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The hidden costs of
war
By David Isenberg
What
would be the cost of a war with Iraq? More than we
think, according to a new analysis. In fact, we may not
be able to see the macro forest for the micro trees,
according to William Nordhaus, an economics professor at
Yale University.
In an article in the December 5
New York Review of Books, he notes that the Bush
administration has not produced any official estimates
of the cost of a war. While that is due in part to the
inherent uncertainty of war (the first rule of which
states that no battle plan survives first contact with
reality), it may also be recognition that the costs are
likely to be much larger and last much longer than
commonly assumed.
The article, which is a
shortened version of a longer study, details many costs
not normally factored into estimates. First among them
is the need for a substantial occupation and
peacekeeping force in Iraq. The cost of such an
operation is substantial. Nordhaus cites Congressional
Budget Office estimates that occupation could cost
between US$17-45 billion per year, which actually might
be low. If the post-war environment is hostile, like
Afghanistan, the cost could be higher.
And that
annual cost might continue for years. According to
Nordhaus "it is difficult to see how a successful
occupation of Iraq could be less than five years, and it
might easily extend for two decades. Thus a minimum cost
could range from $75-500 billion."
Then there
are the reconstruction and nation-building activities.
These could range from (mere) "regime change", to more
ambitious efforts akin to the installation of
Western-style democracies in Germany and Japan after
World War II, with a possible Iraqi Marshall plan thrown
in for good measure.
Nordhaus estimates that if
the goal is to just attain a per capita GNP equal to
Iran or Egypt, and if one half of the capital stock
requires rebuilding, which is not unreasonable
considering the effects of over 10 years of sanctions
and air strikes, the cost would run to about $800 per
capita, or a total of $20 billion. However, that is
conservative. In the longer study from which the article
is derived, Nordhaus estimates that $30 billion in
reconstruction costs would be a reasonable estimate.
If a Marshall-style plan is attempted, the costs
rise substantially. The original Marshall plan cost
$13.2 billion over a four-year period. At today’s income
levels that would equal $2,000 per person total (or $500
per person annually), over twice the $800 per capita
cited above.
But such a figure is still low
because it does not take into account that the Western
European recipients of the original Marshall plan had
undertaken much of the reconstruction on their own and
had considerable infrastructure in place before World
War II. Iraq would have considerably less. Thus the
effort would require six, instead of four years, for a
total of $75 billion. Together, the costs for
reconstruction and nation building could range from a
minimum of $25 billion to as much as $100 billion.
Then there is humanitarian assistance - taking
care of the sick, the wounded and refugees, both in Iraq
and possibly in neighboring countries. While it cannot
be said with certainty, given the variables involved,
Nordhaus estimates that between 1 and 5 million people
would require assistance. Depending on duration, say one
to four years, the cost could range from $1 to $10
billion.
Can the money be found to pay for all
that? It is unlikely. Even if Iraqi oil revenues could
be increased to 3 million barrels a day, it would yield
only $25 billion annually, or about $10,000 per capita.
And much of that would be required for imports of food
and medicine. Plus, Iraq still has war claims against it
by other nations totaling over $300 billion, little of
which has been paid off. All of these claims take
nominal priority over the cost of paying for a US
occupation. And, unlike Desert Storm, there is little
likelihood of other nations helping to pay the bill.
As for the United States actually being willing
to foot the bill, that seems improbable. Nordhaus write
"In virtually every country where the US intervened
militarily over the last four decades, it has followed a
"hit and run" philosophy by which bombing runs have
seldom been followed by construction crews. The latest
war in Afghanistan is a striking example. In the year
ending September 2002, the US spent $13 billion on the
war effort. By contrast, the total Pentagon effort
committed to civil works or humanitarian aid has totaled
only $10 million."
Finally, there are the global
costs. Most important, a war might produce big shocks in
the oil markets. For example, Iraqi forces could destroy
much of their oil fields, as they did in Kuwait in 1991,
or even contaminate them with chemical or biological
weapons. Or OPEC countries might engage in a coordinated
cut in oil production, especially if Israel is involved
in the war.
In the worst-case scenario, oil
production could be cut 25 percent, and oil prices could
triple to about $75 per barrel, with gas rising to
almost $3 per gallon. The cost of oil imports would
increase to $200 billion per year in the US, and the
resulting shock and inflation would likely set off a
recession.
Although most pundits envision a
quick war there are no guarantees. If it goes badly, at
least in the beginning, the macro impact could quickly
turn bad. The economic consequences might resemble the
economic decline following the 1990-91 war, which was at
least partially responsible for the loss by the first
president Bush to Bill Clinton, or the sharp drop after
the September 11, 2001, attacks. Nordhaus believes that
"a plausible outcome would be an average recession set
off by a protracted conflict, with output losses in the
range of 2 to 5 percent of GDP [$200 billion to $500
billion in today’s dollars]."
All together, in a
simplified worst-case scenario, which does not include
the worst-case oil shocks or the use of biological or
chemical weapons, where the US suffers reverses during
or after the war, the outcome could reach $1.6 trillion.
Admittedly, that is less likely. But even a best-case
scenario costs around $120 billion, which is about twice
as much as the 1991 war. And other countries financed
most of that.
In conclusion, Nordhaus finds that
while the US may be militarily prepared, it is not
economically prepared. Since Bush took office, the
annual federal budget surplus of $360 billion has been
eliminated and the country is facing budget deficits
again. In short, the "Bush administration has not
prepared the public for the cost of financing of what
could prove to be an expensive venture. Perhaps the
administration is fearful that a candid discussion of
wartime economics will give ammunition to skeptics of
the war: perhaps it worries that acknowledging the costs
will endanger the large future tax cuts, which are the
centerpiece of its domestic policy."
(©2002 Asia
Times Online Co Ltd. All rights reserved. Please contact
content@atimes.com
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