Will the US Economy Become a Victim of the Iraq War?

War is not only Hell — but Hellishly expensive:

"In September 2002, the Congressional Budget Office, a nonpartisan
research arm of Congress, estimated that the war would cost $1.5
billion to $4 billion per month. In fact, it costs between $5 billion
and $8 billion per month.

The Pentagon says the "burn rate" — the operating costs of the wars
— has averaged $5.6 billion per month in the current fiscal year, but
that does not include some costs for maintenance and replacement of
equipment and some training and reconstruction costs, experts say."

Recall our Pre-War Analysis from March 19, 2003 (Not-So-Hidden Agenda: Strategic and Economic Assessments of U.S. led Invasion in the Middle East) — we predicted the War in Iraq would last up to 10 years and cost $1 trillion dollars over that decade. That length and expense was (at the time) considered an outlier, far beyond other expectations.   

Now, almost 2 1/2 years later, other analyses are (finally) catching up. A recent study from the Center for Strategic and Budgetary Assessments upgrades the estimates of what the war will cost to ~3/4 of a trilllion dollars (so we are getting closer to my $ trillion dollar estimate).

"The wars in Iraq and Afghanistan have already cost taxpayers $314
billion, and the Congressional Budget Office projects additional
expenses of perhaps $450 billion over the next 10 years.

That could make the combined campaigns, especially the war in Iraq,
the most expensive military effort in the last 60 years, causing even
some conservative experts to criticize the open-ended commitment to an
elusive goal. The concern is that the soaring costs, given little
weight before now, could play a growing role in U.S. strategic
decisions because of the fiscal impact.

"Osama (bin Laden) doesn’t have to win; he will just bleed us to
death," said Michael Scheuer, a former counterterrorism official at the
CIA who led the pursuit of bin Laden and recently retired after writing
two books critical of the Clinton and Bush administrations. "He’s well
on his way to doing it."

The Center for Strategic and Budgetary Assessments, a nonpartisan
Washington think tank, has estimated that the Korean War cost about
$430 billion and the Vietnam War cost about $600 billion, in current
dollars. According to the latest estimates, the cost of the war in Iraq
could exceed $700 billion.

Put simply, critics say, the war is not making the United States
safer and is harming U.S. taxpayers by saddling them with an enormous
debt burden, since the war is being financed with deficit spending."

You can get a visual sense of how much the war(s) have been costing the United States per year below; These data points reflect budget allocations, and do not include the epxenditures for military men and material already budgeted.

Click for larger graph


Chart courtesy of San Francisco Chronicle

One of the few vocal critics of the cost the Iraq war has generated has been Nebraska Senator Chuck Hagel (R). He has pointed out (repeatedly) that the present expenses are many multiples greater than what the White House had promised in 2003; Future expenses threaten to make the war even more costly.

Long term deficit hawks (and that should include equity investors) should take note of Hagel’s obserervations regarding the ultimate impact of this spending: it is throwing U.S. fiscal priorities "out of balance," and "It’s dangerously irresponsible."





James Sterngold
Chronicle Staff Writer, Sunday, July 17, 2005

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What's been said:

Discussions found on the web:
  1. thrashbluegrass commented on Jul 21

    Bravo for your prescience, Barry. It seems to me that this was the honest conclusion that those not blinded by the rosy scenarios the administration was pushing should have come to in the beginning.

    Of course, they all had an agenda to serve.

  2. Myke commented on Jul 21

    Is the post-Vietnam era an appropriate indication of what we might expect?

  3. Mr. Econotarian commented on Jul 21

    On total annual Federal outlays of $2.2 trillion, the numbers for the war (~$100 billion a year) are actually not that huge, especially when compared to the $1.2 trillion a year spent on “manditory” programs such as Social Security and Medicare.

    When war spending is redistributive (such as paying salaries), its economic impact may be limited to the dead-weight loss of taxes. It is spending on military weapons which is probably the greatest absorber of wealth.

