Debate Rages About Impact of Iraq War on US Economy

USA Today

April 9, 2008 – Washington, DC — The refusal of the top U.S. commander in Iraq to give Congress a timetable for additional troop withdrawals has escalated an already fierce debate about the rising cost of the conflict to taxpayers — and to the faltering domestic economy.
The testimony this week by Gen. David Petraeus comes as Congress prepares to debate later this month the latest in a chain of emergency spending bills to continue Iraq operations. But with the U.S. economy veering toward recession, lawmakers from both parties are increasingly restive about voting for open-ended funding, especially as the White House resists their plans to increase aid for housing and other domestic needs.

Economists differ on the magnitude, but they generally agree the true cost of the war goes beyond the direct appropriations for fighting it. Effects include bigger deficits and higher oil prices. Now, economics are getting tangled up with politics.

Congressional Democrats tend to play up the drag the war places on the economy, and to highlight the White House’s willingness to run larger deficits to fund the war while stinting on domestic needs. Many Republicans in Congress reject the notion that the war effort is a significant factor in the current economic slowdown and say that by making the nation safer, the funding has large benefits.

Rep. Rahm Emanuel, D-Ill., says his voters frequently bring up the issue of Iraq funding, and their message is clear: “Take care of our own first.”

“This is one where the public is way ahead of Congress,” says Emanuel. “They see libraries that are closing earlier, schools that aren’t getting built, yet they’re still getting the bill for projects halfway around the world.”

Including current White House requests, the price tag for U.S. military action in Iraq and Afghanistan and associated costs of the “war on terror” since 2001 is on track to exceed $750 billion, according to the non-partisan Congressional Budget Office.

The cost of war

That figure reflects only a small fraction of the economic cost of the war, according to analysts such as Columbia University economist Joseph Stiglitz. He says the ultimate price tag for Iraq — which administration officials initially pegged at $50 billion to $60 billion — is easily $3 trillion or above when factors such as the cost of health care for disabled veterans, surging oil prices and the economic impact on families who have lost breadwinners are considered.

Disability and health care payments for veterans alone could amount to $600 billion. “This (war) is an unfunded entitlement (program) we have created in the past five years,” Stiglitz this week told a forum at the Carnegie Endowment for International Peace, a Washington, D.C.-based non-profit.

Top Republicans bristle at Democratic suggestions that the war is a major cause of the current economic doldrums. House Republican Leader John Boehner, R-Ohio, issued a statement Wednesday that called Democratic efforts to blame the downturn on the Iraq war “political opportunism at its worst.”

Allen Sinai, president of consulting and analysis firm Decision Economics, says defense spending does add to gross domestic product, the broadest measure of the value of goods and services in the country. But at the same time, he says, the net impact of the Iraq conflict has been to reduce GDP by as much as a full percentage point annually. According to Sinai, the economic drawback of the war includes the inefficiency of defense spending as opposed to other, more productive investment, negative effects on financial markets and its drag on consumer sentiment.

Many effects won’t be fully felt for years, Sinai adds. Deficit financing of the war makes the United States more dependent on foreign investors to finance its debt and, ultimately, lowers standards of living. It leaves the nation in worse shape to face coming economic challenges as the baby boomers retire and health care costs rise, straining Medicare and Social Security, he says.

The costs must be balanced against other intangibles, however, such as the benefits of military action on overall U.S. security, some argue. The Defense Department also points out that defense spending as a percentage of the economy has been running about 4{cd9ac3671b356cd86fdb96f1eda7eb3bb1367f54cff58cc36abbd73c33c82e1d}, vs. 9{cd9ac3671b356cd86fdb96f1eda7eb3bb1367f54cff58cc36abbd73c33c82e1d} during the Vietnam War and 11.7{cd9ac3671b356cd86fdb96f1eda7eb3bb1367f54cff58cc36abbd73c33c82e1d} during the Korean conflict.

Deputy Defense Secretary Gordon England told the Veterans of Foreign Wars in early March that the large U.S. economy could support the rising military spending, which he said should be considered a sort of national insurance policy.

England also said Congress should quickly approve additional military spending, thinking “about not just the military side, but the economic benefits that we could also accrue from this.”

Behind oil prices

Analysts caution against overstating some of the costs of the conflict. For example, fighting in Iraq — a major oil producer — arguably has contributed to skyrocketing oil prices, but it is far from the sole cause. Crude oil prices were about $25 a barrel five years ago, compared with more than $100 now.

James Williams of WTRG Economics notes that the beginning of the Iraq conflict coincided with a deep cut in production in Venezuela, a big oil exporter. Global demand has also surged. After years of disruptions, Iraq on average now is producing about 2.2 million barrels a day, close to its production prior to the conflict. Still, he says, risks remain, with a speculative premium built into the oil market of $20 to $30 a barrel.

“How much of that is Iraq, I don’t know,” Williams says. “We’re just so thin on spare capacity right now that just about anything can move that market.”

Stiglitz in his analysis attributes at least $5 to $10 a barrel of higher oil prices to Iraq.

The next major Iraq funding skirmish is likely to come on the floors of the House and Senate. Democratic leaders say they will use the war appropriations bill as a vehicle for plans such as extending unemployment benefits at home.

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