March 19, 2006 to March 26, 2006
The Iraq War
The Economics of the Iraq War--BECKER
The third anniversary of the start of the Iraqi war has brought forth several assessments of how it was conducted, what its cost has been, and what the costs will be in the future. These include analyses of whether American military leaders adequately prepared for a war of insurrection, whether economic costs were grossly underestimated, and whether the American people were prepared for the protracted nature of and heavy casualties during the insurrection period. I will concentrate mainly on attempts to measure economic costs, but these estimates include assigning costs to deaths and injuries of American military personnel.
Clearly, aggregate costs to the United States have been considerable, and they will continue to rise as the insurrection persists and additional lives are lost. These costs include the military equipment lost during the war and subsequent fighting, the value placed on deaths and injuries, increased depreciation of military equipment, higher cost of attracting enlistments to the military, and reconstruction aid to Iraq. Davis, Murphy, and Topel of the University of Chicago Graduate School of Business in "War in Iraq versus Containment", unpublished, February 15, 2006 make various estimates of the aggregate cost under different scenarios about how long the insurrection continues, the number of American lives that will be lost in the future, etc. They assume a statistical value of life of about $7 million per each military death, and about seven injuries per fatality. Their median estimate of the total cost discounted back to 2003 at a 2 per cent interest rate is about $450 billion, while their "high" estimates are between $650 and $850 billion. One can quarrel with their estimates--such calculations are extremely difficult-- but they are carefully made. In any case, their results show that the cost of the war is large in some absolute sense.
Estimates of the war's cost by Bilmes and Stiglitz in "The Economic Costs of the Iraq War", have received much more publicity. Stiglitz very briefly summarizes these estimates in a short piece this month called "The High Cost of the Iraq War", in the online forum Economists' Voice. In many respects their numbers are similar to those by Davis, Murphy, and Topel, but they are larger. Their "conservative" estimate of budgetary costs that does not include additional interest on the larger federal debt due to the war is $650 billion when discounted at 4 per cent. They also have "conservative" estimates that include additional interest on government debt, but I do not understand why this should be counted since they already count military spending as a cost. They adjust the $650 billion figure to account for increased depreciation of military equipment, the value of lives lost, and additional costs due to the many injuries of military personnel. Mainly due to the assumption about increased depreciation and additional losses due to injuries, they raise their estimate to $840 billion. I believe they exaggerate how large these costs are, but the calculations are difficult to make. Even so, their total is consistent with the high end of the Davis, et al. estimates.
I am much more doubtful about the additions that Bilmes and Stiglitz make to reach total costs of between $1 and $2 trillion, the numbers that have received the greatest publicity, and are cited in Stiglitz;' Economic Voice paper. They assume that the war increased the price of oil from $5 and $10 a barrel for between 5 and 10 years. These are sheer guesses that are far from obvious. This would depend on the net reduction in Iraqi oil production, the increase in the oil supplied by other producers, and the effects of the war on demand for oil. It is not clear that there was even a net reduction when one considers the alternative of continuing containment. Assuming the scandals in the UN administered oil for food program would have been discovered anyway, might not Iraqi exports under containment been considerably reduced?
About half of the increase in their estimate of costs from $1 to $2 trillion is due to their most generous assumption about the magnitude and duration of the oil price increase. The other half is due to what strikes me as highly dubious assumptions about other macroeconomic effects of the war. Since they count government spending on the war as a cost, it is a bit of a stretch (and even double counting under reasonable assumptions) to count also some of the reduced spending on other government programs. This requires assumptions about private versus public returns on spending that have little basis in hard evidence. I have similar doubts about their adjustment ($250 billion) for the effects of the war on economic growth.
I tentatively conclude from these two studies that the cost of the war will amount to somewhere between $500 and $850 billion, taking account of the loss in life and injuries. These are certainly high numbers, and generally much larger than initially estimated by the administration and many outsiders. Has the war been worth its cost? The American people are increasingly expressing grave doubts about that. I do not know the answer to this question, but whether the war was justified depends on how the Iraqi situation plays out, and what would have happened had we not gone to war.
The Bilmes-Stiglitz paper, along with other papers on the cost of the war, do not compare these costs with the costs of alternative policies. Davis, et al do estimate the cost of various alternative scenarios, including continuing the containment of Saddam Hussein that had been in place before the war. Their middle range scenario concludes that the present value of the cost of continuing containment would have been about $400 billion. This is lower than their estimates of the cost of the war, but how much lower depends on which war estimate is used. With their middle range estimate of war costs, the difference is not large, but the difference is considerable with the $840 billion estimate of Bilmes-Stiglitz.
