The Cost of War

Good column from Bob Herbert on Iraq's hefty price tag and, of course, there's Stiglitz's book as well. If you look at something like the economic problems in Ohio right now and consider how much better that situation would look had that kind of money been invested in productive infrastructure in the US, it's pretty infuriating. Spent directly, that money would have meant jobs. But spent on something more useful than a fruitless occupation of Iraq, it would have laid the groundwork for continued prosperity. Now at best it's down the drain.

This reminds me of something John Brennan, formerly of the CIA then director of the Terrorist Threat Integration Center and then the National Counterterrorism Center until retiring in 2005, said on Sunday, namely that in contrast to John McCain, Barack Obama "understands the direct correlation between tremendous expenditures of blood and treasury in Iraq and the US economy." Brennan points out that "al-Qaeda strategy has been to bleed the US into bankruptcy" and thus to do as McCain proposes and "continue with the same approach will have severe consequences for U.S. national security." Obviously this came out in the midst of a primary campaign, but it's hardly an Obama-specific point; rather it's one anti-war candidates of any stripe can (and should) make.

Few people seem to appreciate it, but it's quite literally true that al-Qaeda's strategy is to cripple the U.S. economy by dragging us into quagmires abroad. Osama bin Laden himself has said this, and it's the only strategy that makes sense. A smallish number of people with no base of resources can't possibly defeat us unless we shoot ourselves in the foot repeatedly as Bush and McCain propose.

Comments

Exactly true, it's why I thought McCain's assertion that if we left Iraq we'd be handing Al Qaeda a country should have gotten more coverage. Obama responded pointing out that Bush/McCain let Al Qaeda into Iraq, but strategically going forward McCain's strategy continues to cede the strategic advantage to Al Qaeda, along with billions and billions of our hard earned tax dollars.

Posted by AJ | March 4, 2008 9:52 AM

The effect of the difference in manufacturing wages between workers in Ohio and workers in Asia and Mexico is greater than any effect of the Iraq War on the federal budget. I think the war spending is a waste, but the idea that absent the war you'd have a strong manufacturing base and more jobs seems like political spin.

Posted by Helter | March 4, 2008 9:53 AM

You just don't seem to realize that all those holes in our feet will reduce wind resistance as we stomp on our enemies with our holy (holey?) boots of freedom and justice.

Posted by DMonteith | March 4, 2008 9:55 AM

The US military and economic situation has more than its share of parallels to the Spanish Empire in the 16th century. Foreign imperial ventures sapping the treasury at home, with an inflationary monetary policy and large-scale borrowing used to paper over the problems for a while.

Meanwhile, international hegemony steadily slips away to the more dynamic and productive commerical centers.

Posted by Doug T | March 4, 2008 9:56 AM

I'm very skeptical that investments in Ohio by the Federal government would create any longterm economic changes.

Posted by thehova | March 4, 2008 10:14 AM

I heard Stiglitz speak on CSPAN and found his comments to be misleading.

He argued that the Iraq war is more costly due to its being financed by debt. Anyone who has took a class on finance knows that it doesn't matter how a large entity like the US government finances projects. The US government could have raised taxes instead of finance the war through debt. BUT IT DOESN'T MATTER.

The way he added the cost together was also misleading. You can't just add future costs 10 years from now with costs five years from now. You have to take a net present value of all the costs.

of course, Stiglitz knows all of this. He just wants to be misleading.

Posted by thehova | March 4, 2008 10:22 AM

Brennan points out that "al-Qaeda strategy has been to bleed the US into bankruptcy"

If that's the strategy, it's been a massive failure, given that our deficit in quite low, historically.

Posted by Al | March 4, 2008 10:30 AM

thehova, Maybe you can tell us why it doesn't matter how the US finances its debt? Because this is a rule which applies to all large entities? Or is because the state can always fall back on the efforts and wealth of the land and its citizens? I have little understanding of these matters. I'd appreciate a small explanation.

Posted by Quentin | March 4, 2008 10:31 AM

Okay, maybe 2 trillion might not have fixed Ohio. But, the point is that the money could have been used here and not bled down the drain of Iraq.

Posted by mike | March 4, 2008 10:34 AM

The effect of the difference in manufacturing wages between workers in Ohio and workers in Asia and Mexico is greater than any effect of the Iraq War on the federal budget. I think the war spending is a waste, but the idea that absent the war you'd have a strong manufacturing base and more jobs seems like political spin.

Are you kidding me? One trillion dollars divided among 300 million Americans is $30,000. Per household, it's $100,000. I think that kind of extra wealth over the last 6 years would more than compensate for a few jobs lost overseas.

