Dollars and Sense

National Interest

July 2, 2008 – There has been much talk of late about the cost of the Iraq War, due in no small part to the huge estimates postulated by Nobel Prize–winning economist Joseph Stiglitz. Together with his colleague Linda Bilmes, Stiglitz asserts with confidence that the cost of the Iraq War will exceed $3 trillion, prompting sound-bite-prone journalists to dub Iraq “the trillion dollar war.” Of course, these estimates are for costs extending through 2017. In fact, our Iraq adventure will cost far less on the margin, since the military will not disappear even if the war in Iraq does. Whether or not we retain forces in Iraq, they will have to be equipped, housed and trained somewhere. Attributing those costs to the Iraq War is disingenuous. What is real are the hidden “opportunity costs” we’ve already incurred.

The cost of the decision to overthrow the Baathist government of Iraq in 2003 was one number. The cost of the decision to occupy the nation of Iraq until they come up with a government that can hold the country together and pass muster with America’s goal of installing a human-rights-respecting democracy is a larger number.

But economists insist that the true cost of any decision includes the opportunity cost of events that were precluded by the decision. In the case of invading and occupying Iraq, that is a very large number.

Had the United States not invaded and occupied Iraq, the world would almost certainly have enacted the Doha round of trade liberalization that would have ended most agricultural subsidies. Absent Iraq, Germany would have pressured France to abandon their farm subsidies. But because of Iraq, Germany and France linked arms against America, and trade liberalization was frozen.

The World Bank has estimated that enacting Doha would increase world GDP by $300 billion by 2015. Instead, Iraq means millions of farmers in the third world have lost income and opportunity. How many idle hands did this create? And what will those idle hands do in the future?

Another opportunity cost surfaced in March of 2003, when the American government announced that the Iraq War effort would cost $74.7 billion more than previously thought. The Senate reacted by scaling back the 2003 tax cut from a projected $726 billion over ten years to just $350 billion. Specifically, the double taxation of corporate dividends that was to be reduced to zero from 35 percent was only cut to 15 percent.

But the American taxpayer did not simply lose $350 billion in lower taxes. The stock market increased by more than $5 trillion in response to the scaled-back tax cut of 2003. Had the entire tax cut been enacted and taxation on dividends reduced to zero, the value of stocks would have increased another $2 or $3 trillion. That is another opportunity cost of the war.

The greatest opportunity cost of the Iraq War, though, flows from its impact on the 2004 and 2006 elections. Absent the Iraq War, Bush was predicted to win the 2004 election with 58 percent of the vote. Yet, he limped across the finish line with 51 percent. In 2006, voter unhappiness with Iraq was targeted at House and Senate candidates, and the GOP lost thirty House seats and six senators.

This means that the 2001 and 2003 tax cuts will not be extended (unless the 2008 and 2010 elections reverse control of Congress), and taxes will automatically increase an estimated $2 trillion over the next decade. The gains in the stock market of more than $5 trillion will also evaporate once capital-gains taxes and dividend taxation jump back up to pre-2003 rates. A Democratic Congress has already signaled hundreds of billions in new domestic spending on farm subsidies and welfare. A Democratic Congress may change labor laws, end efforts at tort reform and further constrict trade-liberalization efforts.

And as the presidential campaign season carries on, and as Iraq remains central to the debate, other important drains on our budget are being ignored. Our operations outside of Iraq are far more costly than most people realize, and could get more costly still if the presidential candidates actually keep their campaign promises. Current operations in Afghanistan are costing about $2 billion a month, and there is widespread agreement that more forces are required to ensure that the country does not once again fall under the rule of the resurgent Taliban. General Dan McNeill, outgoing commander of the International Security Assistance Force (ISAF) in Afghanistan, said that he requires two combat brigades and a training brigade to pacify the country. That translates into ten thousand troops, not including combat-support and service-support forces. Neither of the candidates has challenged this estimate. Indeed, Obama (D-IL) himself has underscored the need for more troops in Afghanistan to fight what he calls the “real” focus of the war on terror.

Senator Obama also calls for more forces operating in Pakistan so that Osama bin Laden can at long last be captured. That commitment is open-ended, however. And it is not at all clear how the tribes of Waziristan will react to the presence of large numbers of American troops, if that is what it ultimately takes to capture the terrorist leader.

More generally, the Democractic candidate has not talked about cutting back on the military. He even recognizes that this election year is not like 1968—the military is far more popular than he is. Nominally, at least, the Democrats are committed to equipping forces adequately, which implies, at a minimum, a willingness to provide the army with the necessary dollars to “reset,” i.e., rebuild the tank, truck and helicopter forces that have been worn down in Iraq. The Government Accountability Office estimates that an army reset will cost about $190 billion through 2013; neither candidate has flinched at that number.

More tellingly, however, Obama supports an increase in the size of the army and Marine Corps force levels, although such increases will bring with them ancillary costs that he tends not to discuss. These are military personnel costs, benefits for the troops that the Democrats in particular have vocally supported. Thanks to the exertions of Democrats on the Hill, the package of benefits available to the military has grown like Topsy. In particular, Democrats continue to press both for expanding health benefits—which this year will consume $12 billion in defense dollars—and extending more and more of those benefits to the reserve forces.

Personnel expenditures may well be the most-important cost drivers in the defense budget. They have begun to crowd out other critical military needs, most notably the acquisition accounts. How Obama, who traditionally supports trimming the defense budget, can square his support for expanding personnel programs, force-level increases, more deployments to Afghanistan and an army reset is a question he has not addressed.

The costs do not end there. Though he advocates talking to Iran, Obama also calls for a strong military response to Tehran, if necessary.

And Iraq, thought to be a Democratic “bill payer” because everyone assumes a Democratic win goes hand in hand with a drawdown and pullout, is likely to prove far less lucrative a source than has been supposed. Other budget needs will not necessarily be covered by freed-up resources. Senator Obama himself has pledged to withdraw combat troops from Iraq, but a promise without a context means little. And even he has not spoken of withdrawing trainers and various support units. Merely to protect the country’s borders and train Iraqi forces will require at least fifty to seventy thousand troops, at a cost of tens of billions annually. Security and economic assistance could add further billions to the bottom line.

The “war on terror” will continue to have costs. Senator McCain’s (R-AZ) plans, too, carry a heavy price tag. He makes no bones about the need to remain in Iraq, both to complete combat operations and to sustain a stable polity there. He has taken a tough line on Iran and on North Korea. He has not challenged General McNeill’s requirements for Afghanistan or the army’s reset needs.

On the other hand, he has a long and honorable record of seeking and enforcing controls on runaway contract costs. More generally, he has long crusaded against “waste, fraud and abuse” in the Pentagon and did indeed spur the investigation that led to the jailing of air-force bureaucrats and two senior officials at Boeing as a result of the tanker-lease scandal. In addition, unlike leading Democrats, and despite his stellar military record, he has not been an outspoken advocate of mindlessly piling on personnel benefits on top of personnel benefits.

Nevertheless, McCain is unlikely to find savings to offset the cost implications of the policies he advocates. He too will have to contemplate an increased defense budget, though it is unlikely to cause him the same degree of discomfort it would generate for a Democratic president. Still, an annual budget in excess of three-quarters of a trillion dollars is no small matter, and a McCain administration will have to work hard to defend it.

Counting the money spent in the past several federal budgets is easy. The true cost of the Iraq decision includes what might have been if the president and Congress had been able to focus on other national priorities over the past five years. And the question now needs to be asked: what will be our new opportunity costs?

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