    It is interesting that despite the spending on Iraq and Afghanistan, US GDP growth is higher than OECD average and US unemployment is less than OECD average. I’m sure we would be doing even better without the war, mind you, but whether it is very much better is questionable.

    The comparison with the Vietnam War era is very telling. The Vietnam era saw significant inflation, whereas current inflation is very low.

  4. Lin Ma commented on Jul 21

    considering that ALL of this money is borrowed, the interest cost will push the total very close to $1T.

  5. James Cameron commented on Jul 23

    “It is interesting that despite the spending on Iraq and Afghanistan, US GDP growth is higher than OECD average and US unemployment is less than OECD average. I’m sure we would be doing even better without the war, mind you, but whether it is very much better is questionable.”

    I enjoy your commentary on Realmoney.com, and you don’t disappoint here either. Regarding the passage above (not yours), in fact we could do much better with better and more imaginative leadership. $80 billion a year towards alternative energy program development, for example, could have a dramatic impact on our foreign energy dependence, which only grows worse year by year.

    While you focus on the costs of Iraq, let’s not ignore the much greater costs of our overall military spending, which far exceeds spending by any other country (Russia and China being next on the list, in that order), and much of which is devoted to hugely expensive military projects that are more likely than not determined by their political rather than their military merit. Once these are started, they’re more difficult to kill than Superman.

    j. cameron, seattle

  6. Master of War commented on Jul 23

    Iraq War is U.S. equivalent of Japanese public works programs and a means to stimulate the economy.

  7. Rae commented on Jul 24

    If your worried about the economy, have someone you love in the military during War Time. The economy won’t be such a big issue to you anymore.

  8. Barry Ritholtz commented on Jul 24

    Totally agree — Indeed, its a given —

    But my job is to think about what events impact the global and domestic economy.
    This is certainly one of them.

    And in order to do it, I have maintain some degree of objectivity and clinical detachment . . .

    I hope it doesnt come across as blase or lack or recognition of the human costs of these events

  9. James Cameron commented on Jul 24

    “And in order to do it, I have maintain some degree of objectivity and clinical detachment . . .”

    There absolutely should be discussions that examine the critical economic, social and strategic issues involving Iraq and elsewhere. This is what generally drives informed public and foreign policy. Or it should, anyway: with much better preparation we may not find ourselves in the pickle we now face in Iraq.

    Generally, people must be able to step back and take a hard look at Iraq and understand what a long-term stay there means in terms of the costs to this country. This is not an easy task because, frankly, we are largely being driven by events there, month by month.

    FYI, analysis of the costs of an Iraqi war in 2002/2003 did not anticipate current levels of spending.

    Let me say, however, the US will not remain a rich country forever if it continues to shoulder the lion’s share of the world’s military and war spending year after year after year, especially not with the other financial burdens the country is increasingly faced with.

    -j. cameron

  10. David J. Blumberg commented on Dec 8

    If you were taking a course on economics at university you would fail. You have made a significant error by considering war spending in absolute dollar terms instead of as a % of our rapidly growing GDP.

    Further, your point that the war would harm the US economy or Michael Scheuer’s hysterical notion that fighting OBL will “bleed us dry” financially or otherwise – is nonsense. In fact, the war has had only minor effect on the US economy from a borrowing/debt perspective and economy is very strong and strengthening.

    Recall also that during WWII the US spent 130% of GDP on defense. Under Kennedy, defense spending declined to only 12% of GDP, under Reagan 9%, under Bush Sr. 6% and under Bush Jr. 4%. I am citing the data from memory so check it for yourself. I orignally saw the data series in Economist and WSJ.

    The main point is that interest rates and inflation are still at historically low levels, employment is booming, productivity and real wages are growing at a rapid clip, and the Stock Market is on a significant ramp upwards since the post dot.com & Y2K bubble crash of 2000.

    Thus the data strongly contradict your chief point that spending on Iraq and Afghanistan has harmed the US economy.

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