Costs of the Iraq War to Montgomery County
September 2008
By
Brendan O'Flaherty, Ph.D.
I am here to talk to you about Montgomery County being battered and a large part of its wealth being destroyed. Not pretty, not hopeful. But that's what the Iraq war is-not pretty, not hopeful.
Maybe that's why a lot of people are working overtime to make you forget about it these days. But the occupation of Iraq is burning through $15 billion a month or more, even if it's rarely in the news.
People don't like to pay attention to bad news. A year ago, the shareholders of Bear Stearns didn't want to pay attention to bad news. Fannie Mae, Freddie Mac, Lehman Bros, Merrill Lynch, AIG-they all ignored the bad news.
We are the shareholders of the U.S. government and of the Iraq occupation. It's really hard for us to dump our stock and pretty hard to sell short. So we'd better pay attention to bad news.
Tonight, I'll talk about the cost of the war. The cost, though, is abstract, and so I want to make an effort this evening to help you understand it.
For while the cost is abstract, it is nevertheless real. If you have mold in your basement, you may see nothing, you may hear nothing, you may not understand why you are getting sick so often, you may have no picture you can see on the nightly news or put on YouTube-but that mold is still real. Oftentimes, the greatest abstractions are those things that might have been but never were: careers you could have had, loves you could have pursued, talents you could have nurtured, family or friendship ties you could have maintained, kind words you could have said. These are losses and they are real, but they are also abstract. You can't take a picture of them.
The cost of the war is abstract, like mold or the pain you feel when you think of someone you love who is no longer alive. And that cost is just as real.
The best source on the cost of the Iraq war is Bilmes' and Stiglitz' book, The Three Trillion Dollar War. It explains economists' view of the costs of the war: namely, what we have lost that we would not have lost had there been no war in Iraq.
My comments tonight include the following restrictions:
1. Only Iraq. I am not including the costs of the war in Afghanistan because of accounting problems with that conflict.
2. Only U.S. costs, and hence Montgomery County costs. As moral human beings, we should be concerned about the costs borne by other people, particularly Iraqis, and these costs should shape our view of whether or not this has been a just war, but the County Executive and the County Council have a special fiduciary responsibility to worry about the costs borne by Montgomery county citizens and future citizens, and so that is why, for this discussion, we are focusing solely on U.S. costs.
3. Only economic costs. We are not considering the human costs, the deaths and injuries sustained by our military forces and by the Iraqi people.
We'll consider costs incurred into early 2009, since Congress won't deal with the war again before that time. Of course, in making cost projections, there is considerable uncertainty about everything: uncertainty about how long the occupation will last, and uncertainty about the costs of what's happened already. In particular, how much is it going to cost to give veterans the kinds of benefits and medical care that they're entitled to, and will the federal government provide it?
It is convenient to divide the costs a couple of ways: between what's been obligated already, morally and legally; and what hasn't been.
Another division is between costs that have already been paid for by Americans, including Montgomery County citizens, and those that are on the credit card or will come due later.
Let me say a little about each of these categories. Direct federal appropriations to early 2009 are about $653 billion. (That's probably considerably bigger than what all the bailouts will end up costing in the end.) The scary number here is that the burn rate for these dollars is still about $10 billion a month, double what it was at the beginning of the war and higher than it was even in 2006. The reason for this is not so much the surge in troop numbers but the fact that the cost per soldier-year is way up.
A burn rate of $10 billion per month means that only idiots would say that Iraq is not an issue anymore, or that there isn't anything that needs to be done.
But direct federal appropriations are only the tip of the iceberg. The next biggest single item is giving veterans their due, both financially and medically. These costs stretch out over the next 50 years, but the war now is what is responsible for them. Obviously, we can only project here because we don't know what it will take to treat APPROPRIATELY the veterans who have returned already, and we don't know how many more veterans the war will produce because we don't know how or when the occupation will end.
Under the most optimistic scenario-the occupation ends quickly and Iraq war veterans cost about as much to treat as Gulf war veterans and a lot less than Vietnam veterans-the total veterans' bill comes to $371 billion. More realistic and less optimistic scenarios double this amount. That is, veterans costs are likely to be about the same size as direct appropriations for the war.
