Remarks by Dan O'Flaherty, Columbia University, at Be About Peace Day Forum March 29, 2008

"The Cost of the War in Iraq"

Remarks by Dan O'Flaherty
Be About Peace Day 2008
Economics Department, Columbia University
Treasurer, South Mountain Peace Action

5 years ago, many of us watched the start of the Iraq war with dismay because we thought it was morally wrong, strategically stupid, and going to be outrageously expensive. Most attention since then has been paid to the stupidity angle, while justice and cost have gotten short shrift. My job tonight is to redress some of that imbalance by looking at costs. But we should not forget justice either: in the just war tradition costs are an important consideration in assessing the morality of a war.

Envisioning the folly of this war is easy. The cost, though, is harder to grasp, and so I want to help you understand it.

There are three questions about cost: how much is it? Who will bear it? And when will they bear it? Each of them is difficult, but some general principles are obvious.

Most of the work has been on the first question, how much the war costs. Linda Bilmes, from the Kennedy School, and Joe Stiglitz, my colleague at Columbia, have come up with the most comprehensive and plausible set of estimates. Their answer is in a book they just published called The $3 Trillion Dollar War. The answer really isn't $3 trillion -- it's a range of $1.7 t to 4 t.

How do they get this estimate, which is a lot higher than what we've been hearing recently? You have to look at what Congress has explicitly appropriated for the war, and what it has not, and what costs have already been incurred and what costs are likely to be incurred going forward.

Start with the easy stuff: explicit appropriations for the past. Up to Sept 2007,that comes to $473 b. in 2007 equivalent dollars; to Sept 2008 it will be something over $610 b. That's the number you see most often.

The next question is what the direct budget costs will be before the war gets over. That obviously depends on how and when the war gets over. In the best case, it winds down fairly quickly after a new president is elected. But that still means major costs through 2010 and all sorts of demobilization and ‘reset' costs -- replacing the equipment that's been used up in Iraq. This best case is another $448 b. or so. But if the occupation drags on, this could easily double.

Next are the government costs that don't appear in the congressional appropriations for Iraq, and still have to be incurred. The big item here is veterans -- costs for disability payments and for medical care. These stretch out over the next 50 years, but the war now is what is responsible for them.

On the most optimistic scenario -- the war ends quickly and Iraq war veterans cost about as much to treat as Gulf war veterans and a lot less than Vietnam veterans -- this comes to $371 b. More realistic and less optimistic scenarios close to double this.

So that gets budget costs of $1.3 T to 2 T.

That doesn't exhaust the costs that Americans bear. You have to add the costs that are borne by families who care for injured veterans, the costs to veterans themselves of the injuries they have incurred, above the cost of medical care, and the value of statistical lives. That adds another $260 b-370b.

Finally, you get the macroeconomic impact -- primarily the increase in the cost of oil and the fallout from that. Stiglitz and Bilmes wrote before the latest surge and they attribute only a small portion of the oil price rise to Iraq, although that is probably conservative ($5-10/bbl).

This adds another 200-1600 b. That's how those big totals are derived. As you can see, 3 T is not pushing it, and you can reject a substantial number of the Bilmes-Stiglitz arguments and still get there.

Notice that this is just the figure for Americans.

How much is $3 trillion? In 2006, the total value of owner-occupied non-farm residences in the US was $13.7 trillion. So think about your block. Imagine 2 out of every 9 nine houses vanishing. In total, that's about 1470 houses in Maplewood and 890 houses in South Orange vanishing. That's how expensive this war is.

Another way is to think of the physical damage associated with 9/11. The US lost about $20b of non-human wealth then. Corrected for inflation, that's just about the amount of non-human wealth the US loses every additional month we stay in Iraq.

Or you can look at it on annual basis. Think about poverty in the US. Over the past 5 years, the poverty gap has been about $100 billion a year. That's how much money you would need to raise the income of every household under the official poverty threshold and bring it up to the poverty threshold. Just the budgetary costs of this war are enough to totally eliminate poverty in America.

