After wildly lowballing the cost of the Iraq conflict at a mere $50 to $60 billion, the Bush administration has been concealing the full economic toll. The spending on military operations is merely the tip of a vast fiscal iceberg. In an excerpt from their new book, the authors calculate the grim bottom line.
By Joseph E. Stiglitz and Linda J. Bilmes
On March 19, 2008, the U.S. will have been in Iraq for five years. The Bush administration was wrong about the need for the Iraq war and about the benefits the war would bring to Iraq, to the region, and to America. It has also been wrong about the full cost of the war, and it continues to take steps to conceal that cost.
In the run-up to the war there were few public discussions of the likely price tag. When Lawrence Lindsey, President Bush's economic adviser, suggested that it might reach $200 billion all told, Secretary of Defense Donald Rumsfeld dismissed the estimate as "baloney." Deputy Defense Secretary Paul Wolfowitz went as far as to suggest that Iraq's postwar reconstruction would pay for itself through increased oil revenues. Rumsfeld and Office of Management and Budget Director Mitch Daniels estimated the total cost of the war in the range of $50 to $60 billion, some of which they believed would be financed by other countries.
For fiscal year 2008 the administration has asked for nearly $200 billion to fund the wars in Iraq and Afghanistan. If Congress provides the money, as it almost certainly will, then the total appropriated for direct operations in these two countries (including reconstruction, embassy costs, enhanced base security, and foreign aid) since the wars began will come to roughly $800 billion. It is extremely difficult to disentangle the Iraq and Afghanistan numbers, but Iraq is by far the larger endeavor and accounts for about three-fourths of the total. By the administration's own reckoning, then, the cost of the Iraq war, counting only the money officially appropriated, will soon be some $600 billion, or more than 10 times Rumsfeld's original number.
The administration's estimates have been low—and wrong—from the start. Some of this is the result of its shortsightedness about every aspect of the war, beginning with its nature and duration. For instance, extensive use of reservists and the National Guard avoided the need to increase the size of the armed forces or resort to a draft—but at a heavy price, including reliance on highly paid contractors, people who in other contexts would have been called mercenaries. Another factor is the soaring price of fuel caused by the increase in the price of oil—which is itself, in part, a consequence of the war.
But even the $600 billion number is disingenuous—which is to say false. The true cost of the war in Iraq, according to our calculations, will, by the time America has extricated itself, exceed $3 trillion. And this is a deliberately conservative estimate. The ultimate cost may well be much higher.
Why the huge difference between our number and the administration's? One big reason lies in the misleading way the federal government does its accounting. Any publicly owned business, no matter how small, is required by law to use a method of accounting that takes future obligations into consideration. This is known as "accrual" accounting. But Defense Department accounting is done on a "cash" basis, which logs only what the government is actually spending day by day and ignores future obligations. In the case of the Iraq war, the future obligations are huge. They include the cost of replacing military equipment, which is being used up at 6 to 10 times the peacetime rate. They also include the cost of providing health care and disability payments for our returning troops. These costs will be especially high because of our improved ability to keep even the most horribly wounded soldiers alive.
The cash type of accounting also provides an incentive to make short-term savings. It was only in 2007, four years after the war began, and after roadside bombs had caused some 1,500 American fatalities, that the Pentagon decided to replace its vulnerable fleet of 18,000 Humvees with vehicles designed to withstand blasts from so-called improvised explosive devices (I.E.D.'s). The short-term savings have resulted in a great deal of long-term human suffering and have brought on higher-than-anticipated costs for medical care.
Another obstacle to estimating the true costs is that many of them are buried in other government accounts and therefore don't show up in the direct appropriations for the war. Further, some war-related spending has been pushed out of the government altogether and is borne by private parties. But just because it doesn't show up in the government ledger doesn't mean it isn't a cost—it means only that someone else pays it. For example, the failure to provide adequate budgetary support for the Veterans Health Administration has forced many veterans to buy private medical care. While this reduces government spending, there are no real savings for the country. Similarly, relying on the National Guard and the reserves to help fight the war removes hundreds of thousands of workers from the civilian labor force, imposing real costs on the economy as a whole—not to mention on the men and women who are suddenly called to active duty, and on their families.
