Economists and the Cost of War

Research released Monday by two Ivy League, ivory tower economists – Joseph Stiglitz of Columbia University and Linda Bilmes of Harvard University – indicates that the total financial cost of the second phase of the Iraq war will cost over $1 trillion. While the study’s numbers may have merit, the predictable interpretation of it is vastly flawed.

The first flaw is its lack of class. The study relies in large part for justification of its numbers on the cost of providing ongoing benefits to some 16,000 injured soldiers. Economists’ complaints about the financial cost of providing these benefits look utterly crass next to the real sacrifice already made by these soldiers and the more than 2,100 other soldiers who made the ultimate sacrifice to achieve their mission. So, it’s going to cost you a few bucks to care for these men and women who were injured in your service – get over it.

Moving beyond the contemptible attitude reflected in the penny pinching regarding the benefits due injured soldiers, the numbers and their use have serious problems. Perhaps foremost is that this “economic” study fails to reflect economic thinking on a number of basic points. (I will temper my comments by saying that I haven’t read the actual study – but that is the risk that researchers take when they practice research by press release to achieve political objectives rather than following normal procedures of peer review. ) Economic thinking on public policy matters, or any matters really, generally looks at two things – opportunity costs, as opposed to mere accounting costs, and the relationship of costs and benefits. Further, economic thinking recognizes that though we can’t always quantify them there are nonfinancial costs and benefits in most actions. Finally, any real look at costs requires something that these individuals clearly did not do, which is discounting costs and benefits to net present value. The only reason not discount to present value is an intellectually dishonest attempt to create an inflated figure.

Stiglitz and Bilmes argue that official cost estimates

fail to take into consideration disability payments to veterans over the course of their lifetime, the cost of replacing military equipment and munitions.

Clearly these economists are working under the mistaken impression that were we not involved in Iraq, military equipment and munitions would simply sit in a warehouse in pristine condition awaiting its future use, which they would no doubt oppose anyway. That is not the case. Military equipment obviously suffers a higher rate of failure on the battlefield than in training and some of it is destroyed, but a tank, a Humvee or a rifle used and properly maintained in Iraq is not “used up” in the process. In other words, the opportunity cost of the Iraq war is not the cost of using this equipment in a later conflict, but the cost of allowing it to deteriorate in storage or be used in training. Don’t get me wrong – in a perfect world, I’d love to see it all deteriorate in storage, but that we have the equipment in the first place is a pretty clear indication that we don’t live in a perfect world.

Stiglitz and Bilmes argue that one cost of the Iraq war is

…the ripple effect on higher oil prices on the US economy, which in part can be blamed on the military venture.

This point is arguable at best. Consider the effect on oil prices of 3 years of Iraq continuing to violate UN Security Council resolutions. Consider the effect of 3 years of Iraq continuing to fire on British and US forces patrolling the no-fly zones with the regular return fire from our side. Perhaps most importantly, consider what would have happened if Saddam Hussein were still in power given the revelations about corruption in the oil for food program. Put simply, the program would likely have been shut down or at least seriously curtailed, resulting in roughly a million barrels a day less crude on the market. In other words, attributing a cost of any significance to increased oil prices isn’t an accurate representation of the alternative, of the true opportunity cost.

But all of those arguments pale by comparison to the fact that an analysis of cost without a look at benefits is only half the picture. As such, it is clearly intended for partisan political purposes in a game of research by press release. Let’s look at some of the benefits.

First, it is true that Saddam Hussein was attempting to reconstitute his nuclear weapons program and did attempt to arrange the purchase of uranium from Africa, though apparently not from that small part of the continent called Niger (preferred pronunciation: nÄ«’jÉ™r). It is also true that Abu Musab al-Zarqawi had begun establishing his network in Iraq shortly after he was treated in Baghdad, with the tacit approval of Saddam Hussein and his son Uday who had charge of the hospital, for wounds received in the Afghan conflict. Suppose for a moment, Hussein and Zarqawi had conspired to infiltrate a group of suicide bombers with a nuclear device onto Manhattan Island. The annual economic product of New York City is over $400 billion. It’s quite reasonable to assume that a nuclear device set off in the center of that activity would cut economic activity 20% or more. That’s $80 billion a year. If we’re going to extrapolate a lifetime of medical costs, then let’s extrapolate that $80 billion of lost economic activity over the same period, say 30 years. The cost of a nuclear device set off on Manhattan Island that reduced New York economic product by 20% would be two trillion four hundred eighty-four billion six hundred million dollars over 30 years. (Of course, this number should be discounted to present value, but for comparison to the nondiscounted, and therefor inflated, numbers of the distinguished authors of the study, I haven’t done so.)