Most of the first $2 T or so will be already committed on Jan 20, 2009. It's gone, and there's no way to get it back. The damage is irreparable. But who is paying this cost?

The answer is pretty simple: not us. Except for those connected with the military, almost no Americans have made any sacrifices for the last 5 years because of the war. This has created the illusion that we have not been impoverished by this war and that when the war ends there will be a peace dividend that can be redirected to good purposes.

There will be no peace dividend because we have barely started to pay for this war. Our goal should be to keep things from getting even worse; they won't get better.

How has the illusion of a costless war been created? Why don't we in this room feel as terrible as we should if we were losing 2300 houses in our two little towns or an empty World Trade Center were being bombed every month?

One major reason why most of us here tonight are not seeing the cost of the war is that it's being financed by borrowing and by making commitments to veterans for future taxpayers to honor. Until very recently, a big piece of the borrowing has been from outside the U.S. -- Americans haven't even been asked to postpone consumption by lending the government enough money to fight the war.

The long term consequence of borrowing, of course, is that you have to pay back. The Chinese Ministry of Finance and the rest of the world loaned us this money not because they love us, but because they intend to be repaid sometime in the future.

The same is true for the domestic investors who bought more government bonds because of the war. To pay back, you have to produce more than you consume or invest. The domestic savings diverted into government bonds also could have been used for productive investment instead -- investments that would have made us healthier and more productive and richer but won't because they were never made.

For people who are young now, payback means you and other Americans will have less to spend on yourself, less to invest in new businesses and new ideas and new ways of doing things, less to spend on art and culture, less to spend on education for your kids. And you will have to work harder -- you will have less time for the things you like to do.

So, high school students, 20 years from now when you have to get on the 7 am train and your kid is crying and you really don't feel good about the child care place where you have to leave her because that's what you can afford -- that's when you should think about George Bush prancing around on the aircraft carrier and know that that's what your sacrifices and your kids' sacrifices are for.

To keep the record straight, those of us who are old now are not going to escape the costs of the war entirely. Some of the consequences of the war and the way it has been financed are showing up already:

-- The fall of the dollar and the rise in prices of imports
-- The sale of America to foreign corporations and sovereign wealth funds
-- Oil prices

But these are the tip of the iceberg. If you voted in the 2004 election, unless you were connected to the military, the odds are pretty good that you will be spared most of the cost of the war. Funny how that works out.

So to summarize:

1. Except for the military, the people who are now paying for the war don't realize it, and those will pay for it won't realize it either.

2. That doesn't mean it's any less real or and less horrific. $3 trillion could do an awful lot of good for an awful lot of people, but it's been burned up.

3. The imperative is to end the war to stop the situation from getting worse.

4. The other thing to worry about is whether veterans get the kind of benefits and medical care they deserve, even if it increases the taxpayers' cost of the war.

5. You should have bought your kids a condo in Vancouver in 2003 before the war started.

______________________________

Handout for Dan O'Flaherty's Remarks

Be About Peace Day 2008
Analysis of Iraq War Costs, following Bilmes and Stiglitz (2008)
Total Costs for Iraq Only (in billions of 2007 dollars)

Budget costs: Estimated Range (billions of dollars)

Appropriations to 9/07 .......$473-473
Appropriations after 9/07....$382-669
Veterans cost...................$371-630
Demobilization...................$20-20
Reset, hidden, net..............$46-247

Social costs, net of payments (billions of dollars)

Deaths..........................$50-57
Injuries.........................$150-229
Family...........................$49-69
Other social....................$14-14

Macro costs (billions of dollars)

Oil.............................$187-800
Slowdown........................$0-825

_________________________________________________________

Total...........................$1,742-4,033 [ $1.7 trillion to $4.0 trillion]

Interest costs of $442-616 billion were not included.