Finally, we should point out that the procedure used by the administration to fund the Iraq war was chosen deliberately in order to deflect close attention. The administration has requested nearly all the money for the war in the form of "emergency" funding, which is not subject to standard budget caps or vigorous scrutiny. Emergency funding is intended for genuine crises, such as Hurricane Katrina, where the utmost speed is required to get the money to the field. The continued use of this emergency procedure—five years after the war began—is budgetary sleight of hand that makes a mockery of a democratic budget process.
The Other Surge
To understand why the true costs of the war are so much higher than the official estimates, we can start by looking at America's veterans. No one has suffered more from the administration's blindness and stinginess. To date, more than 1.6 million American troops have been deployed in the Iraq and Afghanistan operations. More than 4,000 have been killed. More than 65,000 have been wounded or injured, or have contracted a disease. Of the 750,000 troops who have been discharged so far, some 260,000 have been treated at veterans' medical facilities. Nearly 100,000 have been diagnosed as having mental-health conditions. Another 200,000 have sought counseling and re-adjustment services at walk-in vet centers.
No adequate preparation was made for casualties on this scale. The Department of Veterans Affairs (V.A.) and other agencies have been overwhelmed—both by the need for immediate medical care and by the demand for disability benefits. Already, a quarter of a million returning veterans have applied for disability benefits. Not surprisingly, many disability claims are complex: the average veteran cites five separate disabling medical conditions. The least fortunate among the veterans have suffered unimaginable horrors: brain trauma, amputations, burns, blindness, and spinal damage. Because a greater number of the injured are surviving today, the relative costs of long-term care will be greater than for any previous war. This is the surge the administration doesn't talk about.
In 2000, the V.A. had a backlog of 228,000 pending compensation claims. Today, owing in part to a rising tide of claims from newly injured military personnel, the number has mounted to more than 400,000. It is now taking the V.A. an average of six months to process an initial claim. About 14 percent of veterans appeal the initial decision, and it then takes the V.A. nearly two years to process the appeal. In the interim, many veterans are left in limbo.
As for medical care, the V.A. is stretched beyond capacity. It has run out of money, and in cities around the country V.A. hospitals are having trouble hiring enough doctors and nurses. In many areas, seriously wounded veterans are being forced to wait more than 30 days just to see a doctor. A study by the Government Accountability Office put its finger on one reason: the V.A. based its forecasts for health-care needs as late as 2005-6 on data for 2002, before the Iraq war began.
The administration's dishonesty when it comes to casualties and health care has been twofold. First, by failing to take into account the long-term burden of caring for veterans, it has vastly understated the true cost of the Iraq war—by hundreds of billions of dollars, as we'll see. Second, from the outset the administration has reported casualties in a way intended to downplay the human consequences of the war.
The Pentagon is highly secretive about the total number of casualties. While it reports deaths of service personnel from both combat and noncombat operations, the official tallies list only those wounded in combat. The military has considerable discretion in deciding how a particular case is classified. If the second vehicle in a convoy crashes into the first, which has been blown up by an I.E.D., is it an accident? Or should any killed and wounded be counted as combat casualties? If a helicopter crashes in a night flight because it is too dangerous to fly during the day, should we think of this, too, as just an accident?
The Pentagon has classified more than half of those who have had to be medically evacuated from Iraq as noncombat casualties. It maintains a separate, hard-to-find tally of military personnel wounded during noncombat operations, a figure that includes those injured during vehicle and helicopter crashes and training accidents, as well as those who become physically or mentally ill during deployment, or who succumb to the exotic diseases common in the region. We found this list almost accidentally, when the V.A. published a complete casualty tally in a fact sheet in September 2006. This report in turn was linked to the full Department of Defense tabulation. The Pentagon has since demanded that the V.A. release only the combat-casualty figures, and the Pentagon's newly reorganized Web site makes it hard to locate and interpret the full casualty report.