It is not a justification for the war but neither is it totally irrelevant to put the war's cost in perspective. The over 2000 young American men and women killed are a minor fraction of the almost 60,000 soldiers killed, and 350,000 casualties, during the Vietnam war. It is also a fraction of the 40,000 mainly young persons killed annually in automobile accidents. Consider the magnitude of the cost of the Vietnam War if it had been (and should have been!) calculated the correct way.
I have not mentioned anything about the costs or benefits to the Iraqi people. Much property has been destroyed and many Iraqis killed during the insurgency, but can anyone doubt that practically all Kurds and Shiites (about 75 per cent of the total population), and some Sunnis, consider themselves better off now than under the brutal regime of Saddam? This brutality includes not only the enormous devastation to the Iraqi economy, but also the many thousands of deaths that he caused, a number that would be well in the hundreds of thousands if deaths due to the Iran invasion are included. Since Democrats as well as Republicans often mention spreading democracy, I do not see how the effects on Iraqis can be ignored.
No terrorist attack has taken place in the U.S. since 9/11, including the three years after the war started. Maybe that would have happened anyway, and maybe the war even raised the probability of such attacks. Still, the circumstantial evidence would suggest that the war might have decreased the probability of attacks in the U.S. This could be because terrorists have been busy concentrating on Iraq, or because we have killed many who might have been involved in such attacks.
Still, I believe the war should be assessed a bad failure if Iraq degenerates into civil war that leads before very long to another brutal dictatorial regime. On the other hand, if Iraq stabilizes reasonably soon, has a decent government, and starts to progress economically, the war would have been a success. I say this not only because the war got rid of a cruel and dangerous dictator who inflicted immense harm on his own people, and who would have used highly destructive weapons on others if he ever obtained them. In addition, a stable and progressive Iraq is likely to have beneficial effects on Syria, Saudi Arabia, and other bad regimes in the Middle East that will directly benefit the whole free world, possibly including creating a background for a peace between Israel and its Arab neighbors.
It could be a decade or more before the ultimate verdict about the war is available.The future looks precarious at present, but it is too early to throw in the towel and conclude that the war was a costly failure.
The Cost of the War in Iraq--Posner's Comment
One of the major questions that I asked in my book Catastrophe: Risk and Response (Oxford University Press, 2004) is what can be salvaged of cost-benefit analysis in situations of enormous uncertainty. I think a lot, and refer the reader of this blog to chapter 3 of my book for explanation. The war in Iraq (not discussed in my book) provides a test case for this proposition.
Apparently the Administration did not conduct a cost-benefit analysis before deciding for war. Maybe it thought the benefits so obviously great that no reasonable estimate of cost would exceed them. I believe that the Administration's only public estimate was that the war would cost no more than $60 billion and that some of this expense would be defrayed (as in the 1991 war with Iraq) by other countries. The estimate seems to have assumed that the probability of a short, cheap (i.e., $60 billion maximum), victorious war was 1.
A responsible cost-benefit analysis would have costed alternative scenarios (such as short-victorious war, long-victorious war, long-losing war, and long-breakeven war), attached a probability or, more plausibly, a range of probabilities to each, and summed the expected costs generated by multiplying each cost estimate by its associated probability or range of probabilities. Benefits to be valued would include (1) elimination of Iraq's weapons of mass destruction, (2) a demonstration of U.S. military prowess that would intimidate hostile nations such as Iran and North Korea, (3) cost savings from eliminating the containment regime (the no-fly zones and sanctions enforcement designed to box in Saddam Hussein), and (4) improvement in our military capabilities as a result of wartime experience. (1), (3), and (4) seem susceptible of quantification, though (1) would have been overestimated by virtually everyone because of the widespread and highly plausible, but erroneous, belief that Iraq had an active WMD program. (2) could probably be ignored on the ground that it was likely to be offset by adverse reactions to our embracing a doctrine of preventive war. I would have given no weight to the Wolfowitz project of promoting democracy in the Arab region, as it is completely uncertain whether democracy in that region is in the interests of the United States. We have certainly not been pleased with the result of the democratic election in Palestine that has brought Hamas to power. We would not like to see the Muslim Brotherhood take power in Egypt, though it may be the most popular political group there. We were distinctly displeased with the result of the Iranian presidential election.
I would also ignore the effect of the Iraq war on our struggle against international terrorism. I imagine the effect is negative, but there is too much uncertainty to try to quantify it.
