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The economic costs of war with
Iraq
By Miriam
Pemberton
(Testimony before the US Congress,
September 13. Republished with permission from Foreign Policy in Focus.)
I want to begin with two caveats. The first is
that if attacking Iraq clearly fell into the category of
a just war, we [the US] should of course spend whatever
it would take to wage it. Providing for the common
defense is our government's first mandate. But by my
reckoning our government has not remotely made the case
that this would in fact be a just war. I'll just mention
quickly a couple of reasons, which the president's
speech last week at the United Nations did not change.
Most fundamental is of course the fact that Iraq
has not attacked us, and there is no credible evidence
that it is collaborating with al-Qaeda, which has. The
administration's attempts to establish such a linkage
have not been convincing. A couple of weeks ago
Secretary of Defense Donald Rumsfeld announced a few
sightings of suspected al-Qaeda members in Iraq. Well,
this was northern Iraq, which is under the protection of
US warplanes from the Iraqi government. And if the
presence of suspected al-Qaeda members were reason
enough to attack, we should be bombing Germany, and
ourselves. Second, in addition to distracting from the
pursuit of al-Qaeda, an attack on Iraq shows real
promise as a recruiting tool for more terrorists. An
excessive, intrusive response by the world's superpower
in the Middle East helps them make their case for
resistance by any available means.
In the
absence of a clear case for starting this war, then, we
need to consider the ways in which starting it might
conflict with our government's second mandate, which is
to promote the general welfare. To the extent that an
attack would have the effect of weakening an already
shaky economy, it would undermine the welfare of all of
us. So as we debate this profoundly serious question,
the issue of the economic cost of going to war needs to
be included in our deliberations.
My second
caveat is that no one can say for sure what these costs
will be. Wars never go according to war plans. And in
this case the complex and far-reaching repercussions of
- to pick one thing out of a hat - a destabilized Middle
East, can be partially predicted but not foreseen. So
mostly we are groping for the best calculus of risks.
But I will try to distinguish between what we know for
sure at this point and what is likely enough that it
should worry us.
One thing we know is that fears
that the US might go ahead with an attack on Iraq have
already begun to affect oil prices. Oil is already
trading close to an 18-month high of $30 a barrel. Ten
months ago, the price was half that. So the war fever
premium has already been high. And every time a US
official comes out and says something that suggests an
attack is actually imminent, or even is in fact likely
to happen at all, oil prices spike. Vice President
Cheney made the first of two such speeches on August
26th, for example, and by the end of the day, the price
of each barrel sold on the US market had jumped 65
cents.
Following the last US invasion of Iraq,
oil prices doubled, and stayed high for the better part
of a year. A repeat would create ripple effects
throughout our economy. Estimates by Wall Street
analysts indicate that a $10 per barrel rise in oil
prices - half the amount of the last Gulf War effect -
would over a year's time reduce the US's GDP growth by
about half a percent, and add nearly 1 percent to
inflation.
The economic drag from these oil
price shocks is being felt most strongly across the
transportation sectors that grease our economy's wheels,
and is adding friction to these wheels, an effect that
is of course being passed on to consumers. In the
airline sector alone, the nine major US carriers have
lost $7.3 billion in the past year, and one of them has
been propelled into bankruptcy. This is despite the
bailout package passed after September 11 totaling $5
billion in direct federal aid and $10 billion in loan
guarantees. Most analysts expect that a US attack on
Iraq could send the price of oil beyond $50 a barrel. In
that event, we will probably be bailing out all our
airlines.
There are always some winners in war -
the defense industry is obviously riding high. But there
are also many losers, as international trade in general
becomes constricted. Tourism is the world's largest
industry; experts estimate that it employs about 10
percent of the world's workforce. The last Gulf War
actually depressed tourism in places as far from the
Middle East as Costa Rica and East Africa.
The
US is trying to prepare for a disruption of its own
supplies by adding to its Strategic Petroleum Reserve.
Its target goal is to cover US import needs for about 60
days. But this short-term cushion won't help the rest of
the world, or do anything to restrain prices.
And given the current fragile condition of the
global economy, higher oil prices could mean the
difference between modest growth and a full-blown
recession.
Growth deceleration in the American
economy is already underway: the first-quarter
annualized rate of 5 percent had by the second quarter
dropped to 1.1 percent. It would be a mistake, of course
to blame all our economic bad news on the September 11
attacks. But as one writer for the London Times put it,
what can be said with certainty is that al-Qaeda struck
the US and world economies at an exquisitely vulnerable
time, when such factors as corporate accountability
scandals, oil price rises from the explosion of violence
in Israel-Palestine, and the tanking of the dot-coms had
done their damage. September 11 only exacerbated the
loss of investor confidence and depressed investment,
which have in turn raised the cost of capital and
reduced the prospects for long-term productivity growth.
