War Without End? - The Costs of the New Military Buildup

The Bush administration’s war on terrorism and its proposed military intervention in Iraq have sparked the steepest increases in military and security spending in two decades.

Since September 11, 2001, the federal government has approved over $110 billion in increased military spending and military aid. Spending on national defense is slated to reach $399 billion in the FY 2004 budget, and to rise to over $500 billion by the end of this decade.

These vast sums do not include the costs of the ongoing war in Afghanistan or a war with Iraq. Those costs will be paid for through supplemental spending bills.

Steven Kosiak of the Center for Strategic and Budgetary Assessments estimates that only about one-third of the Pentagon’s new spending from 2001 to 2003 was devoted to anti-terror activities, and that only 5 to 10% of the FY 2003 Pentagon budget is being set aside for these purposes.

The greatest potential driver of military and security costs in the coming decade is the open-ended nature of the Bush administration’s national security strategy. The administration has moved from rapidly from a focus on acting against 'terror networks of global reach,' to a commitment to displace regional tyrants like Saddam Hussein, to a pledge to use American military might to promote 'democracy and free markets' worldwide.

The Hidden Costs of War: A Historical Perspective

As Robert Hormats of Goldman Sachs International has observed, 'History is littered with gross underestimates of the cost of war . . . The first world war was originally forecast to be short and inexpensive. The Vietnam War cost 90 percent more than forecast.'

Yale economist William D. Nordhaus has suggested that governments often understate the costs of conflict because 'If wars are thought to be short, cheap, and bloodless . . . it is easier to persuade the populace and the Congress to defer to the President.'

Major American wars of the past half century have differed widely in their budgetary and human costs, from $2.8 trillion and 290,000 U.S. casualties in World War II to $76 billion and 148 casualties for the 1991 Gulf War. Each conflict has also had its own unique 'hidden costs.' Deficit financing of the Vietnam War helped spur the 'stagflation' of the 1970s - slow growth and high inflation. The 1991 Gulf conflict had an unprecedented rate of 'postwar casualties': more than one-quarter of the veterans of that war are receiving benefits to deal with service-related medical problems ranging from memory lapses and fatigue to cancer and birth defects. The costs of treating Gulf War-related injuries and illnesses is $2 billion per year.

Rolling the Dice on 'Gulf War II': Real Money, Real Risks

'The big story of an Iraqi war will likely be all the negative consequences that arise, such as slumping confidence, an undermining of real equity wealth . . . and increased risk premiums. The negatives are the things that are going to shine through, because the positive boosts to GDP growth coming from a relatively modest defense buildup are not enough to make much of a difference in a $9/$10 trillion nominal economy.'

Joel Prakken, Chairman
Macroeconomic Advisors
November 2002

The Bush administration has yet to offer a detailed estimate of the costs of U.S. intervention in Iraq. In September 2002, then chief White House economic advisor Lawrence Lindsey made an off-the-cuff estimate of $100 to $200 billion, and suggested that substantial sum represented 'nothing' in the context of the U.S. economy. In December 2002, Office of Management and Budget Director Mitch Daniels suggested that the costs of a war with Iraq would more likely be in the range of $50 to $60 billion, but he offered no data to support that estimate.

Studies by Congressional analysts suggest that the budgetary costs of a war with Iraq are more likely to be in the $100 to $200 billion range suggested by Lawrence Lindsey than the $50 to $60 billion range cited by Mitch Daniels.

A September 2002 report by the non-partisan Congressional Budget Office made the following estimates of the components of cost for a war in Iraq: 1) $9 to $13 billion to deploy a substantial military force to the Persian Gulf; 2) $6 to $9 billion for the first month of conflict, and $5 to $8 billion for each month of combat thereafter; 3) $1 to $4 billion per month for peacekeeping/postwar occupation; and 4) a $5 to $7 billion one-time cost for redeploying U.S. forces to their home bases after the war.

If CBO’s estimates hold true, a three month war followed by a two year occupation would cost between $58 and $92 billion.

A related analysis by the Democratic staff of the House Budget Committee puts the initial costs of a war with Iraq, involving 30 to 60 days of combat, at $48 to $93 billion. Once the additional costs of rebuilding and stabilizing the country in the aftermath of war are taken into account, the report suggests that 'a new war with Iraq could easily cost as much as $200 billion.'

Unlike the first Gulf War, when more than 80% of U.S. war costs were paid for by allies like Germany, Japan, and Saudi Arabia, this time around the United States will have to pay the costs mostly on its own. In some cases there will actually be substantial net costs involved in recruiting allies. For example, the Bush administration has pledged an aid package of approximately $14 billion in grants and long-term loans for Turkey in exchange for Ankara’s agreement to let U.S. air and ground forces launch a 'northern front' against Iraq from Turkish soil.

