1. THE ECONOMIC COSTS OF THE IRAQ WAR Linda Bilmes Kennedy School of Government, Harvard University and Joseph E. Stiglitz University Professor, Columbia University March 2004

2. 2 Before the Iraq War….  Costs of the War were estimated by Mitch Daniels and Rumsfeld at $60bn  Lindsay predicted $100-$200 billion  CBO now projects past and future expenditures to exceed $500 billion  Even this grossly underestimates full economic and budgetary costs

3. 3 Costs to date  Congress has appropriated $357Bn for Iraq and Afghanistan military operations, reconstruction, enhanced security at US bases and foreign aid programs $251bn for military operations in Iraq  Since FY 2003 the monthly average cost of operations has risen from $4.4bn to $7.1 bn – largely due to Iraq.

4. 4 Objective of Our Paper  Provide estimates of full costs of the Iraq war, including: Full budgetary costs, including long-term expenditures not included in current budget True social costs of expenditures Macro-economic effects

5. 5 Two Scenarios  “Conservative” scenario: Assumes all US troops withdrawn by 2010  “Moderate” scenario Small but continuous US presence through 2015  Both scenarios Use 4% discount rate Use troop deployments based on projections by the Congressional Budget Office Exclude Afghanistan Exclude costs by other countries Ignore important costs which are not easily quantifiable

6. 6 Large Future Budgetary Expenses Incurred 1.Continuing operations 2.Veterans costs 3.Increased defense spending 4.Demobilization 5.Interest: large cumulative debt

7. 7 LT Veterans Costs for Iraq war  Medical care and related costs (rehabilitation,retraining,prothetics)  Medicare care treatment for brain injuries So far 3,213 troops -- 20% of those injured in Iraq -- have brain/spinal injuries that require lifetime care costing $600,000-$5million  Disability Pay based on analysis of 1 st Gulf War patterns

8. 8 Increased defense expenditures attributable to Iraq (1)  Since 2002, annual appropriations for DoD have risen from $310bn to $420bn Total cumulative increase: $325bn.  Costs of replacing military hardware have risen Iraqi operations wearing out equipment 4-5 times faster than normal (climate, usage) CBO estimates military will require some $100bn in replacement hardware

9. 9 Increased defense expenditures attributable to war in Iraq (2)  Additional recruitment costs Military facing severe hiring challenges Recruitment cost per military recruit has increased from $14,500 in 2003 to $17,500 in 2005 Additional costs of higher wages, combat pay, pensions, contractor costs, death benefits, life insurance, benefits packages  We conservatively attribute only 30% of increased DoD costs to Iraq  And then subtract DoD savings from no longer enforcing the no-fly zone in Iraq

10. 10 Budgetary Costs of the Iraq War ($Bn)

11. 11 True social costs (1)  Focuses on differences between true economic costs and expenditures  Economic Cost of Reserves Reserves’ pay is less than their opportunity cost Does not directly measure the economic and budgetary costs arising from reduction in first responder capabilities  Economic Cost of Military Fatalities Death benefit understates “economic value of life” used by government in other areas  Economic cost of contractor fatalities

12. 12 True Social Costs (2)  Economic cost of the seriously injured Disability compensation less than reduction in productive capacities Does not include measure of pain and suffering  Accelerated depreciation of military hardware In excess of actual replacement expenditures

13. 13 Adjustments to Budgetary Numbers to Account for Economic/Social Costs

14. 14 Direct Budgetary and Economic Costs of the Iraq War ($Bn) ScenarioBudgetary cost without interest Budgetary Cost (including interest) Cost with Economic Adjustments Conservative652750839 Moderate8841269 1189

15. 15 Macro-economic effects (1)  Increased price of oil Instability in Middle East a major reason for failure of normal supply response Conservative estimate attributes $5 of increase to Iraq war, Moderate $10 Direct impact—transfer of resources to oil producers Multiplier effect—reduced purchasing power (in periods in which economy had excess capacity) Global general equilibrium effects—as incomes in Europe and Japan also reduced (not included in analysis)

16. 16 Macro-economic effects (2)  Incidence analysis of expenditures Counterfactual—what would otherwise have been the case Money could have been spent on investments Would have stimulated the economy more in short run  First round “leakage” larger, e.g. for hiring foreign workers in Iraq Investment would have had long term growth benefits  Included in “moderate” scenario only

17. 17 Macroeconomic effects ImpactConservativeModerate Oil price increase Transfer (supply side) effect125[1][1]300 Aggregate demand[2][2]62150 Global General Equilibrium 150 Budgetary impacts Expenditure switching 200 Growth impacts (PDV) 250 Total 187 1050 [1][1] conservative: $5 barrel for 5 years;moderate: $10 barrel for 6 years [2][2] conservative: (multi-year) multiplier of 1.5; moderate: (multi-year) multiplier of 2

18. 18 Total Economic Costs of the War in Iraq ScenarioConservativeModerate Direct costs8391189 Macroeconomic1871050 10262239 TOTAL COSTS

19. 19 OMITTED COSTS (1)  Costs of risks borne by individuals Health care costs not borne by the government  All costs borne by other countries, including Iraq Military costs Destruction of property Loss of life  All costs of increased insecurity  Increased costs of cross border flows  Reduced Private investment  Value of reduced capability of responding to national security threats elsewhere in the world  Value of reduced capability of responding to domestic situations in which the National Guard or the Reserves might have been called upon (as in New Orleans)

20. 20 OMITTED COSTS (2)  Indirect aggregate demand effects Reduced incomes in trading partners Anti-American sentiment  Consequences of tighter monetary policy as a result of increased inflation  Costs of oil price volatility Investment, Bankruptcy  Losses in asset values (arising from increase in oil prices or otherwise Equity market Housing  Indirect consequences of worsening fiscal position Increased government expenditures on oil Increased expenditures on the war

21. 21 Unanswered Questions  Why were costs were so vastly underestimated? Incompetent analysis Historical error – wars usually cost more than expected, in both money and lives  Would different decisions have been made if we had estimated costs more accurately?  Could long-run costs have been avoided if the war had been conducted differently? Body armor provided earlier

22. 22 What is clear…  Costs were vastly underestimated  More realistic assessment of risks (costs) could have led to the war being conducted differently  There is a high opportunity cost Could we have had a stronger economy And a more secure country Had it been spent in a different way?