With a mind-set like this, it is little wonder that the administration was caught flat-footed.
The calculations we used to arrive at the conservative $3 trillion estimate for the cost of the Iraq war are conceptually simple, even if sometimes technically complicated. The basic framework for the calculation can be divided into 10 steps:
1. Total appropriations to date. This is the simplest step: adding up the amounts that have been directly appropriated for the war. There have been more than two dozen separate appropriations, covering a variety of ongoing current operations. As noted, our estimated total for the Iraq war alone, including 2008 funding, comes to more than $600 billion.
2. Add operational expenditures hidden elsewhere in the defense budget. Between 2002 and 2007 the military budget outside of spending for Iraq and Afghanistan has grown by some $500 billion, cumulatively. This is faster than the rate at which defense spending has risen over the past 40 years. The increase cannot be attributed entirely to ordinary increases in spending. Working from discussions with defense analysts, we estimate that at least one-quarter of the additional money has been devoted in one way or another to fighting the wars in Iraq and Afghanistan. About $110 billion of this Pentagon spending over the past five years should be assigned to the Iraq conflict alone.
3. Correct for inflation and the "time value" of money. A dollar today is different from a dollar five years ago, and the difference is sufficiently large that it cannot be ignored.
These first three steps give us the value in 2007 dollars of what we have actually spent in Iraq so far—a number that approaches $800 billion, already much larger than the figure advertised by the Bush administration.
But the meter is still running.
4. Add future operational expenditures (both direct expenditures and those hidden elsewhere in the budget). Even if the new president orders a quick but orderly departure, it will almost surely require at least 12 months—taking us through the end of 2009. The more likely scenario is that there will be debate and discussion, consultation and deliberation, all of which will take time, and, in the end, the drawdown of our troops will be more gradual. Any realistic assessment of the cost of the war needs to consider what we will have to pay for U.S. military operations over the next few years, as well as the cost of bringing troops and equipment home and maintaining a smaller deployment or peacekeeping force into the future. We base our estimates on official projections, all of which assume that we maintain some presence in Iraq for at least another decade. We estimate that future operating costs will run to about $520 billion.
5. Add the full costs of health care and disability payments for returning veterans. This is one of the biggest long-term financial obligations we face. Under any realistic scenario at least 2.1 million individuals will have done a tour in Iraq before the war is over. Some 44 percent of veterans of the 1991 Gulf War—a war that lasted only a few weeks—have applied for disability compensation, and nearly 90 percent of their claims have been approved. (Today we still spend $4.3 billion per year paying disability compensation to veterans of that short war.) Judging from the number of claims that have been filed already, we project that at least a comparable percentage of Iraq veterans will be entitled to receive disability pensions as a result of the Iraq conflict—and the severity of their disabilities (and amount of monthly compensation) may well be higher. These costs can be considered "promissory notes" of the war—accrued liabilities that must be paid. Our estimate of the cost of these accrued liabilities comes to roughly $590 billion over the lifetime of our Iraq-war veterans.
6. Add the cost of restoring the military to its pre-war strength. We have already counted, under "operational expenditures," the ongoing amount spent on replacing ammunition, vehicles, and equipment. But in fact the Defense Department is increasingly in arrears—it's not replacing equipment and supplies as fast as they are being consumed by the war effort. We estimate that the net cost of restoring the U.S. military, including all reserve forces and the National Guard, to its pre-war strength will reach $280 billion.
7. Add budgetary costs incurred by other parts of government. The war has imposed costs across the entire breadth of government—not just at the Defense Department. Most of these costs are related to providing Social Security disability-compensation benefits to veterans of Iraq who can no longer work, which will amount to $38 billion.
Together, Steps 5, 6, and 7 allow us to calculate the total budgetary cost of the war to the federal government—about $2.2 trillion. However, this does not include another important cost—interest.
8. Add interest. The U.S. has borrowed most of the funds used to wage the Iraq war. We will have to repay this debt with interest. If we include in our tally the interest payable on what we are borrowing over only the next 10 years, this adds another $615 billion to the price tag, and brings the total budgetary cost of the Iraq war into the neighborhood of $2.8 trillion.
