How Much Will the War in Iraq Cost



The Cost of War

A war, however how well or poorly justified, costs a great deal of money. Whether you view that war as “worth it” or not depends greatly on your ethical and political values, but it should also depend on whether the war aims are significant enough to justify the expense in lives and money. Putting aside the question of whether the war in Iraq was justified or unjustified, this chapter will look at how an economist would estimate the cost of a war using that particular war as its primary example.

In so doing, this topic serves as a useful example of the Chapter 1 concept of opportunity costs, the Chapter 5 distinction between economic and accounting costs, the Chapter 6 discussion of GDP accounting, the Chapter 7 concept of present value in calculating the dollar value of lost lives, and, finally, the environmental and cultural cost of such a war.

Before the war began, the Bush Administration, the media, and policy analysts placed the cost at between $75 billion for a short war with a short occupation to more than $1 trillion for a lengthy war with a ten-year post-war occupation. While the war was hardly lengthy, lasting about 20 days from the first shot [explosion?]attempt to kill Saddam with a bombing run on one of his palaces until the fall of Baghdad, the length of the occupation can only be estimated at this point. At a Pentagon estimate of $4 billion per month, the occupation’s cost in terms of both lives and treasure [cultural treasures?] will surely outstrip the cost of the war itself.

Opportunity Cost

Chapter 1 referred to the economic concept of opportunity cost as the “forgone alternative of the choice made.” Unless attacked directly, war is always a choice. Though we had war thrust upon us in World War II, we chose to go to war in Europe in World War I, and chose to fight in Korea, Vietnam, Grenada, Panama, Kuwait, Bosnia, and Iraq. Whether going into Iraq was a good choice or a bad one, it was clearly a choice. France, Germany, Russia, and China, and by pre-war poll numbers a sizeable minority of the American population, believed that continued weapons inspections were a better option than war. President Bush believed that such a choice left America vulnerable to a chemical, biological, or nuclear attack by terrorist organizations. Whomever you agreed with at the time and whomever seems to be right in retrospect, a choice was made and there are costs to that choice.

More than 250,000 men and women from the Army, Navy, Air Force, and Marines were deployed to the Persian Gulf in the months leading up to the March 2003 attack and an additional 150,000 were deployed after hostilities commenced. Though the war was surprisingly short, more than 150,000 thousand troops remained in the area for months after the war.

The fact that these troops were no longer at their bases meant that whatever they could have accomplished there, they were unable to accomplish because they were in Kuwait, Iraq, Qatar, or at sea. Their fighting power, both in terms of damaged equipment and exhausted personnel, [equipment?] was degraded because of their constant use such that if they had been needed elsewhere they would have been unable to respond with their previous ability. At the beginning of the conflict, North Korea was posturing itself in a way that at least some of these American forces might have been usefully deployed in and around eastern Asia in response. At least some of the forces used in the Gulf were diverted from the hunt for al-Qaeda suspects in the horn of Africa. Finally, after Baghdad fell, but before all was secure, a crisis in Liberia erupted. Unlike the situation in Iraq, members of the United Nations, and France and Germany in particular, were clambering for U.S. forces to head there to keep the peace. Though a small force was sent, the primary reason for limiting the scope of U.S. involvement was the degree to which forces were stretched too thin across the globe. In large part this was because so many were in Iraq.

Similarly more than 150,000 reservists were called up to active service. As a result, they were providing military service rather than producing goods and services for sale in the private marketplace. Suppose, for example, that a community’s local National Guard or Reserve unit specialized in handling prisoners of war. Suppose further that the unit was disproportionately composed of the community’s police officers. If the unit was called to active duty and these officers were not replaced, the increase in crime in the community that resulted from inadequate policing was a cost of the war. If reservists called to active duty would have been producing automobiles, the lost production was a cost of the war.

A final opportunity cost to consider is the impact of the deployment on families here at home. Fathers, mothers, husbands, wives, sons, and daughters spent the months of March and April under extreme stress worrying about their deployed loved ones. That stress was only compounded by the daily news of attacks by Saddam loyalists through the summer of 2003. Although it is not easy to establish a monetary value for these costs, they are costs nevertheless.