Budget costs are directly from table 2.2. Social costs are 89% of table 4.1, based on footnote 26 on page 241 that attributes 89% of veterans' costs to Iraq, 11% to Afghanistan. Macro costs are based on table 5.1: 100% of $5-10 oil price rise was attributed to Iraq, and 75% of slowdown cost (based on footnote 26, which attributes 75% of budget cost to Iraq).

Temporal Breakout (billions of dollars)

Obligated before 2009 and paid by Americans before 2009.......$312-931
Obligated before 2009 and paid by Americans after 2009.........$1,430-2,236
Obligated and paid after 2009..........................................$463-776

Source: Dan's calculations and guesses. Worksheet available on SMPA website, www.BeAboutPeace.com. Since Bilmes and Stiglitz advocate withdrawing as soon as possible, I considered all costs associated with their best-case scenario (surge ends in 2008, 75k troops in Iraq and Afghanistan in 2010, 55k by 2012) as obligated now.

Reference: Bilmes, Linda and Joseph Stiglitz, 2008, The Three Trillion Dollar War: The True Cost of the Iraq Conflict. New York: Norton.

Thanks, Dan for making "The Three Trillion Dollar War" more comprehensible.

There are two points that I'd like to take issue with.

First, regarding the budgetary expenditures, I don't agree that we can say that all funds that pay for the war are borrowed funds as opposed to taxpayer dollars. While it's true that war spending has almost entirely been paid for by "supplemental appropriations" rather than through the budget process, the checks written for government expenditures -- whether for a highway in New Jersey or a highway in Baghdad -- are all written from the same US Treasury account. So you can't really say which dollars were borrowed or which dollars were provided by taxpayers.

Second, while it's true that hundreds of billions have been spent -- and that money is gone -- and hundreds of billions have been obligated for the future, I don't think it's accurate to say that there's no Peace Dividend if we end the war.

If the war ended last year, more than $100 billion would have been available to invest in America instead of wasted in Iraq. If the war had ended two years ago more than $200 billion would have been available.

If the war ended today, more than $100 billion (less the costs of withdrawal) would be available to invest in America that otherwise will be wasted in Iraq.

So looking at the present and looking forward, ending the war frees up hundreds of billions for investing in America that otherwise would be poured down the drain in Iraq. In my opinion, that's a Peace Dividend.

Paul Surovell

Don't Miss the Conservative Strategic Initiative

Thank you Dan for providing an incisive picture of the economics of this war.

We all need to take this another step and recognize theres a conservative strategic initiative playing out here.

When you look at the numbers a narrative emerges:
"The invasion and occupation of Iraq has cost us billions. Every day, the American people are forced to choose between funding the occupation and funding schools, health care, family services, and housing. Every day, our national debt grows and the ability to provide for our people is reduced."

A hidden truth lurks behind this narrative that we should be aware of now. This has all been done intentionally. It is part of the plan. Whose plan? Conservatives.
A strategic goal of conservatives is to shift decision-making powers from the public (government) to private institutions (corporations). Every time they gut public agencies, defund social programs, empty the treasury, or place political appointees who despise specific regulatory bodies at their helm, there is a method behind the madness. They are NOT stupid. They are NOT incompetent. No. No. No.
CONSERVATIVES ARE SETTING UP GOVERNMENT TO FAIL SO THAT PUBLIC SERVICES CAN BE PRIVATIZED AND USED TO EARN PROFITS.
This strategic initiative should be included in discussions of the economics of the war. We need to call it out and also develop a counter initiative of our own.

http://www.rockridgenation.org/blog/archive/2008/02/20/weekly-workgroup-moveon-and-the-iraq-recession

Regards,

Jim

Comments on Paul:

1. How it was financed. Any discussion of cost or any piece of history is a discussion about counterfactuals. If I say, for instance, that St James Gate increased the amount of drinking in Maplewood Village, then I'm implicitly asserting that if I were to construct a history of Maplewood Village in which St James Gate did not open -- one in which the clothing store stayed open or a nail salon opened there instead -- then in that alternative history there would be less drinking in Maplewood Village. I am also asserting that my counterfactual history is the most likely one to have occurred, other than that which actually occurred. If you disagree with me, you can construct another counterfactual history -- say, if St James Gate did not open some other bar would have opened there -- and assert that your counterfactual history is more likely than mine. Then judging whether or not my basic assertion about St James Gate should be accepted is tantamount to judging which counterfactual history is more likely (when of course neither actually occurred).