So even with an almost immediate end to the occupation, and even if Iraq veterans turn out to be remarkably healthy, the cost for the war is going to be well over a trillion dollars.
But we're still counting.
You have to add the costs that are borne by families who have to care for injured veterans, the costs to veterans themselves of the injuries they have incurred-- above the cost of medical care--and the imputed statistical value of lives lost. That adds another $300 to $400 billion.
To this I would add the costs that communities are going to have to bear to care for returning veterans. If I were to ask the County Executive, I'm sure he'd tell me that Montgomery County is not going to turn its back on its veterans. And that's going to cost money, above and beyond what families and the federal government are paying.
Finally, you get the macroeconomic impact-primarily the increase in the cost of oil and the fallout from that. Stiglitz and Bilmes published their book before the latest increase in oil prices, and they attributed only a small portion of the oil price rise to Iraq, although their estimate was probably conservative. The conventional wisdom says that China and India are responsible for the oil price rise (the way that conventional wisdom says that China and India are responsible for almost anything bad), but this makes little sense. Oil markets and oil futures markets are efficient, and the rise in oil demand in Asia has been steady and predictable since the mid-90s. Oil is storable, and predicable variation can't move efficient markets in storable commodities. Walmart stock doesn't go up when Christmas approaches. Oil futures didn't start rising until the invasion was imminent, which indicates that uncertainty about the Middle East is driving a good part of the market, not certainty about Asia.
The macroeconomic costs related to oil price increases add another $200 to $800 billion to the total costs of the war. As you can see, $3 trillion is close to the lower bound for an estimate of the cost of the war.
To summarize, in order to get a true picture of the cost of the war, we have to look at four categories of cost:
- Direct federal appropriations
- Indirect federal appropriations, especially for veterans
- Social costs
- Oil and other macroeconomic costs
Considering all four of these, somewhere between $2.2 to $4 trillion is the total cost of the war. But this total doesn't break it out as to when the costs are going to be paid. Here's my estimate:
Incurred
Before 2009 After 2009
Before 2009 $0.3 to $0.9 trillion
Paid
After 2009 $0.5 to $0.8 trillion $1.4 to $2.3 trillion
The chart shows that for those of us without direct military connections, the worst is yet to come: the great majority of the costs will be paid after 2009.
Most of us have not been asked to make any sacrifices to pay for this war. That's why the public doesn't perceive it as burdensome-because there has been no burden. Yet.
I've heard a lot of people talk about the good things that could happen if the dollars going to Iraq were freed up for some other purpose. Unfortunately, such lists are delusional. There will be no peace dividend. When the occupation is over, we will start paying for it; we will have no extra money. Money that goes to Iraq is gone.
Until very recently, a very large proportion of U.S. borrowing--more than half in most sophisticated estimates--has been from outside the U.S. Americans haven't even been asked to postpone consumption by lending the government money to fight the war. Instead, places like China, Taiwan, Korea, Dubai, and the UK have lent the U.S. government money to pay for this war. They have bought Treasury bonds and similar kinds of debt instruments. That was very kind of them. That's why your taxes have not had to pay for this war. Yet.
Now, I said China, Taiwan, Dubai, and the UK lent this money-I didn't say the Tooth Fairy gave it to us. So there are some consequences of their lending it to our government-both now and in the future.
The immediate consequence is that China, Taiwan, and the UK have taken money that could have been used to improve the standards of living for Chinese, Taiwanese, and British people here and now and lent it to the U.S. instead. Maybe wise, maybe not. Money that could have gone into reducing pollution or improving education or creating a safety net has been loaned to the U.S. to occupy Iraq.
The long term consequence of borrowing, of course, is that you have to pay back. The Chinese Ministry of Finance and the rest of the world lent us this money not because they love us (nobody does any more--another cost of the war), but because they intend to be repaid sometime in the future, with interest. The same is true for the domestic investors who bought more net government bonds because of the war. To pay back, you have to produce more than you consume or invest.
That's what's going to happen over the next 20-30 years. You guys in high school now are going to have to deal not only with your student loans, but also your war loans. The only difference is that you got an education out of your student loans, which presumably will help you earn a living or at least was fun, but you got nothing out of your war loans.