So far we have been looking simply at the effect on federal coffers—at the money that the government in Washington must pay out. The next two steps go beyond the federal budget and look at costs to our society in a larger sense.
9. Estimate the cost to the economy. There are many social and economic costs of the war outside the purely budgetary ones; although they may be large, they are hard to quantify. For instance, death benefits do not adequately reflect the loss in economic output that each death represents, and disability payments are far less than what disabled individuals would have earned had they been able to pursue a normal life. In at least one in five affected families, someone will have to give up a job to provide care. Many from the National Guard and reserves who are called to duty have careers interrupted and family life destroyed. The budgetary cost to the government is far less than the burden that these individuals end up shouldering. The estimated cost to the economy is $370 billion, in addition to the budgetary costs.
10. Estimate the macro-economic impact. This comes in two major forms. First, the war has diverted government expenditures from schools, roads, research, and other areas that would have stimulated the economy in the short run and produced stronger economic growth in the long run. We have financed the war with deficits, and the higher deficits, too, will impose a long-run burden on the economy. Second, higher oil prices, in large measure a consequence of the war, have weakened the American economy. A realistic but conservative estimate for the war's macro-economic impact is roughly $1.9 trillion.
Most economists would not count both interest and economic costs, because doing so introduces an element of double counting. Thus, the total cost of the war ranges from $2.8 trillion (in strictly budgetary costs) to $4.5 trillion (if one adds in the economic costs). These numbers reflect what we have called our "moderate" scenario. We also considered a "best case" scenario, in which the U.S. would withdraw all its combat troops much sooner, and fewer veterans would need medical care and disability pay. Even under this unlikely and extremely optimistic scenario, the total cost of the war comes to nearly $2 trillion.
Under the circumstances, a $3 trillion figure for the total cost strikes us as judicious, and in all likelihood errs on the low side. Needless to say, this number represents the cost only to the United States. It does not reflect the enormous cost to Iraq, or to the rest of the world.
Paying Full Price
The president and his advisers wanted a quick and inexpensive conflict. Instead, the Iraq war is costing more than anyone could have imagined. The only war in our history which cost more is the Second World War, when we had armed forces of 16.3 million fighting for four years at a total cost (adjusted for inflation) of about $5 trillion. Assuming we stay in Iraq another 24 months, the direct military costs alone, calculated in comparable dollars, are likely to be at least 50 percent higher than those of the Vietnam War, twice those of the Korean War, and four times those of World War I.
The chronic underestimation of costs, verging on outright deception, has continued. In January 2007, the administration estimated that it would cost $5.6 billion to deploy an additional 21,500 troops for the proposed "surge" in troop levels. But this estimate referred to the cost of deploying the combat troops alone, and for only four months. According to the nonpartisan Congressional Budget Office, the surge would also require deployment of at least 15,000 combat-support troops, a mobilization which would raise the cost to at least $11 billion (also for four months), reaching $27 to $49 billion if the surge continued for 12 to 24 months. Even this expanded estimate did not take into account the long-term health and disability costs for the extra veterans, or the cost of replacing the equipment that these additional troops would use.
Most Americans have yet to feel any of the costs of the Iraq war. The price in blood has been paid by members of the volunteer military. The price in treasure has been financed entirely by borrowing. Taxes have not been raised to pay for the war—in fact, taxes on the rich have actually fallen. Deficit spending gives the illusion that the laws of economics can be repealed. They cannot. Americans will have to pay for the war at some point—and when they do, they will be paying not the Bush markdown but the full price.
Excerpted from The Three Trillion Dollar War, by Joseph E. Stiglitz and Linda J. Bilmes, to be published this month by W. W. Norton & Company, Inc.; © 2008 by the authors. Available in the U.K. through Penguin Books.
Nobel laureate and economist Joseph E. Stiglitz is a professor at Columbia University in New York and was chair of President Clinton's Council of Economic Advisors. Budget and finance expert Linda J. Bilmes is a professor at Harvard University's Kennedy School of Government.