Posted by mpowell | March 4, 2008 10:37 AM

Someone above praises the two tril for aWol's bogus war. Let's hope the commenter plans no vacation to Europe this summer.

Posted by Hedley Lamarr | March 4, 2008 10:39 AM

"thehova, Maybe you can tell us why it doesn't matter how the US finances its debt? Because this is a rule which applies to all large entities? Or is because the state can always fall back on the efforts and wealth of the land and its citizens?"

I'm just going off what I heard on the CSPAN show. I found it misleading for Stiglitz to stress how the war was being financed on debt. Of course, he does this because most people (especially conservatives) fear debt more than tax hikes. BUT IT DOESN'T MATTER HOW THEY FINANCED IT.

I don't find it very honest. And it leads me to the conclusion that the book isn't very honest.

I just found this review from the financial times that doesn't believe it's an honest book either:

http://www.ft.com/cms/s/0/07d4beda-e8c3-11dc-913a-0000779fd2ac.html

Posted by thehova | March 4, 2008 10:45 AM

Control of 112 billion barrels of oil for $2 trillion! Hey that's less than $20 a barrel!

GWB is a financial wizard.

Posted by gregor | March 4, 2008 10:52 AM

thehova -

So whether or not a buy a car with cash or take out a loan, IT DOESN'T MATTER? Weird, because the lender always charges me interest to borrow the money, which means I end up paying more than just the cost of the car.

Now, if you're suggesting that economic growth trends suggest we can grow our way out of debt service, that's a defensible position. But on its face it certainly DOES matter whether or not you borrow or not.

Posted by Kurzbein | March 4, 2008 11:01 AM

Well, you can either raise taxes to pay for it now, or raise taxes to pay for it in the future. Financing it through debt now was significant because the Fed made borrowing easier by loosening credit, which pumped a lot of money into the capital markets which had to go somewhere, like repackaged liar loans. It exacerbated economic conditions that would have been mitigated by raising taxes, or avoided by not having the war at all.

Perhaps voting for the "Authorization to Use Military Force" might disqualify one from asserting credibility on matters military or economic.

Posted by David B. | March 4, 2008 11:02 AM

If you look at something like the economic problems in Ohio right now and consider how much better that situation would look had that kind of money been invested in productive infrastructure in the US, it's pretty infuriating. Spent directly, that money would have meant jobs.

Matt, that money was spent directly, and did mean jobs. As Krugman has pointed out, the wars served as a massive Keynesian stimulus that probably helped keep the 2001 recession fairly short.

But you're certainly right that it would have been better spent on *anything* else instead of on a counterproductive war.

Posted by gustav | March 4, 2008 11:02 AM

...it would have laid the groundwork for continued prosperity. Now at best it's down the drain.

It bought the GOP two elections, and may buy a third. And it kept at bay the twin menaces of gay marriage and slightly higher marginal rates of income tax.

That's hardly 'down the drain', now is it?

Posted by Davis X. Machina | March 4, 2008 11:08 AM

Krugman's doing a lot to earn his John Bates Clark medal, lately, hasn't he! How can there be a meaningful Keynesian stimulus for a war fought on the cheap? Where was the mass mobilization a la World War II? What happened instead is that a lot of wage earners in the reserves were sent to Iraq, putting tremendous strain on their economically, as well as emotionally. At most there was the loose credit Stiglitz discussed, and that's boomeranged on us with a vengeance.

Keynes made his name with the "Economic Consequences of the Peace," before the "General Theory." He thought that having a country with large debt, a devalued currency, and decaying infrastructure that was dependent on foreign countries for capital was a recipie for disaster. Krugman should stop arguing with the Obama who only lives in his head and actually deal with the work of JMK.

Posted by David B. | March 4, 2008 11:10 AM

I guess my "IT DOESN'T MATTER" chants were a little off. But not for the reason your claiming.

The US government should never feel morally obligated, as Stiglitz misleadingly suggested, to avoid debt.

Right now the Chinese are purchasing a lot of bonds. So it makes absolutely no sense to avoid financing the war through debt and finance it through taxes.

Stiglitz was just trying to piss people off who hate debt.

Posted by thehova | March 4, 2008 11:20 AM

Even if you fight a war "on the cheap" as David B says, you still end up spending a lot of money. Those hundreds of billions we've spent have largely gone to American companies. The Keynesian effect is far from maximally efficient, but surely it must be there in some capacity. Even a straight up giveaway to the top 1% of earners would have some Keynesian effect.

thehova overstates things when he says "it doesn't matter", excuse me, I mean "IT DOESN'T MATTER" whether the war is financed through debt of through taxes.

I think what he's trying to say is, in terms of calculating the war's overall cost, how the war is financed should not make that much difference.