This is not to say that the war was not, at least potentially, worth the cost. The defeat of Saddam Hussein’s regime was greeted with the gratitude of many Iraqi people. In the end though, figuring all of the costs of the war is an important part of that calculation.

Present Value and the Value of a Human Life

In war, people die. Soldiers die, pilots die, and civilians die. While many of the costs of war are difficult to estimate, economists have for quite some time felt comfortable giving an estimate of this loss. This is because we have much practice at doing it. When someone dies at the hands of a drunk driver or as a result of someone’s or some company’s negligence, economists are called upon to estimate how much money their loved ones would need as compensation.

A forensic economist computes the net loss for each year the person would have likely been alive. This net loss is the income the person would have made had they not died, minus the portion of that income they would have spent on their own consumption plus the value of their non-market activities to their families. Once that data is in place then the present value of the net loss is taken at a low-risk market interest rate. Jury awards for economic damages in wrongful death cases tend to vary between $500,000 and $2 million for a young person. Juries will often add to that figure with punitive damages or amounts for pain and suffering. These damages vary widely. You may choose to be skeptical of the technical or moral validity any of these calculations, but for every 100 American soldiers who died as a result of the war and the occupation, between $50 million and $200 million is added to its cost.

When Iraqi dead are included, the total is likely to grow substantially higher. How much higher depends to a degree on how many Iraqis died but also on the present value calculation for the average Iraqi. Early estimates of between 4,000 and 5,000 Iraqi civilians were based entirely on local hospital records. Those that died and remain unaccounted for because they died and never got to hospitals surely make that number small by comparison. It is important to note that the amorality of the present value calculation has the average American being worth substantially more than the average Iraqi because the average American will earn substantially more money. [nice paragraph]

Economic vs Accounting Cost

Chapter 4 stressed the difference between economic and accounting costs in the context of a person quitting their job and starting a new business. In that example, accounting costs were those “costs that must be explicitly paid...” The idea was that costs such as those for personnel, supplies, and equipment count toward the cost of doing business. Economic costs represented “all costs of a business: those that must be paid as well as those incurred in the form of forgone opportunities.” In that chapter, the example used to illustrate the cost of forgone opportunities was the cost associated with giving up a salary and benefits and the loss of interest on savings invested in the business. As a result, the accounting costs were only a portion of the total costs. A war is a case where certain accounting costs are not counted by economists, and certain economic costs are not counted by accountants.

Personnel, Food, and Supplies

What appears to be the most obvious cost of the war may not be a cost of a war at all in an economic sense. Paying the regular soldiers their regular pay is not necessarily an economic cost of the war because they would have been paid in their home bases. When more soldiers have to be recruited to fill in the gaps or reservists must be called up, these costs are economic. If a mission that would otherwise have been undertaken is impossible because the forces are elsewhere, at least some of the personnel costs of the deployment are economic as well.

There are some aspects of a soldier’s salary that clearly count under any circumstance. Soldiers in a war zone get “imminent danger/hostile fire pay” of $150 per month and a “family separation allowance” of $100 per month. As a result, for every month soldiers are deployed to combat areas they get $250 per month more than their regular pay. For perspective, consider that a brand new recruit’s (E-1) basic pay is $1,064 per month, a Sergeant (E-5) with six years of military service receives $2,037 per month, a newly minted officer (O-1) receives $2,183, while a division commander/ship’s captain with twenty years in the military makes nearly $10,000 per month. So, although the cost of paying 400,000 soldiers is approximately $1 billion per month, as little as $100 million of that may be a cost of the war in terms of explicit personnel costs. Of course, if these soldiers would have been put to use elsewhere had they not been deployed in this fashion, the economic cost may again rise to the $1 billion per month figure.

The costs of feeding, housing, and supplying soldiers are substantially increased when they are a half a world away from home. While the soldiers must also be fed at home, they can be fed in efficient cafeterias at a relatively low per-soldier cost or they can feed themselves in their own homes. On the front lines a soldier is eating pre-packaged MREs (Meals Ready to Eat). Production costs of MREs amount to between $1 and $2 per pouch. If you assume that producing and delivering food in this form increases costs from $5 per soldier per day to $10 per soldier per day, the cost of food is $60 million per month. Once the fighting ended and the occupation began, food costs dropped because less expensive methods of food preparation were used. But a significant number of soldiers continued to eat MREs as they went about their patrols in occupied Iraq.