Two non-governmental studies of the costs of war with Iraq beyond go beyond the budgetary costs addressed in Congressional analyses to examine the full costs of war to the U.S. economy. Economist William Nordhaus has evaluated six major cost factors involved in a war with Iraq:
1) the direct costs of combat; 2) occupation and peacekeeping; 3) postwar reconstruction; 4) humanitarian assistance; 5) the impact on oil markets; and
6) the impacts on the economy as a whole.

Nordhaus estimates that the costs of a conflict with Iraq could range from $99 billion to $1.9 trillion over the next decade. He explains the wide range of the estimates as follows:

'Returning to the metaphor of war as a giant roll of the dice, we might say that the United States could end up paying the low costs of around $100 billion if the dice come up favorably. If some dice come up unfavorably, the costs would be between the high and low cases. However, if the United States has a string of bad luck or misjudgments during or after the war, the outcome could reach the $1.9 trillion of the high case.'

The Center for Strategic and International Studies (CSIS) has also produced a range of estimates of the costs of war with Iraq.

Under CSIS’ best case, a four to six week war 'without any problems,' economic growth actually increases slightly, and U.S. unemployment moves down steadily from over 6% now to about 5% by the end of 2004. In the intermediate case, a six to twelve week war with difficulties but 'no political catastrophes,' the war pushes oil prices up substantially, resulting in a 1.75 percent drop in U.S. Gross Domestic Product (GDP), and unemployment stays above 6% for a year or more. In the worst case, which involves 'serious attacks on oil facilities, serious use of chemical or biological weapons, and serious problems with our allies,' oil prices hit $80 per barrel, GDP drops 4.5 percent in the first year after the conflict, and unemployment jumps to 7.5% and stays above 7% for a year or more.

This wide range of economic outcomes - from mildly positive to seriously negative - underscores the uncertainties involved in going to war with Iraq at this time. These uncertainties are compounded by the fact that a 'Gulf War II' will be substantially different than the first Persian Gulf conflict or the war in Afghanistan.

General Joseph Hoar, the retired former chief of the U.S. Central Command, has suggested that driving Saddam from power could be substantially more difficult than driving Iraqi troops from Kuwait, particularly if it involves significant urban combat. Military expert Anthony Cordesman notes that Iraq still retains substantial military forces, and that 'some of these forces are almost certain to be loyal and to fight effectively. . . there are some [Iraqi] Republican Guard brigades that have more heavy weapons than were operational in all of the Al Qaeda and Taliban forces combined in Afghanistan.'[emphasis added]

The economic impacts of a war with Iraq will be made more severe by the way in which the Bush administration is choosing to finance the war effort, by running deficits and pressing for major tax cuts even as military spending costs continue to mount. With deficits slated to top $300 billion in 2004 even before the costs of war are factored in, there is a real danger that the United States will project an image of ongoing budgetary disarray that could undermine private investment and the value of the dollar. David Gilmore of Foreign Exchange Analytics suggests that 'investors are not happy with the fact that [a war] is more or less a go-it-alone operation . . . The geopolitical risks get spread more if it’s multilateral, and the economic cost gets spread more.'

A rush to war without full allied support could also prompt a backlash against U.S. products. From airliners and computer software to soft drinks and fast food, analyst Jon Alterman of CSIS suggests that in a worst case scenario, war with Iraq 'could drive anti-Americanism that hits American producers pocketbooks.'

Considering the Alternatives: Opportunity Costs of Military Spending and War

The federal government’s ability to respond to non-military needs, both domestic and international, is already severely circumscribed. Spending on national defense accounts for 51% of federal discretionary spending in the FY 2004 budget, more than all other federal priorities combined. Interest on the national debt is slated to grow from roughly $160 billion this year to $254 billion by 2008. Something will have to give.

To give a sense of the opportunity costs involved in running high military budgets and pursuing a policy of 'preemptive'” war, some comparisons may be helpful.

If the military budget could be sustained at current levels rather than increased to $500 billion or more by the end of this decade, there would be enough money available to put Social Security on a solid financial footing for the next 75 years, at a cost of roughly $70 billion per year.

On the domestic front, a $9 billion emergency aid package to cash-strapped state governments could be financed for the cost of four to six weeks of the administration’s proposed war in Iraq. The $6 billion shortfall in the administration’s 'No Child Left Behind Act' for 2004 could be funded for the cost of just three to four weeks of a war with Iraq.

On the international front, a $10.5 billion, full-scale effort aimed at stemming the global AIDS crisis could be funded for the cost of less than two months of the proposed war with Iraq. The first year of a global effort to provide safe drinking water and basic sanitation services to every person in the world who know lacks them could be financed for $19 billion, the cost of roughly three months of the proposed war with Iraq. An accelerated global effort to secure or eliminate nuclear weapons and the raw materials that go into building nuclear, chemical and biological weapons could be financed for $3 billion, the equivalent of less than two and one-half weeks of the proposed war in Iraq.

Given the major budgetary tradeoffs and considerable economic uncertainties cited in this report, it is well past time for President Bush to level with the American people about the full costs involved in going to war with Iraq.