The payback means you will have less to spend on yourself, less to invest in new businesses and new ideas and new ways of doing things, less to spend on art and culture, less to spend on toys and care for your kids. And you will have to work harder-you will have less time for your hobbies and the things you like to do. Your kids will have less time with their parents. They will probably not be as happy or as healthy or as smart as they would have been if there had been no war.
So, high school students, 20 years from now when you have to get on the 7 a.m. train and your kid is crying and you really don't feel good about the child care place where you have to leave her because that's what you can afford-that's when you should think about George Bush prancing around on the aircraft carrier in front of the Mission Accomplished sign and know that that's what your kids' sacrifices are for.
The financial meltdown over the last couple of months could affect what happens. Parenthetically, I don't think that the Iraq war was directly responsible for this meltdown. It takes more than one mistake to do all the damage that the Bush administration has done, and I think this administration is capable of making more than one mistake in 8 years.
But with respect to the war debt--why was the rest of the world so willing to lend us all this money? There were a lot of reasons, but a big one was our excellent financial system. We were safe, we were transparent, we were stable, we were honest. The U.S. was the best place to park your money. Today, it's hard to say that with a straight face. The Bush administration may well have killed the goose that was laying its golden eggs, and the day of reckoning may be closer at hand than I used to think.
But, remember that the occupation of Iraq is not over yet. Every month costs another $15 billion, at least, when everything is accounted for. There is no guarantee that it will be over 16 months after a new president takes office, if that president is Barack Obama, and no guarantee that it will ever be over if that president is John McCain or Sarah Palin. The 2006 election, when Iraq was the major issue, was not enough to stop the war. The 2008 election, when nobody is talking about Iraq, is not going to stop the war, either, unless groups like the Montgomery County Council all across the country keep forcing the issue.
The important point going forward is not that we have wasted a ton of money already. The important point is that if we don't stop the war very soon we're going to waste another ton of money, and another.
Let me put these numbers in perspective:
All the public schools in America would cost $1.6 trillion to replace. We've already committed up to $4 trillion for the Iraq war. So the loss we've suffered in this war already is far greater than the loss we would have suffered if every public school and every public college in the nation had been obliterated. It may be as big as the loss we would have suffered if they had been destroyed, rebuilt and then destroyed again.
Here's another comparison: The current cost of all family private residences in the U.S. (residences that accommodate one to four families) is $12.7 trillion. Since we've obligated up to $4 trillion for the Iraq war, it's equivalent to losing about one quarter of all our housing stock--and we could easily lose another 4-6% more.
In Montgomery County that translates into an equivalent cost of somewhere between 35,000 and 65,000 houses lost, with an additional 16,000 possible to lose soon.
Suppose you saw the headline "Hurricane George Pummels Montgomery; 50,000 Houses Destroyed! Hurricane John on the Way; 15,000 More Homes Could Be Lost." You would say, "Oh, my God, it's terrible! Why didn't they tell me this was coming? Let's do everything we can to protect ourselves from the next hurricane."
Your county leaders wouldn't say, "That's just weather, above our pay grade, not our job." They would do something to protect you.
I've shown you tonight that the Iraq war is a lot like these hurricanes in terms of the economic damage to our community, one of which has hit, the other of which is looming but could be mitigated.
But the story is actually slightly different, in that the damage is more insidious. A better analogy is termites. Imagine this headline: "Invisible Termite Plague Hits Montgomery; 50,000 Houses Already Doomed! But They Don't Know It-Another 15,000 Could Also Be Lost Unless Action Taken"
Montgomery County has already lost a lot, although few people realize it, and the County will lose a lot more if the occupation doesn't end quickly. Montgomery County has broadly construed police powers to protect its citizens from harm, and fiduciary responsibility to exercise those powers. The peace resolution offered tonight is a way of fulfilling that responsibility.
The war wasn't solely responsible for getting us into the financial mess that we're in, but ending it is one of the better ways of getting out of it. We aren't as rich tonight as we thought we were in the spring. We never could really afford to waste $15 billion a month plus, and we can afford it less well now. We need to attract money from the rest of the world, and it's hard to do that if the rest of the world thinks we're profligate bellicose idiots. Ending the occupation is a major step to restoring world confidence.
Montgomery county and its citizens are going to be facing some huge challenges in the months ahead. The occupation of Iraq is a major impediment to meeting those challenges. You should try to remove that impediment.