Of course, soldiers also need other non-ammunition supplies such as water, razors, changes of uniform, and other miscellaneous items. Getting soldiers what they need is much more expensive when it needs to be shipped thousands of miles; especially when the last 300 or so is along a supply line that is under threat of ambush as it was in the first two weeks of the war. Though these things are needed at home too, the cost of getting them to the soldiers in the field costs at least an additional $60 million per month.

Because 150,000 service men and women were called to active duty from the guard and reserve units to fill roles that the deployed regular units would have filled, this is a cost of the war because if the war had not occurred they would not have been called up. Strangely enough, as we will learn when we discuss GDP accounting, this substantial cost may not show up as a loss to the economy as it is measured. Assuming that the ranks represented in these units are proportional to the ranks in regular units, this call-up costs $340 million per month.

Cost of Munitions

Attempting to figure out how much expended ammunition costs is difficult at best. From “smart” bombs that cost more than $1 million apiece to bullets that cost less than ten cents, we have to account for the cost of munitions. Obviously, a bullet is not just a bullet anymore. For instance, had your grandfather or great grandfather served in an armored unit in World War II, the tank shell he would have fired would have essentially been a big bullet that was lucky to hit what it was pointed at. Today, a tank shell has a guidance system. Furthermore, it doesn’t blast through the enemy’s armor-- it melts through it. So while it may take fewer shells to destroy an opposing tank, the shells themselves are far more expensive.

The bullets fired by 30-caliber machine guns are no longer simply bullets either. Made from depleted uranium, each bullet coming from an A-10 “Warthog” can cost $50. When the pilot fires the nose-mounted Gatling gun for one second, she can expel $1,000 in ammunition. It is expensive but effective. A single burst from an A-10 can take out a multi-million dollar tank.

Bombs are also far more expensive than those from past wars. If you look at the first Gulf War, $2.7 billion worth of bombs were dropped. Of the 227,000 bombs and missiles used, only 7.5 percent were “smart” in that they were guided to their targets. Though many more of the munitions this time around were the more expensive “smart” variety, presumably fewer of them were needed to destroy a particular target.

Estimates suggest that we used approximately $7 billion to $10 billion worth of ammunition in the approximately 21 days of active fighting. In the first Gulf War, the unguided bombs used were taken from inventories and to a large extent not replaced. This was because a strategic decision was made to focus procurements of new munitions of the “smart” variety. Nowadays, each smart bomb used will likely end up being replaced with a new one.

Cost of Getting Personnel and Equipment in Position

Though precise estimates for getting the force in place have not come out for this war, we can assume again that it is proportional to the costs from the previous Gulf War. A “round-trip” ticket for this volume of personnel and equipment is likely to cost between $5 billion and $10 billion.

Fuel

A significant line item in this war was the cost of fuel. An M1A1 Abrams tank has a gas tank that holds 500 gallons of fuel and gets less that a half a mile per gallon. One of the riskiest ventures of the opening week of the war was getting fuel across a 300 mile supply line that was constantly subject to ambush. Fuel costs for the first Gulf War totaled more than $30 billion. In that war, the fuel was provided free of charge by the Saudi Arabian government. Such was not the case this time around. Estimates suggest that fuel costs ranged between $10 billion and $15 billion for the combat phase and $1 billion or more per month in the occupation phase.

How GDP Was Affected

Because GDP accounting doesn’t distinguish between paying someone to be a soldier and paying someone to make something that consumers will buy, the way in which we count GDP will miss the degree to which the economy is affected by a war. GDP is simply the sum of the money spent by consumers, businesses, the government and foreign buyers (minus imports) on their purchases of goods and services. What the good or service is, whether it is in pursuit of something wise or unwise, is irrelevant to the accounting.

To see how this works, suppose a civilian reservist is capable of producing $50,000 worth of stuff in her private job. Suppose she is called up as a $28,000 per year sergeant to take a role at a military base that was being performed by a soldier currently deployed to the war. If she is not replaced in her private job, there is a loss of consumption of $50,000 as the goods she would have produced for her boss’s customers don’t materialize. Consumption falls by $50,000 and government spending increases by $28,000 so the loss to GDP ends up being $22,000. Nevertheless, there is a loss of $50,000 worth of consumer goods.

