Home > World Events > A trillion dollar war (crossposted at CT)

A trillion dollar war (crossposted at CT)

September 23rd, 2005

Before the Iraq war began, Yale economist William Nordhaus estimated the likely cost at between $100 billion and $2 trillion. At the time most of the interest lay in the fact that the bottom end of the range was twice as much as the $50 billion estimate being pushed by the Administration. But with a couple of years’ experience to go on, Nordhaus’ upper range is looking pretty accurate. Assuming that Bush ‘stays the course’, it’s safe to estimate that the war will cost the US at least $1 trillion by the time all the bills come in, and it could easily be closer to $2 trillion.

Let’s start with direct military costs. These have been running at about $80 billion a year and are unlikely to decline in the next year or so. Allowing for a gradual withdrawal over the rest of Bush’s term, a rapid withdrawal thereafter and some continuing military aid, it seems reasonable to estimate operational costs totalling $500 billion.

But that’s not the end of the military costs. The war has forced the US military to eat into its capital stocks, literal and metaphorical. The most obvious impact has been on the National Guard, which was never intended for long-term discretionary military operations like the Iraq war. Recruiting for the National Guard, not surprisingly, has collapsed. To quote RedState.orgRegardless of the path chosen, the National Guard, as we know it, cannot survive in this environment and neither should it. Rebuilding or replacing the National Guard will cost big money. The Army and Army Reserve have similar problems, if not quite as drastic, and will be paying the price of the Iraq deployment long after the last troops are withdrawn. Then there are the costs, stretching far into the future, of caring for the thousands of troops badly wounded in the war. Overall an estimate of $250 billion looks conservative.

Nonmilitary aid to Iraq has been grossly inadequate to achieve anything and the chaos on the ground has meant that the amount of aid actually delivered has been tiny. Still, it’s hard to imagine that the eventual total will fall short of Nordhaus’ estimate of $50 billion.

The big unknown in Nordhaus’ estimates was the effect on oil markets. The worst-case scenario, with the entire Middle East being disrupted hasn’t happened. Still, with oil markets stretched tight, even the modest reduction in Iraq’s exports caused by the war has had an impact. I’d estimate about $5/barrel, which implies about $20 billion/year on the US import bill or around $100 billion over five years.

Finally, there’s the impact of the increased debt on US interest rates. So far there hasn’t been any observable impact. There’s a wide range of estimates of the impact of additional deficit spending. A conservative estimate is that the short-run impact of an extra one per cent of GDP added the deficit is a 10 basis point increase in interest rates. On a net foreign debt of $2 trillion, that’s 20 billion per year, or $100 billion over five years. The full cost could easily be many times this amount.

Adding up all these costs, we get a round $1 trillion. As noted, most of these estimates are pretty conservative, and the total could be much more. Feel free to suggest corrections/amendments.

A trillion dollars is a lot, but is it too much to pay for overthrowing a tyrant (let’s suppose for argument’s sake that some sort of stable government emerges in the end)? I’ve hammered the opportunity cost points (spent on US health services, this sum could save around 200 000 American lives, on civilian aid, tens of millions of lives in the Third World) too many times already, so I’ll try another tack. Given a budget of a trillion dollars and almost unlimited military power, does anyone really want to suggest that competent managers couldn’t have achieved a great deal more liberation from oppression than this. I have plenty of ideas, and I’m sure others do too.

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  1. doug
    September 23rd, 2005 at 20:53 | #1

    John, I think you’ve got millions and billions mixed up a couple of times–end para 4, near end 3rd last para.

  2. jquiggin
    September 23rd, 2005 at 21:08 | #2

    Thanks for that. Fixed now, I hope.

  3. Peter Evans
    September 23rd, 2005 at 21:33 | #3

    Let’s see. A trillion dollars. That’s about 15k for every Iranian (sic) man, women, and child, to do their bidding (thanks Uncle Sam). I think I’m gonna go find me an Iranian investment adviser. They’re on to something.

  4. David Allen
    September 23rd, 2005 at 23:07 | #4

    How much has it cost us?

  5. September 24th, 2005 at 12:16 | #5

    A stunning example of synchronicity: John Quiggin, the nerdiest Left wing critic of the war in lock step with Steve Sailer, the nerdiest Right wing critic of the War:

    Dept. of Now-They-Tell-Us: A new cost-benefit analysis by the AEI-Brookings Joint Center for Regulatory Studies on “The Economic Costs of the War in Iraq” concludes that the Iraq War is likely to end up costing over twice what it’s worth:

    We estimate that the expected total net present value of the direct costs [of the Iraq War] through 2015 could be $604 billion to the U.S., $95 billion to coalition partners, and $306 billion to Iraq, suggesting a global total expected net present value of about $1 trillion. The net present value of total avoided costs, meanwhile, could be about $429 billion.

    The BBC cites a report that shows the Iraq war is now costing more in fiscal terms than the Vietnam war.

