Tuesday, March 18, 2008

War Costs

The Iraq war is five years old today. Considering the incalculable human costs of the enterprise, there is something almost unseemly about discussing the economic costs, but those are far from trivial.

The Financial Times reports on several different estimates of the war's costs. Economics Nobel laureate Joseph Stiglitz has co-authored a book on the subject, "The Three Trillion Dollar War." He chatted with washingtonpost.com readers today (see also this op-ed with his co-author Linda Blimes).

One interesting point that came up in his discussion was the notion of "opportunity cost" -
San Francisco, Calif.: A trillion here, a trillion there, pretty soon we'll be talking about real money.

Could you address the opportunity costs of the war? For example, health care reform is a major issue in the presidential election, and three million dollars could've gone a long way towards funding it. Social Security is another example.

Joseph E. Stiglitz: That is the right way of asking the question. As a rich country, we can, in some sense, "afford" the war. But spending money on the war means that we are not spending money on other things that we could have spent the money on.

One of the real costs of the war is that our security is actually less than it otherwise would have been (ironic, since enhancing security was one of the reasons for going to war). Our armed forces have been depleted--we have been wearing out equipment and using up munitions faster than we have been replacing them; the armed forces face difficult problems in recruitment--by any objective measures,including those used by the armed forces, quality has deteriorated significantly.

Economically, we are gain weaker. Millions of americans have no health insurance--including many poor children. if they do not get the care they need, they may become scarred for life; but the President vetoed the children's health insurance bill--evidently we couldn't afford it. But we were talking about just a few days fighting in Iraq.

The list of what we could have done with just a month or even a few days fighting in Iraq is long. These are called the opportunity costs of the war. In our book, we give many examples of these opportunity costs.

Opportunity cost is a good concept for thinking the decisions of utility-maximizing agents - when a choice is made, the opportunity cost is the next best alternative which is forgone. However, that may not be a good way of understanding the outcomes of our political process. The Tax Policy Center's Howard Gleckman tried to be realistic about where the money would have gone:

Here is a little thought experiment. Had there been no occupation, we would have had a balanced budget by fiscal 2007. The deficit was $162 billion, almost exactly equal to the direct cost of the war that year. Factor in other foregone costs, such as the expense of caring for wounded vets and the like, and we probably would have had a modest surplus.

And what would we have done with it? This is just speculation, of course, but if Stiglitz can do it so can I. The White House would have said, "We have balanced the budget, so let's extend the 2001 and 2003 tax cuts." Congressional Democrats would have said, "We have a balanced budget, let's extend the SCHIP child health program." And, in the end, they may very well have done a little of both. But long-term entitlement fixes? I don't think so.

Since taxes were not raised to finance the war, the financial burden ultimately takes the form of higher government debt. That will mean taxes in the future will be higher than otherwise in order to pay the interest (currently more than 8 cents of every federal spending dollar goes to interest), and having those costs locked into the budget may hinder a future administration in addressing other issues. Moreover, the government's borrowing contributes to our current account deficit and a significant portion of the future interest payments will be made to foreign creditors. This last point means that some of our future output will generate income for foreigners rather than Americans (i.e. GNP will be less relative to GDP).

Update (3/19): The Times also looks at estimating war costs.

No comments: