Tuesday, October 4, 2011

Q's and A's on U.S. war costs

I've been talking to journalists a lot recently about U.S. war costs in Iraq and Afghanistan, but I'm not sure how much has ended up in print, or if it has, exactly how!  Here are some Q's and A's from two different reporters and me.

1. The US is in the middle of an economic crisis. To what extent have the wars undertaken after 9/11 2001 contributed to create such a situation?

By "crisis" do you mean the recession that began in December 2007 and ended in June 2009 and its aftermath, including continued high unemployment, low inflation, and continuing difficulties with household debt?  If yes, then my opinion is that the wars in Iraq and Afghanistan have not played any role in creating that crisis.

If by "crisis" you instead mean the lowering of the U.S.'s sovereign credit rating in August and the political gridlock in Washington over the debt limit and fiscal policy, then the wars in Iraq and Afghanistan have contributed about one fourth (25%) of the problem.  I derive that by measuring the total increase in debt held by the public since 2001 and attributing portions of it to war spending and associated interest costs.

The rest of the fiscal problem is due to other trends in taxes and spending since 2001 including the recession of 2007-2009, the policy response, and earlier policies such as the Medicare prescription drug expansion and the Bush-era tax cuts.

2. Could the cuts to public spending have been avoided if there had been no war?

If there were no war, we would have experienced only about 75% of the run-up in debt held by the public.  You might say that we'd then require only 75% of the policy response to increased debt that we will see.

3. Who pays for the wars?

In the short run, holders of U.S. government obligations.  These are private citizens, governments, and pension funds in the U.S. and abroad.  In the long run, present and future (unborn) U.S. taxpayers must pay for them eventually because they are the providers of U.S. government revenues that ultimately pay debts.

4. The money used on wars does not disappear in thin air. Who has been making money on the wars?

The specifics are unclear to me because it isn't entirely obvious who supplies the goods and services purchased by the Defense Department (and others).  They include U.S. corporations and workers, including private contractors, and foreign corporations and workers.  The split between domestic and foreign suppliers is unknown to me.

That said, my estimates suggest that if past trends are relevant for current experience (which may or may not be true), then it is likely that the U.S. economy is "making money on the wars" because U.S. national income tends to rise when defense spending increases.  U.S. firms and workers earn more because they are producing more goods and services purchased by the U.S. government to fight the wars.

5. Some years ago, Joseph Stiglitz and Linda Bilmes estimated the costs on war in Iraq on 3 trillion U-$. In the foreword of his book "The true cost of the Iraq war", he says that the sum is huge, but would not harm US-American state budget in an extreme way. Today, US-budget debt is more than 14 trillion US-$. Did Stiglitz underestimate the impact of war on US debt?

No, but it is true that three trillion is if anything a conservative estimate. Public finances are strained primarily because of the large recession and unprecedented fiscal policy response. Politics aside, I would not say that the country's current fiscal state is unsustainable. Rather, it will become unsustainable with the aging of the baby boom generation due to entitlement spending. Or if another massive recession hits before fiscal sustainability can be reattained.

6. How has the war in Iraq, Afghanistan and Pakistan been financed so far? (I mean, are there differences in financing by the Bush or the Obama administration)?

No differences. All of it has been borrowed because the budget has been in deficit all along.

7. Which negative impacts of the costs of war can the US-citizen feel right now and/or will feel in the future? (I mean: Will the next generation have to pay for the war in Iraq and Afghanistan and how much?)

Economists believe and studies have shown that increased government debt raises interest rates and crowds out productive capital. Future generations will inherit a smaller capital stock and thus lower productivity and wages, in addition to increased tax burdens to pay the larger debt. Higher interest rates se counterintuitive currently given the Fed's actions, but evidence suggests long-term interest rates rise with government debt. These include mortgage rates and rates on corporate borrowing, which may be temporarily low now due to monetary policy but will likely rise in the future.

8. The US has been harshly critiziced by other states for the wars in Iraq, Afghanistan and Pakistan. Did the reputation of US-economy suffer from the wars since 9/11?

I'm not sure what connection there may be between government war policy, reputation or public perception, and economic transactions.

9. Maybe a little bit to far-fetched - but are there any effects of the wars on the economy of Europe?

I don't know.

10. On the website "costs of war", the military spending in the period 2001-2011 is said to be 1,3 trillion US-$. Is this only for the wages of the soldiers or for the equipment/weapons of the soldiers, too?

Both, and other costs related to deployments, reconstruction, and aid.

11. One Million US-$ in military spending creates 8,3 jobs, in public education 15,5 jobs. Is it realistic to say that without the war in Iraq and Afghanistan, USA would suffer from less unemployment than now (9,1 %)?

It depends what one thinks would have happened without the wars. If war spending had somehow been spent on other equally productive projects, then there may have been no net effect on income or unemployment.

The fact is that government spending on defense is most likely to have a positive effect on aggregate demand and thus income and jobs. This is because in other activities, the government is competing with private suppliers who could get crowded out. That said, it is not clear to me whether defense is as labor-heavy as other industries, so there could be bigger employment effects associated with other types of spending, even if GDP may nit rise as much as with defense.

I think you are referring to another paper in the COW Project, and my reading of it is that the author feels differently about the counterfactual than I.

12. Iraq is an oil-rich country. Are there estimates/figures about the impact of the wars in Iraq, Afghanistan and Pakistan on the oilprice and the world economy?

My reading of the literature is that there was no evidence of any impact of the wars on market supply and prices. The same was not true of Gulf War 1 nor other events, perhaps including the disruptions in Libya.

13. Were there also short-termed POSITIVE effects of the war on the economy of USA?

Yes. Defense spending raises GDP in the short run.

14. The "war on terror" in Iraq, Afghanistan and Pakistan cannot be called successful and as your report shows, has an enormous price for the US. What could have been the alternative reaction after 9/11 in your eyes?

I'm not sure I agree that the wars have been unsuccessful. They have been very costly. But I think the removals of Saddam and Osama are positive outcomes, and there are others.

I have little else to say other than I think history has already judged the invasion of Iraq to have been an unfortunate distraction from chasing down the true enemy, al Qaeda.