Usually, especially when speaking under time constraints, we don't state explicitly our counterfactuals, because we have certain conventions about what they are.

Now to get back to the deficit issue, start with the basic relationship for the US government:

Expenditure in a year = taxes collected in that year + borrowing in that year.

The conventional counterfactual about the war in Iraq is that if it didn't happen, the government would not have spent this money. Someone may disagree and say, for instance: "If Bush had not gone to war in Iraq he would have done something equally silly and expensive (an invasion of Venezuela or Alberta, say) within a few months and we would have spent just as much money invading Alberta as we have invading and occupying Iraq." That is a logically valid objection that none of the cost studies take into consideration. I will reject here as I (and everyone else implicitly) rejected it before because I don�t have time to explore it and because if you accept it then I can re-label all my arguments "cost of Bush" instead of "cost of Iraq." So the counterfactual history has expenditures in every year equal to what they actually were, less the cost of Iraq in that year.

The next counterfactual is the history of taxes in the absence of the Iraq occupation. The counterfactual that I used was that that history would not have been different if Iraq had not occurred. In particular, taxes would not have been lower if Iraq had not occurred. Again, you can have other political stories, but my counterfactual is probably pretty close to what most people think about this.

Thus my no-Iraq-occupation counterfactual has expenditures lower in every year than what actually occurred and taxes the same. It follows that borrowing is higher -- by the exact amount of the Iraq expenditures. That is my precise statement. It has nothing to do with attaching identities to dollars; it is totally based on conventional (and fairly reasonable) counterfactuals.

What do you have to show that not all the costs were deficit? Either: (a) they would have spent the money for something else (not an impossible argument, but it reduces the cost of the war); (b) taxes would have been lower if there had been no war (pretty big stretch in my mind).

2. Peace dividend. Here the issue is one of appearances and illusions.

Once again it helps to construct explicitly the counterfactuals -- this time they are alternative histories of the future.

I was working with what I take to be the "person in the street" view of the future, which is that everything will go along in the future as it has in the past with changes occurring only for the reason of specific changes in the future. Thus in this view U.S. taxes and U.S. non-Iraq government expenditures and U.S. consumption and U.S. investment keep going along about as they are now (with little fluctuations for growth for growth and recessions) into the indefinite future. Then on some happy day in the future the war in Iraq ends. That is the only reason for a change, in this view. And the change is a good one: the money that had been going for the war in the year before can go for some good purpose in the year after. Let the war end in year t. Then the person-in-the-street view is that the sum of US consumption, investment, and non-Iraq government expenditures in year t+1 will be greater than the corresponding sum in year t-1 and that this difference will equal the year t-1 Iraq expenditures. That is the peace dividend, and that is the view of the future that I believe is encouraged by uncritical talk of the good things that the money being spent in Iraq could do.

By rejecting the peace dividend language, I was rejecting the "person in the street" view. Believing that there will be more resources when the Iraq war ends is as naive as believing that if you pay for Christmas on a credit card you will have more money to spend on normal goods in January than you did in November.

Of course, as Paul correctly points out, if you think in terms of present value and are well-informed about the size of the deficit and its rate of growth, then if the war ends sooner than you had anticipated your lifetime expected wealth increases. (And any day that the war actually ends is earlier than the expected date of termination that you had calculated when you woke up that morning.) People who think like this realize "peace dividends" every day, and "war anti-dividends" just about every day too. (Thus peace dividends are realized every day or never.)

People who are this well-informed are around. They only got that way by reading books like Bilmes-Stiglitz and listening to talks like mine. My remarks were not addressed to them, because they didn't need to hear them. They were addressed to those who were not yet well-informed in the hope that they would become well-informed.