In a paper first published in March 2003, very shortly before the war began, the economists Steven Davis, Kevin Murphy, and Robert Topel conducted a limited cost-benefit analysis. It was basically just a comparison between the cost of going to war and the cost of continuing the containment policy. They estimated the former as $125 billion maximum and the latter as between $380 billion and $630 billion. The gravest weakness of their analysis was the failure to consider war alternatives to the short, cheap, victorious war that the Administration assumed. They recently updated their paper and raised their estimate of the cost of the war to $323 billion, while allowing (no doubt chastened by their original underestimate) for the possibility that it might go higher. This seems too low since the budgetary cost of the war is already $250 billion and increasing at the rate of $6 billion a month. The costs can of course be capped at any time by U.S. withdrawal from Iraq, but then the benefits of the war would have to be written down to zero except for the important and curiously ignored benefit that consists of having one's armed forces engaged in a recent war. The lessons of war cannot be duplicated by peacetime training, planning, and analysis.
Linda Bilmes and Joseph Stiglitz in a recent paper estimate the cost of the Iraq war as being between $1 trillion and $1.2 trillion. As Becker points out, the estimate is based in part on entirely speculative estimates concerning the impact of the war on the price of oil. My own view, moreover, is that higher oil prices are a very good thing from the standpoint of combating global warming, though I would prefer to see them brought about by high taxes on fossil fuels, which would have the additional benefit of reducing the wealth of oil-producing nations. The Bilmes and Stiglitz paper usefully emphasizes, however, the costs resulting from the unexpectedly long deployments of our troops. Apparently, as they point out, these were not anticipated and thus impounded in military salaries and benefits, and as a result the nation is having to incur increased recruitment and other personnel costs in order to maintain the armed forces at the desired level. With the dubious (as Becker notes) cost items subtracted from the Bilmes-Stiglitz estimate, the total is still a sizable $840 billion, which as Becker points out approaches the high end of the Davis-Murphy-Topel current estimate.
I have two disagreements with Becker. First, I do not think that a comparison of U.S. military deaths in Iraq and Vietnam is meaningful. Partly because of increased media coverage, there is much greater sensitivity to casualties today than there was in the Vietnam era (or think back to the Civil War--twice as many deaths as in World War II, in a population less than one-fourth as large). Apparently the Administration has decided that it is imperative to reduce the number of U.S. military deaths in Iraq, even though the total for 2005 was only 846, compared to 14,000 in 1968, the critical year of the Vietnam war.
Second, I would not count the welfare of Iraqis in a cost-benefit analysis of U.S. warmaking. I do not think most Americans want to sacrifice American lives and resources for the sake of foreigners. There is some American altruism toward Iraqis, and to that extent increasing the welfare of Iraqis is a benefit to Americans, but, in my view, only to that extent. And I think it is quite slight.
All this said, I do not think a decision to go to war should be based on cost-benefit analysis. It would terrify the world if powerful nations conducted cost-benefit analyses of whether to go to war. There are 192 nations besides the United States; should we ask the Defense Department to advise us which ones we should invade because the expected benefits would exceed the expected costs? Might a conquest of Canada produce net benefits for the United States? Rather, our policy should be to wage only defensive wars, though that would include aiding allies that have been attacked, which was a reasonable basis for our entry into the Vietnam war, though the results were deeply disappointing.
I also do not think a nation threatened with attack should base a decision whether to defend or surrender on cost-benefit analysis. Rather, it should commit itself to fight regardless, as such a commitment will in most instances greatly increase the expected cost of the attack. That is the economic logic of revenge and the basis of our policy of massive retaliation during the Cold War.
I said that the Administration did not conduct a cost-benefit analysis of the war in Iraq, and I have also said that I do not think a decision to go to war should be based on such an analysis. But in the case of a war that though in a broad sense defensive is also optional because there is no immediate threat of attack by the enemy, cost-benefit analysis has an important role to play. After 9/11, the danger to be anticipated from Saddam Hussein's possessing weapons of mass destruction, though uncertain, had to be reckoned greater than before. And by virtue of the no-fly zones and the sanctions, the United States was already in a quasi-war with Iraq. Against the background, the decision of the Administration to obtain a United National resolution demanding that Iraq re-admit the inspectors whom it had ousted in 1998 was reasonable and had the support of most nations. Enforcing the demand required the United States to station large forces in Kuwait and elsewhere in attack range of Iraq. In March 2003 the United States had the choice of permitting Saddam's cat-and-mouse game with the inspectors to continue, or invading. That was the point at which a careful cost-benefit analysis might have indicated the desirability of holding off on invading for a month or two, although a significant cost would have been that it would have given Saddam more time to prepare and that having to fight in hot months would have impeded the invasion to a degree.
