This op-ed originally appeared in the New York Times.

The Trillion-Dollar War
Linda Bilmes
Linda Bilmes, an assistant secretary at the Department of Commerce from 1999 to 2001, teaches budgeting and public finance at the Kennedy School of Government at Harvard.

August 20, 2005 -- Click here for graphic.

THE human cost of the more than 2,000 American military personnel killed and 14,500 wounded so far in Iraq and Afghanistan is all too apparent. But the financial toll is still largely hidden from public view and, like the suffering of those who have lost loved ones, will persist long after the fighting is over.

The cost goes well beyond the more than $250 billion already spent on military operations and reconstruction. Basic running costs of the current conflicts are $6 billion a month — a figure that reflects the Pentagon's unprecedented reliance on expensive private contractors. Other factors keeping costs high include inducements for recruits and for military personnel serving second and third deployments, extra pay for reservists and members of the National Guard, as well as more than $2 billion a year in additional foreign aid to Jordan, Pakistan, Turkey and others to reward their cooperation in Iraq and Afghanistan. The bill for repairing and replacing military hardware is $20 billion a year, according to figures from the Congressional Budget Office.

But the biggest long-term costs are disability and health payments for returning troops, which will be incurred even if hostilities were to stop tomorrow. The United States currently pays more than $2 billion in disability claims per year for 159,000 veterans of the 1991 gulf war, even though that conflict lasted only five weeks, with 148 dead and 467 wounded. Even assuming that the 525,000 American troops who have so far served in Iraq and Afghanistan will require treatment only on the same scale as their predecessors from the gulf war, these payments are likely to run at $7 billion a year for the next 45 years.

All of this spending will need to be financed by adding to the federal debt. Extra interest payments will total $200 billion or more even if the borrowing is repaid quickly. Conflict in the Middle East has also played a part in doubling the price of oil from $30 a barrel just prior to the invasion of Iraq in March 2003 to $60 a barrel today. Each $5 increase in the price of oil reduces our national income by about $17 billion a year.

Even by this simple yardstick, if the American military presence in the region lasts another five years, the total outlay for the war could stretch to more than $1.3 trillion, or $11,300 for every household in the United States.

THE ECONOMIC COSTS OF THE IRAQ WAR:
AN APPRAISAL THREE YEARS AFTER THE BEGINNING OF THE CONFLICT

Three years ago, as America was preparing to go to war in Iraq, there were few discussions of the likely costs. When Larry Lindsey, President Bush’s economic adviser, suggested that they might reach $200 billion, there was a quick response from the White House: that number was a gross overestimation. Deputy Defense Secretary Paul Wolfowitz claimed that Iraq could “really finance its own reconstruction,” apparently both underestimating what was required and the debt burden facing the country. Lindsey went on to say that “The successful prosecution of the war would be good for the economy.”

Many aspects of the Iraq venture have turned out differently from what was purported before the war: there were no weapons of mass destruction, no clear link between Al Qaeda and Iraq, no imminent danger that would warrant a pre-emptive war. Whether Americans were greeted as liberators or not, there is evidence that they are now viewed as occupiers. Stability has not been established. Clearly, the benefits of the War have been markedly different from those claimed.

So too for the costs. It now appears that Lindsey was indeed wrong—by grossly underestimating the costs. Congress has already appropriated approximately $357 billion for military operations, reconstruction, embassy costs, enhanced security at US bases and foreign aid programs in Iraq and Afghanistan. This total, which covers costs through the end of November 2005, includes $251bn for military operations in Iraq, $82bn for Afghanistan and $24bn for related foreign operations, such as reconstruction, embassy safety and base security. These costs have been rising throughout the war. Since FY 2003, the monthly average cost of operations has risen from $4.4bn to $7.1 bn – the costs of operations in Iraq have grown by nearly 20% since last year (whereas Afghanistan was 8% lower than last year). The Congressional Budget Office has now estimated that in their central, mid-range scenario, the Iraq war will cost over $266 billion more in the next decade, putting the direct costs of the war in the range of $500 billion.

These estimates, however, underestimate the War’s true costs to America by a wide margin. In this paper, we attempt to provide a range of estimates for what those costs have been, and are likely to be. Even taking a conservative approach, we have been surprised at how large they are. We can state, with some degree of confidence, that they exceed a trillion dollars.

Providing even rough order of magnitude estimates of the costs turns out to be very difficult, for a number of reasons. There are standard problems in cost allocation; there are future costs associated with the Iraq war that are not included in the current calculations; there are marked differences between social costs and prices paid by the government (and it is only the latter which traditionally get reflected in the cost estimates); and there are macro-economic costs, associated both with the increase in the price of oil and the Iraq war expenditures.

Consider, as an example, accounting for the value of the more than two thousand American soldiers who have died since the beginning of the war, and the more than sixteen thousand who have been wounded. The military may quantify the value of a life lost as the amount it pays in death benefits and life insurance to survivors – which has recently been increased from $12,240 to $100,000 (death benefit) and from $250,000 to $500,000 (life insurance). But in other areas, such as safety and environmental regulation, the government values a life of a prime age male at around $6 million, so that the cost of the American soldiers who have already lost their lives adds up to around $12 billion.

The standard estimates of the death costs also omit the cost of the nearly one hundred American civilian contractors and the four American journalists that have been killed in Iraq, as well as the cost of coalition soldiers, and non-American contractors working for US firms.