    The most profitable investment that public agencies can make is in health service delivery and investment. The Lasker foundation has a great series of reports on the benefits from health R & D, especially Exceptional Returns: The Economic Value of America’s Investment in Medical Research, authored by Kevin Murphy.

    An Australian version of this report, Exceptional Returns: The Value of Investing in Health R&D in Australia, was put out by Access Economics. The press release $1 INJECTION INTO HEALTH R&D RETURNS $5 ECONOMIC BENEFIT prospects great gains from health investment:

    Every dollar spent on health research and development (R&D) returns $5 in national economic benefit, a major new report by Access Economics for the Australian Society of Medical Research reveals.
    And Australians’ current life expectancy has increased by eight years compared to the 1960s, because of massive advances in medical research, health promotion and overall healthcare.

    When it comes right down to it, the best way to help people is to heal them, rather than wound them.

  6. Harry Clarke
    September 24th, 2005 at 16:49 | #6

    As someone who supported/supports the war this is compelling stuff that does make you think. In your earlier posts on the opportunity cost angle you came close to a general kind of claim about the inadvisability of war war and your inquiry about what you would do with $1 trillion does essentially the same.

    The effects on oil prices can be questioned. There is a problem with oil anyway that Saddam would not help with. Some of the military costs and even weapons costs are fixed costs in the sense they would need to be incurred to maintain a military. The issue is whether the war effort could be replaced with a $1 trillion offer to improve the world.

    Its an excellent thought-provoking post that makes me feel uncomfortable. I hope you pursue this line of inquiry.

  7. Ian Gould
    September 24th, 2005 at 16:58 | #7

    Harry,

    The net effect of the war on oil supplies is pretty easy to quantify – Iraqi oil output is down by around 500,000 barrels per day – that isn;t huge but its significant in a tight market.

    Additionally much of the oil illegally smuggled out of Iraq via Turkey and jordan was probably being sold in those countries at below market prices.

  8. September 24th, 2005 at 19:42 | #8

    There is also some kind of risk premium built into the price of oil, based on general regional insecurity that the war has exacerbated, particularly amongst Islamists in the Gulf area.

  9. brian
    September 25th, 2005 at 01:01 | #9

    I recently saw a remarkable play in melbourne “Stuff Happens”…and it reminded me that Rumsfelt had actually said at the beginning of the war that it would pay for itself,with the oil revenues paying the reconstruction costs!! He thought that it was possible that it MIGHT just cost about $5 billion !. if things went less well than expected ….if that. Their folly is now here for all to see…and they have no exit strategy,so what now.We are I think the same sort of collapse that engulfed the Russians in Afghanistan..the crash of Emperor Bush ,will be interesting to watch !..and a good reason for those who were always opposed to say that time honoured statement “I told you so “.

  10. John Humphreys
    September 25th, 2005 at 21:00 | #10

    I am happy this line of thought is getting more airtime. Can I add that I have been pushing this line since before the war started.

    http://www.cis.org.au/policy/autumn04/autumn04-5.htm

    And John — you forgot the deadweight loss from the tax that will eventually be raised to pay for the debt. So add another 20-40% to your total.

    I wouldn’t include the cost of the change in interest rates… but I would include the cost to the government of actually paying the interest on their debt.

    And then I would point out that the burden of proof should lie with proponents of the war (or any non-voluntary behaviour) to show that there are likely net benefits.

  11. Ian Gould
    September 26th, 2005 at 09:59 | #11

    >I wouldn’t include the cost of the change in interest rates… but I would include the cost to the government of actually paying the interest on their debt.

    That assumrs the US will actually repay its debts and not either explicitly repudiate them or enage in massive exponsion of the money supply to erode the real value of the debt through inflation.

  12. Brian Bahnisch
    September 26th, 2005 at 10:58 | #12

    A more minor matter, but interesting nevertheless. There was an item in today’s paper saying that 250,000 small arms bullets were being fired for every enemy killed. The US was unable to keep up with supply from domestic sources and was importing bullets from Israel.

  13. wilful
    September 26th, 2005 at 11:31 | #13

    well at least they wont be covered in pork fat.

    But that really is an extraordinary number. I wonder what the lead content is, and whether that is an issue?

    All quiet on the DU front for a while. It was interesting that the Australian Abrams tanks that we’re buying don’t have DU armour (not politically acceptable) but it’s quite clear that our tank crews will be trained to slot into pre-positioned US tanks that obviously will have the offensive item (erm, no play on words intended).

    As for the costs, what would the opportunity costs have been for the US if Iraq had switched to the euro?

  14. Terje Petersen
    September 26th, 2005 at 12:31 | #14

    The US virtually begged China to switch to the Euro. Weird times.

  15. John Humphreys
    September 26th, 2005 at 13:40 | #15

    Ian — there is a cost involved in the delay of paying for the war, no matter how the war is paid for.

    As it is generally regarded that printing money (or repudiating debt) is a higher-cost option than paying off the debt, then it is reasonable to assume that the cost of paying off the debt is a reasonable (minimum) cost for the delay in payment.

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