In addition, once the decision for war was taken, cost-benefit analysis of alternative scenarios--in particular of the possibility of a long war that we would lose or draw--might have indicated net benefits from committing more troops to the invasion and its immediate aftermath in order to prevent the rise of an insurgency.
The Cost of the War in Iraq--Posner's Response to Comments
There were as usual a number of interesting comments. I respond to just a few.
First, on the numbers front, Steven Davis notes that I was wrong to say that the Davis, Murphy, and Topel updated study estimates the cost of the war at $323 billion; their updated estimate is $480-$630 billion. Leigh, Wolfers, and Zitzewitz remind me that they made a prewar estimate of $1.1 trillion.
Second, I was too cryptic in saying that 9/11 increased the risk to be anticipated from Saddam Hussein's possessing weapons of mass destruction. The thinking behind the statement was partly that 9/11 demonstrated a degree of danger to the United States from the Arab world that had not been fully understood, and partly that Saddam Hussein might feel "one-upped" by the demonstration of al Qaeda's ability to hit the United States hard, something Saddam had never succeeded in doing. He might have been spurred by the example to more aggressive action or even to cooperating with al Qaeda.
Third, I never suggested that the United States feared a direct attack by Saddam Hussein on the continental United States. The danger to the United States would be that Saddam Hussein's possession of atom bombs or other weapons of mass destruction would give him a freer hand in the Middle East, where of course the United States has significant economic and other interests. A re-invasion of Kuwait by Iraq would not have been out of the question had Saddam been allowed to obtain nuclear weapons and the missiles to deliver them long distances. There is the further question of what would happen to Iraq after Saddam Hussein died or became incapacitated or was assassinated or otherwise overthrown. If Iraq at that point had weapons of mass destruction, they might well fall into terrorist hands
Reply on the Economics of the Iraqi War-BECKER
Thanks for the interested and interesting comments. Let me add a few reactions to the discussion.
I agree that terrorist attacks sometimes (but not always) take time. I presented only a very mild statement that maybe the War reduced the probability of attack since there has been none for five years. Surely, if attacks had come, as in Spain-where it took hardly more than one year to generate a very deadly attack- the War would have been blamed, at least in part. The Spanish attack helped to defeat the government that sent troops to Iraq, and hastened a withdrawal afterwards by the newly elected government. Why Spain and not here?
I do not see how anyone can claim that Iraqis are no better off, despite the continuing number of horrible Iraqi deaths. It can hardly be doubted that the vast majority of Iraqis supported the overthrow of Saddam. I suspect that a similar majority would oppose the quick withdrawal of U.S. troops. That should not be the reason for keeping them, but we should be clear on where Iraqis stand.
William Nordhaus is an outstanding economist, and I have learned a lot from his many original writings. But an estimate of the war's cost of between $100 billion and $2 trillion is hardly a sharply defined basis for decision-making.
The $7 million estimate for a statistical value of life is for young persons taking various risky decisions. Of course, soldiers are volunteers, but so too are men and women who take risky construction jobs, or join the police force. Estimates of the statistical value of life are trying to measure the amount of compensation people require in order to induce them to take on additional life-threatening risks. I should add that different studies come up with different number, and I consider $7 million on the high side.
Posner and I have no NBER paper on the cost of the war- one commentator is confused on this. I assume he means the paper by Davis, Murphy, and Topel that we refer to. They are the ones who consider continuing containment as one alternative to going to war-they also discuss other possibilities. Perhaps as claimed in the comment, they overstate the cost of containment, but surely considering the cost of alternatives is better than concluding about the desirability of the War without discussing any alternatives?
There can be only one Muppy, my former student. The suggestion of insurance on a war is original, but I do not see how a country can take out insurance on fighting a war that runs into hundreds of billions of dollars. There would have to be a large and reliable market where people can bet in aggregate large sums against the government. But various internet betting markets could have wagers on the costs in any year, the number of casualties, whether any WMD would be found, etc. That may be a bit macabre, but it does encourage many alternatives to official estimates of the costs and benefits of fighting a war. Recall that there was a betting market on whether Larry Summers would resign as President of Harvard. Unfortunately, for Harvard and other universities, those betting that he would resign won.