The military values the cost of those injured by what their medical treatment costs and disability pay; and current accounting only reflects current payments in disability, not the present discounted value of (expected) future payments; a full cost analysis includes both the present discounted value of all future payments, as well as the difference between the disability pay and what the individual might have earned—and even this ignores the enormous compensation that would have been paid for pain and suffering had this been a private injury.

Costs of recruiting have increased enormously—and even after the war ends, there is reason to believe that compensation will have to be increased, including for Reserves and National Guard. Many Reservists, particularly those who are older, supporting families and established in their careers, underestimated the risks of being called to fight a war abroad and the ability of the government to force them to extend their tours of duty and even to serve second and third tours. The majority of these Reservists have suffered a significant loss in wages due to serving in Iraq. By the same token, wages currently paid the military almost surely represent an underestimation of a fair market wage, given what individuals would have needed to make them willingly undertake the job in Iraq. In fact, we know from the wages being paid by contractors performing similar work what the free market wage for such services are, and they are a multiple of what the American military get paid.

Even determining the current “direct” expenditures turns out to be a difficult task. The Administration has provided a number, based on the current costs of operations in Iraq. We are interested here in finding the total economic cost, the value of the resources used, and it is not always clear that standard accounting and budgetary figures reflect that. For instance, the faster depreciation or destruction of equipment already owned by the government is clearly part of the cost of the war. Standard cost allocation procedures would attribute a substantial fraction of the overhead in the Pentagon to the War; by devoting its attention to Iraq, it has less time to work on other issues, to prepare for other problems.

A true costing of the war would focus, of course, on the incremental cost; to the extent that the actual War substitutes for expensive “war games,” the incremental cost is less than the actual money spent. In our analysis we have subtracted the direct savings, such as policing the “no-fly” zone in Iraq, from the cost of the war.

This paper attempts to provide a more complete reckoning of the costs of the Iraq War than have previously been provided, using standard economic and accounting/budgetary frameworks. Of course, a final tally will have to wait the end, and even the President has made it clear that there is no clear end in sight. And even then, it will be years before we can be sure about whether our estimates of future costs—increased costs of recruiting or payments for disability or the health care costs of the injured veterans—were accurate.

Of necessity, the numbers, especially of future expenditures, are estimates, and we have tried to avoid a false sense of accuracy by rounding our numbers from the more precise estimates provided by econometric and statistical studies, when those are employed. We provide several sets of numbers. A “conservative” estimate that we think is excessively conservative. We realize that the numbers provided here may be controversial. They provide a picture of costs that is much larger than that which has been provided by the Administration, especially before the War. We also provide a second estimate, which, while still conservative, is more reasonable. We refer to this as our “moderate” estimate.

Our estimates, for instance, assume that we have 136,000 troops stationed in Iraq in 2006. The Administration has recently announced a troop reduction, from 160,000 due to the pre-election build-up, to 140,000, a number which is still larger than the numbers employed in our analysis.

We have not been able to quantify many of what may turn out to be the most important costs of the Iraq venture. There is a value in military preparedness, and it is the reason for investing so heavily in defense. By most accounts, America’s ability to engage in a second front at the current time is greatly diminished. At the beginning of the War, there was a great deal of talk about winning the hearts and minds of those in the Middle East. Recent opinion polls reflecting public opinion in the Arab world show that exactly the opposite has happened. Some American businesses have even claimed that anti-Americanism spawned by the Iraq War has had an effect on their sales and profits. America’s credibility has been diminished: if some time in the future another American President were to claim that he had solid evidence based on intelligence that there was a threat, that evidence is more likely to be treated with skepticism. America has always prided itself in fighting for human rights; but America’s credentials have been tarnished by Abu Ghraib and Guantanamo. These are among the many costs of the Iraq War that we do not attempt to quantify, but which should clearly be counted in any assessment of the Iraq War.

Nor have we included in this paper any of the costs borne directly by other countries, either directly (as a result of military expenditures) or indirectly (as a result of the increase in the price of oil.) Most importantly, we have not included the costs of the war to Iraq, either in terms of destruction of property (infrastructure, housing) or the loss of lives. Clearly, including these would increase the cost of the war substantially—perhaps by an order of magnitude....

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Americans could, and should have asked, are there ways of spending that money that would have enhanced our long run well being—and perhaps even our security—more. Take the conservative estimate of a trillion dollars. Half that sum would have put social security on a firm grounding for the next seventy-five years. If we spent even a small fraction of the remainder on education and research, it is likely our economy would be in a far stronger position. If some of the money spent on research were devoted to alternative energy technologies, or to providing further incentives for conservation, we would be less dependent on oil, and thereby more secure; and the lower prices of oil that would result would have obvious implications for the financing of some of the current threats to America’s security. While we may not know what causes terrorism, clearly the desperation and despair that comes from the poverty that is rife in so much of the Third world has the potential of providing a fertile feeding ground. For sums less than the direct expenditures on the war, we could have fulfilled our commitment to provide .7% of our GDP to help developing countries—money that could have made an enormous difference, for the better, to the well being of billions today living in poverty. We could have had a Marshall Plan for the Middle East, or the developing countries, that might actually have succeeded in winning the hearts and minds of those in the Middle East. ...