The only meaningful way to speak of the cost of such a long enterprise is through net present value. This means you don't just add up all the costs over time and talk about that number. You take the net present value, which is the amount of money that you would have in hand today such that you could invest it and earn exactly enough to cover all of the costs over time. Using a model like that, the difference in costs between financing through debt or paying "cash" as it were is small, especially when the borrower pays as little interest as the US government does.

Thus, it actually is dishonest to add up all of the debt payments over time and present this number as part of the total cost of the war. I don't know if Stiglitz did this or not, not having read his book. But the accurate way to add the cost of interest payments to the cost of the war would be to take the present value of those payments.

Posted by Rob Mac | March 4, 2008 11:28 AM

Few people seem to appreciate it, but it's quite literally true that al-Qaeda's strategy is to cripple the U.S. economy by dragging us into quagmires abroad. Osama bin Laden himself has said this, and it's the only strategy that makes sense.

Guess what? It's working.

Posted by Jemand von Niemand | March 4, 2008 11:30 AM

It seems to me that for $2 trillion the US could have BOUGHT Iraq outright. That suggests that the Cheney mob actually enjoys bringing about maximal misery to as many people as possible.

Posted by redacted | March 4, 2008 11:34 AM

"One trillion dollars divided among 300 million Americans is $30,000"

No it isn't.

Posted by gcochran | March 4, 2008 11:35 AM

RobMac, I corrected myself above your post.

"I don't know if Stiglitz did this or not, not having read his book. But the accurate way to add the cost of interest payments to the cost of the war would be to take the present value of those payments."

I haven't read his book either. But it certainly sounded like on CSPAN that Stiglitz was just adding cost up through time.

Posted by thehova | March 4, 2008 11:42 AM

But the accurate way to add the cost of interest payments to the cost of the war would be to take the present value of those payments."

No. If you just take the present value of interest payments, they more or less disappear (because for government you'll probably discount at the same rate you pay interest). That would imply that we should always borrow, never tax, preferably financing the entire government through borrowing. I realize this is Republican policy, but still.

The cost of borrowing is the impact on (A) displacement of productive capital investment by government consumption, B) to the extent (A) is replaced by inflows of foreign capital, the outflow of profits to foreign owners, and C) various intangible effects of being more in hock to foreign countries.

Matt was right in his post that what you basically want to do is look at the opportunity cost of investment in Iraq vs. the return alternative investments would have brought you.

Posted by mq | March 4, 2008 11:56 AM

"One trillion dollars divided among 300 million Americans is $30,000"

Oops. Yes, it's $3,000/American. I don't think the cost of the Iraq War could have been used to solve all of America's problems, but it could have helped a lot of them and it could have nearly completely solved any one of them. If you consider the 10 percent of the American population hit hardest by the loss of jobs due to trade, you're back at $30,000. And I think that's pretty substantial aid over a 5 year period.

Matt, that money was spent directly, and did mean jobs. As Krugman has pointed out, the wars served as a massive Keynesian stimulus that probably helped keep the 2001 recession fairly short.
But you're certainly right that it would have been better spent on *anything* else instead of on a counterproductive war.

You have to keep track of the difference b/w short term and long term economic effects. That Keynesian stimulus may have saved us from a business cycle induced inflation. But fundamentally, that money was largely wasted. An investment in infrastructure could provide a Keynesian stimulus while also providing a long term investment in the actual productivity level of our economy.

Posted by mpowell | March 4, 2008 12:02 PM

I think this goes to the heart of why the surge appears to be working in Iraq. AQI is largely imported. The indigenous peoples, both Sunni and Shi'ite want the U.S. out so they can fight it out between themselves and settle things once and for all. But Al Quaeda wants the U.S. bogged down everywhere it can get us trapped. The Iraqis have seen through that and are distancing themselves from AQI, and Al Sadr is extending his cease fire, banking on a Democrat winning in November and pulling out the troops.

Posted by Stillman | March 4, 2008 12:44 PM

The whole discussion of government debt is meaningless if you don't distinguish between a funded debt and an unfunded debt- a nontrivial distinction because Bush has made it clear that the government debt of today is unfunded. Government revenue sources have been slashed and as long as the Bush gang is in power they will try to cut revenue sources.

The funded debt of a stable country is incurred at low interest rates because the risk is small. The unfunded debt is the equivalent of the King pawning the crown jewels.

And there's a joker in the deck here- countries we owe money to know we can simply inflate the dollar, just as the Germans did in the 20s with the mark, to make the 'payment' of the war reparations meaningless. Like the American homeowner today, the Germans pyramided and rolled over loans from Americans in this huge bamboozle that bankrupted the German middle class. And who do you think was waist deep in this financial swamp? Why, George Bush's grandfather, the Dulles brothers, etc etc.