If she is replaced, the impact on the economy depends on what that person was doing before being hired to take the place of the called-up reservist. If the person was not working, and is as capable as the called-up reservist, then the $50,000 in goods is not lost and we still have the $28,000 gain. If her replacement was previously in another job, then this other production was lost or must be replaced. Depending on the degree of unemployment or underemployment prior to the war, the effect on GDP of civilians being called to the military may in fact be positive, negative, or zero. This is not to say that we are necessarily better off or worse off. If the replacement for the reservist is less capable than the reservist, then the quality of the goods may be worse.

On issues of significant economic importance, the war had several impacts for which the cost is hard to calculate. First, during the run-up to war, American consumer confidence was dropping quickly such that in the weeks just prior to the war, one measure had consumer confidence at a decade-old low. Second, the increase in crude oil prices from $30 per barrel to more than $40 per barrel placed a heavy burden on energy-sensitive sectors of the US economy. Third, businesses were reluctant to invest in new plant and equipment in the months leading up to the war. Finally, with a first-week war-related spending request of $75 billion, the President was adding to an already bleak budget deficit picture that could, in the longer term, mean the end of historically-low interest rates.

Though only three weeks passed from the beginning of war to the fall of Baghdad, we did not know that on March 19, 2003 when the bombs started to fall. The $1 trillion figure estimate of the cost of the war was produced by William Nordhaus, a respected economist [Nordhaus?]was who based his estimate on the possibility that the war would drag on, that it would potentially spread, that oil prices would spike, and that the United States would have to occupy Iraq for ten years with 100,000 troops. While the war itself went well [I'd be careful about saying the war "went well"--please be specific about what that means and from whose perspective.]well from the perspective of the American and British militaries and did not spread, and while oil prices have feallen to moderate levels, the occupation could last for years.

It is worth knowing what we were risking by going to war. Consider that a reduction in the projected growth rate of as little as one percentage point means a loss of $100 billion to the U.S. economy per year. Had oil prices gone to $60 per barrel, gas prices would have approached $4 per gallon in major cities. If combat had continued for months, the deficit would have ballooned by several hundred billion a year and interest rates would have increased, adding to mortgage costs and diminishing consumers’ willingness to borrow and businesses’ willingness to invest. The choice to go to war put the economy at risk. Because the war was relatively short means that the macroeconomic costs will likely be muted.

Environmental and Cultural Costs

From a military perspective, the war went well, but it is also important to consider the environmental costs. These come from a variety of sources. First, while oil fires were substantially less numerous and severe than during the first Gulf War, they nevertheless fouled the air around Basra and Baghdad. Second, the depleted uranium-based ammunition eventually leaches into the soil of the area in which they are used. Third, the use of heavy tracked vehicles can break up the thin layer of crust that forms on the desert sand. This crust diminishes the severity of sandstorms.

Estimating the damage caused by the each of these is very difficult, especially when the impacts are very much in doubt. The volume and severity of the oil fires was substantially less than pre-war fears, which were largely based on the oil fires in the first Gulf War. During the time of the first Gulf War, there were acute respiratory difficulties throughout the Middle East. Lung cancer rates in and around the Basra area spiked in the 1990s with the most plausible cause being those fires. The oil fires from this war were extinguished within a month while some of the fires from the first Gulf War went on for more than a year.

While there were several hundred tons of depleted uranium weapons fired during this war, the health impact of this is not certain. The increase in cancer rates in the Basra region of Iraq following the first Gulf War could have been from the volume of depleted uranium in the area, the oil fires lit by the Iraqi army, or by the use of chemical weapons by the Iraqi military during the Iran-Iraq war of the 1980s. A World Health Organization study of Bosnia commissioned after the U.S. role there in the middle 1990s revealed few identifiable health impacts from the use of depleted uranium. The concern is that as time passes the depleted uranium will leach into the ground water.

WFinally, while a desert looks devoid of all life, it is an ecosystem that relies on a top layer of crusted sand. When it is broken up by heavy armored vehicles, the result can be increased sandstorm activity. Quantifying any of these impacts into a dollar figure is an imprecise art.

Finally, while establishing the cost of the environment is difficult, it is simple relative to establishing the cost of lost cultural artifacts. The combined result of the military strategy of using relatively few soldiers in lightening-fast raids into Baghdad and the relatively light resistance in the capital itself was that looting was rampant in the days following the fall of the city. Conceivably one could establish the cost to shop owners and civilian agencies in Iraq of the looting. On the other hand, the world lost some of its earliest known works of art and historical treasures when Baghdad’s museums were looted of artifacts dating to thousands of years prior to Christ’s birth.

Summary

Whether or not you think the war with Iraq was wise from a political, moral, or environmental standpoint, the economic cost will be significant. It cost $5 billion to get the soldiers in position, nearly a billion dollars a month to pay, feed, and sustain them over and above the amount it would have cost to do those things in their home bases, and they used between $10 billion to $15 billion worth of fuel per month of battle. It will cost untold billions more to restore order, $4 billion per month to occupy the country, and another $5 billion to bring the soldiers and their equipment back home. The hit to consumer confidence will likely add an additional $50 billion to $100 billion to that total as the economy grew more slowly than it otherwise would have. Whether the cost ends up at the low end or at the high end still depends on the length of the occupation and whether the transition to civilian control in Iraq is smooth. What we bought is also still in dispute. At a minimum, we bought a Saddam-free Iraq. We may have gotten far more. You have to decide if what we paid, plus what we risked, made that a bargain or not. [Adding up the total monetary cost would be a strong way to end the chapter.]

Quiz Yourself

1. One opportunity cost of the war in Iraq was

a. soldiers still needed to be fed.

b. soldiers still needed to be paid

c. soldiers enjoyed the experience of battle

d. the degree to which the deployed soldiers could not be devoted to other crises.

2. In war

a. economic and accounting costs are identical

b. all economic costs are ignored

c. all accounting costs are ignored

d. economic and accounting costs count depending on whether they would have occurred had the war not occurred.

3. The pay soldiers receive in wartime is an accounting cost of that war

a. but never an economic cost of it

b. but only the “combat pay” ever counts as an economic cost

c. and may be an economic cost if the soldiers had other missions to which they could have been deployed.

d. but only during the combat phase of the war.

4. If soldiers are deployed to a war the cost of feeding them is an accounting cost

a. but never an economic cost of it

b. but only the excess cost of getting the food to them in the field over the cost of feeding them in their bases is an economic cost.

c. and an economic cost as well

d. but only during the combat phase of the war.

5. The method of accounting for the cost of lost lives during a war described in this chapter

a. evaluates all lives equally.

b. evaluates an Iraqi life as worth more than an American one.

c. evaluates an American life as worth more than an Iraqi one.

d. suggests that economists never attempt to place a dollar value on lost lives.

6. GDP

a. accounts for all of the costs of war correctly.

b. counts some costs of war as being positive when they clearly are not.

c. ignores all cost of war

7. When depleted-uranium weapons are fired, economists are concerned

a. with the cost of the weapons themselves and nothing else.

b. that the weapons cost too much.

c. that the weapons are too ineffective.

d. with the potential environmental cost whether or not they are cost effective weapons.

Think About This

Economists are often consulted about the cost of activities that have mainly political goals (like winning a war) and give dollar estimates of those costs. How would you put a dollar estimate on the benefits that accrue from the achievement of those political goals. Suppose that a country is made safer because its enemy is beaten and is no longer a threat. Is there a dollar value for that?

Talk About This

In the months after the fall of Baghdad no evidence of weapons of mass destruction (WMD) were found and little evidence was found tying Iraq to al-Qaeda. While the ruthless oppression of the Iraqi people at the hands of Saddam ended, it is unlikely that we would have gone to war without the WMD argument. Given that, how does this impact what the opportunity costs for the war were.

For More Information

House Budget Committee Democratic Staff “Assessing the Cost of Military Action Against Iraq: Using Desert Shield/Desert Storm as a Basis for Estimates.”

Nordhaus, William “The Economic Consequences of a War with Iraq” NBER Working Paper No. 9631

President Bush’s Request for $74.7 billion for war related expenses.

World Health Organization Report on the Health Impact of Depleted Uranium



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