Many US economists are now revising their growth
projections for the near term slightly upward. Having
taught a couple of kids to ride a bicycle, though, I
liked the explanation I read recently of why an economy
is like a bicycle. When it moves fast, it can ride out
shocks and stay upright. But when a bicycle, or an
economy, is hardly moving, it can be knocked over by
even a modest bump in the road. A war with Iraq would be
quite a bump.
I'll just offer a few more
indicators that war fever is not good for our economic
health. The value of the dollar peaked against the euro
the day President Bush delivered his "axis of evil"
State of the Union address, and has been trending
downward ever since.
And of course, large tax
cuts combined with military spending increases have
turned budget surplus into deficit, just as they did
during the Reagan years. The projected deficit for
fiscal year 2002 - $157 billion - is already well over 1
percent of GDP. As the deficit grows, increases in the
public cost of borrowing will put pressure on long-term
interest rates, and crowd out private-sector borrowing.
The consumer spending that has been buoyed by extremely
low rate - financing purchases like home mortgages and
new cars - is likely to dry up fast. All point to slower
growth, and may trigger a recession. The Congressional
Budget Office projects increases in military spending of
$450 billion over the next 10 years, based on the
president's requests. But their figures don't factor in
the cost of a war with Iraq.
The last time we
had one, in 1991, direct war costs ran around $80
billion in today's dollars. No one believes that this
time it would be that cheap. But of course 80 percent of
the costs of the last Gulf War were borne by our allies.
This time it appears that allies will be much harder to
come by. The Germans and the Saudis, in particular, were
among the largest cash contributors to the last Gulf
War, and they have both indicated their opposition to an
attack. The scattered expressions of international
support for the president's speech at the UN approved of
his working with the UN; no one was promising financial
support for a war.
In calculating the potential
costs to the US of such a war it is important to
remember that putting together the original Gulf War
coalition incurred substantial costs all on its own, in
the form of financial inducements to join. For example,
the US had to give Turkey about $5 billion in debt
forgiveness and other financial benefits to secure their
reluctant support for the war. This time the reluctance
is much more internationally widespread, and overcoming
it is likely to be much more expensive. Last week, the
Turkish prime minister described the possibility of an
attack as "a sword hanging over our heads". Turkey, he
said, "is at the forefront of countries that will be
negatively affected by military action".
In
addition to these direct and indirect costs of waging
the war itself, we need to factor into our calculations
the protracted military presence, lasting years, not
months, that must certainly follow it. Scott Feil, a
retired colonel and expert on post-conflict
reconstruction, estimates that a force of 75,000 would
be necessary during the first year, at a direct cost of
$16.5 billion. Former national security advisor Sandy
Berger recently testified that rebuilding the Iraqi
economy would cost between $50 and $150 billion. Given
the US's recent track record, in Kosovo and Afghanistan,
for example, it is unlikely that we would take on the
whole bill for Iraqi economic reconstruction. But
somebody will need to pay it. Colonel Feil assumes that
the US would take on responsibility for some
humanitarian emergency relief, and some of the costs of
transitional administration, civil service, and other
components of reconstruction. He estimates these at
$15-25 billion over the next decade.
And none of
these estimates tries to factor in the dangers of a
wider war. The worries that are already affecting oil
prices relate not primarily to Iraq itself as an
exporter, but to the likelihood that a war with Iraq
could easily destabilize the entire Middle East,
propelling a wave of revolutions in politically
precarious regimes throughout the Arab world. Any subset
of this scenario would begin to jeopardize oil exports
of almost 20 million barrels a day, which is just about
equal to the whole of US daily consumption, and more
than a quarter of the daily consumption around the
globe. The disruption of supply could come either from
political decisions by the region's leaders or from the
destruction of infrastructure. As the prospect of either
of these effects becomes more likely, oil markets will
react.
Saudi Arabia is both the largest producer
and exporter, and the most politically vulnerable.
Internal instability alone could depress Saudi
production. The Iranian revolution of 1979 cut
production in half, to 3 million barrels, where it has
stayed. We all worried that the last Gulf War would have
a domino effect on the governments in the region, and
this didn't happen. But several of them, Jordan and
Saudi Arabia at the top of the list, are weaker now than
they were then. Iraqi aggression against Kuwait created
broad regional support for an armed response, and this
support does not now exist. And, it should be added, the
1991 war had destabilizing effects that simply took a
long time to incubate and come to light. The US bases in
Saudi Arabia became the focal point for the resentment
that resulted in the attacks of September 11.
When we have not been attacked, when the other
justifications the administration has offered for going
to war are as murky as they are, when there is much
dissension within the government and in particular
within the military about the wisdom of an attack, and
when the idea of attacking has virtually no support from
our allies, then it makes sense for Congress and the
American people to take these economic costs into
special consideration. The preponderance of evidence
suggests that if we start this war we will be
endangering our economic health.
(Miriam
Pemberton is Peace and Security Editor for Foreign
Policy In Focus, and delivered this testimony before
Congress on September 13, 2002.)
(Republished with permission from Foreign Policy in
Focus.)
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