Don't wonder why our savings rate is low- nobody in their right mind would pile up dollars in a vault today.

Posted by serial catowner | March 4, 2008 1:33 PM

MQ, I think RobMac's and my point holds up.

When presenting the cost of Iraq, you shouldn't just say 3 trillion.

As the Financial Times article which I linked argues (and what you argued just now), one has to honestly discern how the funds would have been spent differently and then state the difference.

Posted by thehova | March 4, 2008 1:34 PM

By all means, discern how the funds would have been spent differently and state the difference.

For example, would it have been cost-effective to repair the bridge in Minnesota before it collapsed, killing people and creating a major hole in the transport fabric of the city until it's rebuilt?

What if we had bought overpriced solar panels instead of obscenely overpriced bullets- would we be any better off now?

What if we had bought railroad cars for mass transit instead of Strykers and Humvees that have been blow up in Iraq?

By all means, discern how the funds could have been spent differently and state the difference. It's huge.

Posted by serial catowner | March 4, 2008 3:08 PM

Stiglitz is a very clever, and very partisan, economist. His book is classic sophistry in that it uses highly intellectual constructs to grossly misrepresent reality.

--It is beyond pointless to make elaborate constructs based on all possible future costs that may accrue to this expenditure, and it's even sillier to suggest that money spent on Iraq=money not spent on bridges, healthcare, etc. This is, obviously, apples and oranges. Money already committed to defense is not going to morph magically into bridges or teacher salaries.

--Any speculation about future costs, opportunity costs, etc. needs to be matched to estimates of the costs of having Saddam Hussein in control of Iraq, continuing his drive to dominate the Persian Gulf in a nuclear arms race with Iran at least, and probably Saudi Arabia and Egypt as well.

--The only sensible way to calculate costs like this is as expressed in percentage of GDP. We are currently spending about 4.5% of GDP on defense in total. For comparison the number for Vietnam were 9.5%; for Korea 19%; and in WWII we spent damned near a third of total GDP on the military.

--Nothing is more expensive than losing a war.

Posted by Robert Powell | March 5, 2008 7:49 AM

I guess Robert Powell has been in Antarctica or maybe in The Mummies Tomb for the past five years. Here's a few hot newsflashes for you, Robert- first, Saddam was not building nuclear bombs to dominate the mid-East.

Second, the war spending has not been "money committed to defense", it has been a series of 'off the books' special appropriations that are in addition to all of the regular 'defense' spending.

Meanwhile, 'back at the ranch', current estimates are that we need to spend about $3 trillion to maintain our roads, bridges and airports. The money would have been spent on productive investments.

As it is, our enemies will not need to attack us. They can just sit on the sidelines and watch our bridges fail and our levees crumble. Sic transit gloria.

Posted by serial catowner | March 5, 2008 9:02 AM

Yeah, this is the friggin' problem...

Osama Bin Laden knows way more about US than we know about HIM...

We really haven't figured out September 11, have we?

Really, we should calm down, go back over it, and THINK, for a change...

Who did this? Why? How? What makes sense as a response?

Is the response to a huge wasteful atrocity to commit more huge wasteful atocities?

Posted by wobbly | March 6, 2008 5:35 PM

Now if I'm not wrong, isn't the al-Qaeda strategy the same that the U.S. employed to successfully bankrupt the Soviets. Can't the conservatives remember their own stuff?

Posted by Kindaconfused | March 6, 2008 8:45 PM

Robert Powell:

You have to include all the actual costs of the military to determine the amount of military spending!

See Chalmers Johnson's work for details; for example:
http://www.tomdispatch.com/post/174884

You can also search the "Internets" for "Chalmers Johnson" and podcast; for example:
http://yourcallradio.blogspot.com/2008/02/your-call-020408-prez-candidates.html

-ME

Posted by ME | March 7, 2008 4:05 AM

Robert Powell:

You have to include all the actual costs of the military to determine the amount of military spending!

See Chalmers Johnson's work for details; for example:
http://www.tomdispatch.com/post/174884

You can also search the "Internets" for "Chalmers Johnson" and podcast; for example:
http://yourcallradio.blogspot.com/2008/02/your-call-020408-prez-candidates.html

While I agree that Stiglitz and Bilmers made some odd assumptions, it has some balance. They only attribute $10/barrel to the price rise since 2003. -- though that seems far too low. Oil is around $100/barrel now, and on NYMEX was under $25/barrel in September 2003.

-ME

Posted by ME | March 7, 2008 4:17 AM