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Cost-benefit analysis of Iraq war
May 15, 2006
By: Ahmad Faruqui

The Bush administration has discovered that defeating Saddam Hussain’s army was the easy part of the Iraq War. Stabilizing post-Saddam Iraq has been much harder. Looking at the future, it is not clear whether the worst is over or yet to come. As the last British Lion, Winston Churchill, famously observed: “The future, though imminent, is obscure.”

The American people were never told what the Iraq War would cost, since they were told that America’s very survival was at stake. As the years have passed, it has become clear that Saddam never posed a threat to American security interests. Americans have begun to question the cost of the war, in part because it seems to be spiraling out of control and in part because the war seems to have unleashed more terrorism, not less.

Economics Professor William Nordhaus of Yale University prepared one of the first estimates of the cost of the war in 2002, a year before the American invasion. His study stimulated a debate on the merits of the war. Nordhaus suggested the war and consequent occupation would cost the US anywhere from $100 billion to $1.9 trillion, depending on the difficulty of the conflict, the length of occupation and the impact of the war on the US economy.

Among the officials of the Bush administration, White House economic adviser Lawrence Lindsey was the only one who provided an estimate of the cost of the war. He offered an “upper bound” estimate of $100 billion to $200 billion in a September 2002 interview with The Wall Street Journal. Lindsey was essentially fired for going public with such a high assessment, even though he had argued the cost was small in comparison to the benefits, saying, “The successful prosecution of the war would be good for the economy” because it would lower oil prices.

Just prior to the war, Donald Rumsfeld, the US Secretary of Defense, told Congress that the war would cost under $60 billion. He expected that other countries would pay off the bulk of the expenditure, like they had done during the Gulf War of 1991. His deputy, Paul Wolfowitz, told Congress that Iraqi oil revenues would fund post-war reconstruction. In other words, it would be a cakewalk.

In contrast to these rosy scenarios laid out by Rumsfeld and Wolfowitz, just the direct cost of the war to US taxpayers to date has been $273 billion. This translates into a spending rate of $5.75 billion per month or $8 million per hour.

Scott Wallsten and Katrina Kosec, in a study jointly conducted for the American Enterprise Institute and the Brookings Institution, have put forward a new estimate of costs. Through August 2005, the direct costs amounted to $212 billion. The authors argue that several costs have been incurred, including those associated with lives lost, injuries sustained and productivity losses caused by the induction of civilians into the military. To value lives lost in the conflict, they use an estimate of $6 million for American lives drawn from domestic studies conducted by US government agencies. They adjust this figure downwards for coalition countries and Iraq, to reflect their living standards.

They also estimate the financial benefits of the war, as represented by the reduction in costs associated with enforcing UN sanctions and no fly zones. By subtracting the costs from the benefits, we can figure out the net gain or loss from the war. Through August 2005, the total costs of the war have been $428 billion, of which 60 percent have accrued to the US, 9 percent to its coalition partners and 31 percent to Iraq. The benefits have been $116 billion, yielding a net loss of $312 billion.

Costs are expected to rise in the future, since the US has made a long-term commitment to Iraq. One indicator is the decision to build a $1 billion complex for the American embassy, housed in 21 buildings and spread over a 104-acre complex. This will rival Vatican City in size and vastly exceed the size of the White House complex that stands on 18 acres. Through the year 2015, the authors project that total global costs will reach $1 trillion and benefits will reach $429 billion, yielding a net global loss of $571 billion.

Building on this study, Columbia University’s Joseph Stiglitz and Harvard University’s Linda Bilmes have conducted the most comprehensive examination of Iraq war costs to the US. Stiglitz is a world-renowned economist, being a Nobel Prize winner and former chief economist of the World Bank.

Stiglitz and Bilmes find that the direct costs of the war for the US range from $839-1,189 billion. Indirect costs of the war, including the impact of higher oil prices on US GDP, range from $187-1,050 billion.

Together, they add up to $1,026-2,239 billion.

Of course, these are just the US costs. By estimating costs for the coalition countries and Iraq using the Wallsten-Kosec approach, the total global costs work out to $1,710-3,732 billion. Subtracting the benefits of $429 billion, we obtain a global loss of $1,281-$3,303 billion. By anyone’s yardstick, this is an astronomical sum of money.

There can be no doubt that the American victory over Iraq was a Pyrrhic one. Opponents of the war blame these largely unforeseen costs on poor planning and vision. But even some of the architects of the invasion have now conceded that point. In an unusually frank interview with NBC television, Paul Bremer, America’s second US proconsul in Iraq, said, “We really didn’t see the insurgency coming.”

The Iraq War was fought to enhance America’s national security by winning the hearts and minds of people living in the Arab world. By using a blunt military instrument, the Bush administration failed to accomplish its goal and squandered precious human and economic resources in the process.

Historians will long debate the costs and benefits of the war and whether it was in any one’s interests to pursue it. But in the near term, it falls on the shoulders of the Bush administration to fix the mess. In the months to come, the administration would be well advised to try out peaceful ways of bringing stability to that war-ravaged nation.

Instead, it seems to be focused yet again on achieving a military solution. There is talk of a second round of “shock and awe” tactics to retake Baghdad. And there is even more disconcerting talk of opening another front, directed at Iran, involving tactical nuclear weapons. No wonder more and more retired US generals are calling for the resignation of Donald Rumsfeld.