The price of war?

• Article
• Comments ()
• Click-2-Listen
• Videos

By

Is the Iraq war economically unaffordable? Nobel Prize-winning economist Joseph Stiglitz has become something of a cause celebre among the antiwar set with the publication of his recent book, "The Three-Trillion Dollar War." Mr. Stiglitz's economic criticisms of the war have been echoed by those in Congress who would like to downsize the U.S. military presence in Iraq. The war is criticized for having boosted the price of oil, turned our economy toward recession and saddled future generations with a legacy of debt.

Has it? Start with the charge that the Iraq war has boosted the price of oil on world markets. According to Michael O'Hanlon of the Brookings Institution, who has been following key benchmarks of the war, Iraq's oil production has returned to pre-war levels. Before the war, it was no greater than 2.5 million barrels per day. As of February 2008, it was 2.4 million barrels per day. The rising price of oil, then, isn't due to supply disruptions from Iraq. Rather, it's because of a one-two punch of rising global demand and the weakening dollar. (Oil is priced in dollars in global trading.)

As for whether the Iraq war has turned the U.S. economy toward recession, economists define a recession as two straight quarters of negative economic growth. According to the Department of Commerce, real Gross Domestic Product (GDP) growth for the most recent quarter of reporting, the first quarter of 2008, was 0.6 percent. That's below trend, but it's not recessionary. It was 0.6 percent for the preceding quarter, and 4.9 percent for the quarter before that. The slowdown in the growth rate is attributed by economists to the fallout from the recent housing crunch, not the ongoing cost of a war that's entering its sixth year.

Economists understand that the measure of an economy's ability to sustain anything — defense spending, budget deficits, health care costs, etc. — is the fraction of GDP it represents. The Iraq war's cost of $12 billion per month, or $150 billion per year, equates to 1.0 percent of GDP. The Congressional Budget Office (CBO) reports that U.S. defense expenditures currently account for 4.0 percent of GDP. That includes the cost of the wars in Iraq and Afghanistan as well as all the non-wartime activities of the Department of Defense. Toss out the extra 1.0 percent of GDP for the Iraq war, and today's share of GDP going to defense would be 3.0 percent. That's where the share bottomed out under President Clinton during the late 1990s. By way of comparison, it was 4.9 percent under President Carter in 1980 and 9.5 percent under President Johnson in 1968 (the year of the Tet Offensive in Vietnam). Even with the Iraq war, today's defense share of GDP is lower than at any point during the Cold War.

Mr. Stiglitz links the Iraq war to President Bush's tax cuts and faults the two for the increase in the federal budget deficit. But grouping the war with the tax cuts is a neat device to obscure the fact that the deficit impact of the tax cuts greatly exceeded that of the war. The Iraq war costs $150 billion per year. The 2001 and 2003 tax cuts together cost close to twice that. According to CBO, President Bush's tax cuts reduced federal revenue as a share of GDP from 20.9 percent in 2000 to 18.8 percent in 2007. Had the revenue share of GDP remained at 20.9 percent in 2007 — sans the tax cuts — revenues would have been nearly $300 billion greater. Now, that simple calculation doesn't include the economic-feedback effects from the tax cuts.

Supply-side economists maintain that tax cuts boost the economy's long-term growth prospects by improving incentives to work, save and invest. Mr. Stiglitz isn't known within the economics profession as being a supply-sider, though. For him to hitch the war to the tax cuts in faulting it for the rising federal budget deficit is a bit disingenuous.

During the Civil War, Robert E. Lee famously said, "It is well that war is so awful, lest we grow too fond of it." War is an ugly business. The decision to go to war is not one to be taken lightly. From a purely economic standpoint, however, the Iraq war is not unaffordable relative to an annual U.S. GDP of $14 trillion. To suggest otherwise is to obscure the debate over the war rather than to contribute to it.

Chris Duquette is an economist and spent six months in 2006-07 with the U.S. military counter-IED staff at Camp Victory in Baghdad, Iraq. He is also a Navy veteran of the Gulf War.