Hussein also had ongoing chemical and biological weapons programs such as those run by the British educated “Dr. Germ” and American educated microbiologist “Mrs. Anthrax.” Dr. Germ admitted to UNSCOM officials that she had conducted research into camel pox, as a safer (for the researchers) surrogate for smallpox. Suppose instead of 20 suicide attackers attempting to hijack airplanes that 20 “suicide passengers” got on US airplanes carrying no detectable weapon that would deny them boarding, no weapon other than smallpox virus in their own blood, and crisscrossed the United States as long as their bodies held out. Even if some of them were denied entry and their planes turned around at the border, their exposed fellow passengers would still be in the US within hours of the terrorists being booted from the planes. Suppose each of our 20 or at least one of their fellow passengers manages to visit 5 US airports before being overcome with illness. Smallpox kills 1/3 of those infected. It’s a virus, so there are no effective treatments after the illness sets in and the vaccine strategy is geared to isolating localized outbreaks. Is it unreasonable to estimate that the fatalities could number in the millions? Not at all, in fact that number is probably a conservative estimate. Suppose the number is 2 million dead. Average US per capita income is $21,587. (I’ll ignore that its higher in urban areas where airports are located.) That’s $43,174,000,000 lost annual income. Or over thirty years an undiscounted cost of $1.3 trillion from lost income alone. Preventing that seems to be a pretty substantial benefit.

The bottom line, would seem to be that lies, damned lies and statistics can say pretty much anything we want them to. But the more important lesson is that its worth contemplating the incentive that led two economists to publish such a flawed study that neglected standard economic thinking on opportunity costs, cost/benefit analysis and even such basics as discounting future streams of cost and income to present value.

Iraq war will cost US at least US$1 trillion

Update: Having now read about half of the paper and skimmed all of it, I will say that the news reports portrayed it accurately. In the first three paragraphs we get this gem straight from the Democratic Party talking points…

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.

In fact, there is a clear link between Al Qaeda and Iraq (Zarqawi) dating back at least to 2002 and regardless of whether Hussein supported Al Qaeda he clearly was involved supporting anti-US terrorists. The “imminent danger” canard is actually a play on our memories – the President, as I and others have noted time and again, said very specifically that we could not afford to wait for an imminent threat. Liberals rely on our remembering that he said the words “imminent threat” and forgetting that what he said was that we weren’t going to wait for one and use this as “proof” that “Bush lied”.

The paper does inflate the values by simply asserting that the “cost” is simply the additive sum of future costs without discounting to present value.

Finally, the esteemed economists display a blatant ignorance of the mathematical and economic truth that reductions in marginal tax rates increase government revenues with this bit:

Given that at the onset of the War, the country was already running a deficit, and no new taxes have been levied, it is not unreasonable to assume, for purposes of budgeting[32], that all of the funding for the war to date has been borrowed, adding to the already existing federal budget deficit.

In discussing the issue of increased or decreased security under the heading “The Macro-economic effects of the War in Iraq”, the authors fail to even mention the anti-Syrian revolt in Lebanon or Libya’s ending its WMD programs and making restitution to victims of terrorism.

The authors also assert a classic post hoc ergo propter hoc fallacy with:

The price of oil is significantly higher today than it was before the War in Iraq.

Interestingly, though they completely ignored the benefit aspect of the analysis, they have this to say about what politicians should do:

All of this leads to economists’ constant urging that politicians undertake a cost benefit analysis before undertaking any project—especially one with as significant consequences as war. This can and should be done even if certain elements of the costs and benefits are hard to value.

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