specialist at the conservative Heritage Foundation. Of the Stiglitz-Bilmes thesis, he says, “These are political arguments, not economic arguments. It’s not even saying ‘I’ve done this economic analysis and it has political implications.’ That’s prostitution, as far as I’m concerned. [It amounts to] ‘I’m going to prostitute my craft for politics.’ “
In an interview later, Stiglitz says, “We’ve obviously hit a raw nerve.” He adds that he and Bilmes make clear they oppose the war. But they began laying out their thesis in a 2006 paper published by the National Bureau of Economic Research, a nonpartisan, nonprofit forum. “It was open for people to give us comments, which is in the nature of an academic process. We were very careful in responding to issues that were raised in open debate. The remarkable thing, from the Heritage Foundation or from the administration, is that they won’t come up with their own numbers.”
White House press secretary Dana Perino said in March, when asked about Stiglitz’s calculations: “I’m not going to dispute his estimates. . . . But it’s very hard to anticipate, depending on conditions on the ground and circumstances, how much the war is going to cost.”
In any case, war critics aren’t the only economists studying Iraq. Even before the invasion, a trio of economists at the University of Chicago began examining projected costs of the war against the alternative – maintaining military operations to enforce United Nations sanctions against Iraq (referred to as “containment”). The analysts calculated that containment would have cost $297 billion while military action would cost $414 billion.
“The cost of the war is certainly far in excess of the baseline cost that we estimated for containment,” the study’s leader, Steven J. Davis, concedes. But Davis, a professor at the University of Chicago’s Graduate School of Business, disputes the idea that the underestimate by him and his colleagues strengthens the Stiglitz-Bilmes argument. “Their whole premise is that, in the absence of war, things would have been fine and dandy in the Middle East,” something he calls a “questionable assumption.”
A military-spending specialist agrees decisions on going to war can’t be reduced entirely to dollars and cents. “It’s not like investing in real estate,” says Steven M. Kosiak, vice president for budget studies at the Center for Strategic and Budgetary Assessments, a nonpartisan think tank. “You have to take into account all kinds of things that are not budgetary or economic; there may be times when it is worth going to war even if there is a high budgetary cost.”
Still, President Bush has not been relying on that argument alone in recent comments about the costs and economic effects of the war. “I think, actually, the spending on the war might help with jobs, because we’re buying equipment and people are working,” he told the NBC “Today Show.”
But the classic World War II argument that military spending benefits the entire economy is finding little resonance among lawmakers managing a $239 billion federal budget deficit, whose constituents fear recent economic developments and hear that no plans exist to end the war.
As Hormats points out, “War spending is a highly inefficient way of boosting U.S. jobs and growth; spending on roads, bridges, energy research and education at home would have a far more beneficial and enduring effect on the economy than artillery and tanks.”
“We must ask ourselves,” said Sen. Charles Schumer, D-N.Y., said at a February hearing of the Joint Economic Committee, “is it worth spending trillions of dollars on such an uncertain and unpredictable outcome?”
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