The Cost Of War

In the November 26, 2009 Forbes editorial "The Cost Of War," Bruce Bartlett makes the case that wars financed by deficits last longer than those paid for by taxation:

In recent years, Republicans have been characterized by two principal positions: They like starting wars and don't like paying for them. George W. Bush initiated two major wars in Iraq and Afghanistan, but adamantly refused to pay for either of them by cutting non-military spending or raising taxes. Indeed, at his behest, Congress actually cut taxes and established a massive new entitlement program, Medicare Part D.

Bush's actions were unprecedented. During every previous major war in American history, presidents demanded sacrifices from rich and poor alike. As Robert Hormats explains in his 2007 book, The Price of Liberty: Paying for America's Wars, "During most of America's wars, parochial desires--such as tax breaks for favored groups or generous spending for influential constituencies--have been sacrificed to the greater good. The president and both parties in Congress have come together … to cut nonessential spending and increase taxes."

During World War II, federal revenues roughly tripled as a share of the gross domestic product (GDP) and the number of people paying income taxes expanded tenfold, from 3% of the population in 1939 to 30% by 1943. In 1940, a family of four needed close to $80,000 of income in today's dollars before it paid any federal income taxes at all. By the war's end, it saw its effective tax rate rise from 1.5% to 15.1%. (Today such a family only pays a federal income tax rate of about 6%.) But taxes weren't the only way the war was paid for. Spending on nondefense programs was cut almost in half, from 8.1% of GDP in 1940 to 4.4% in 1945.

Even during wars closer in magnitude to those in which we are presently engaged, significant sacrifices were made. In 1950 and 1951 Congress increased taxes by close to 4% of GDP to pay for the Korean War, even though the high World War II tax rates were still largely in effect. In 1968, a 10% surtax was imposed to pay for the Vietnam War, which raised revenue by about 1% of GDP. And there was conscription during both wars, which can be viewed as a kind of tax that was largely paid by the poor and middle class--young men from wealthy families largely escaped its effects through college deferments.

However, Bush and his party, which controlled Congress from 2001 to 2006, never asked for sacrifices from anyone except those in our nation's military and their families. I think that's because the Republicans understood, implicitly, that the American people's support for the wars in Iraq and Afghanistan has always been paper thin. Asking them to sacrifice through higher taxes, domestic spending cuts or reinstatement of the draft would surely have led to massive protests akin to those during the Vietnam era or to political defeat in 2004. George W. Bush knew well that when his father raised taxes in 1990 in part to pay for the first Gulf War, it played a major role in his 1992 electoral defeat.

Consequently, Republicans resolved to fight our wars on the cheap and with deceptive cost estimates. On the eve of war in December 2002, Office of Management and Budget (OMB) director Mitch Daniels claimed that the war in Iraq could be fought at a total cost of $50 billion to $60 billion. Indeed, Bush even fired his top economic adviser, Lawrence Lindsey, for saying publicly that the war might cost between $100 billion and $200 billion.

Of course, both Daniels and Lindsey grossly underestimated the actual cost. According to a recent report from the Congressional Research Service (CRS), the wars in Iraq and Afghanistan have cost close to $1 trillion thus far. That is exactly what economists not on the White House payroll expected. (See this December 2002 report from the American Academy of Arts and Sciences.)

In his 2008 book, What a President Should Know, Lindsey said that lowballing the cost of the war was a "tactical blunder" because it allowed Bush's enemies to claim that he lied us into war. But at the same time, Lindsey acknowledges that the administration never rose to "Churchillian levels in talking about the sacrifices needed." He also says that asking for sacrifice in the form of spending cuts and tax increases would have served the important purpose of involving the American people in the war effort. As it is, war is largely out of sight and out of mind.

According to the CRS, the marginal cost of continuing the Iraq and Afghanistan wars is about $11 billion per month, with no end in sight. Although there has been some decline in spending for the Iraq war, it has been more than offset by the rising cost of the war in Afghanistan. According to OMB director Peter Orszag, it costs about $1 million per year per soldier in the field, so adding 30,000 additional troops in Afghanistan, as President Obama is expected to do next week, will cost another $30 billion per year.

The White House has given no indication of how it plans to pay for expanding the war in Afghanistan. More than likely, it will follow the Bush precedent and just put it all on the national credit card. But at least some members of Congress believe that the time has come to start paying for war. On Nov. 19, Rep. David Obey, D-Wis., introduced H.R. 4130, the "Share the Sacrifice Act of 2010." It would establish a 1% surtax on everyone's federal income tax liability plus an additional percentage on those with a liability over $22,600 (for couples filing jointly), such that revenue from the surtax would pay for the additional cost of fighting the war in Afghanistan.

It's doubtful that this legislation will be enacted. But that's not Obey's purpose. He will probably offer it as an amendment at some point just to have a vote. Republicans in particular will be forced to choose between continuing to fight a war that they started and still strongly support, or raising taxes, which every Republican in Congress would rather drink arsenic than do. If nothing else, it will be interesting to see those who rant daily about Obama's deficits explain why they oppose fiscal responsibility when it comes to supporting our troops.

Obey makes no secret of his motives. He knows that deficits need to be reduced at some point and this will put pressure on spending programs he supports. "If we don't address the cost of this war, we will continue shoving billions of dollars in taxes off on future generations and will devour money that could be used to rebuild our economy," Obey explained in a press statement.

He is not alone in his fear that war presents a threat to the Democratic agenda. As Boston University historian Robert Dallek told Obama at a White House meeting earlier this year, "war kills off great reform movements." He cited the impact of World War I in ending the Progressive Era, World War II in killing the New Deal, the Korean War in terminating Harry Truman's Fair Deal program and the Vietnam War in crushing Lyndon Johnson's Great Society.

At this point, Republicans are probably nodding in agreement. If it takes wars to end ill-conceived social programs, then that's another argument in favor of continuing the Iraq and Afghanistan campaigns. But that's a very short-sighted view because, as essayist Randolph Bourne once put it, "war is essentially the health of the State." Historians Robert Higgs and Bruce Porter, among others, have documented the pernicious effect of war on the size and scope of government. It creates a ratchet effect in which taxes and spending grow and civil liberties are restricted permanently, because when war ends, we never go back to the status quo ante.

If it takes the threat of a tax increase to get people to think seriously about whether it's worth continuing to fight wars far from home--wars that have only the most tenuous connection to the national interest--then it's a good idea. History shows that wars financed heavily by higher taxes, such as the Korean War and the first Gulf War, end quickly, while those financed largely by deficits, such as the Vietnam War and current Middle East conflicts, tend to drag on indefinitely.

If Americans aren't willing to follow John F. Kennedy and "pay any price, bear any burden, meet any hardship" to fight a war, then we shouldn't be fighting it.
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Bruce Bartlett is a former Treasury Department economist and the author of Reaganomics: Supply-Side Economics in Action and Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. Bruce Bartlett's new book is: The New American Economy: The Failure of Reaganomics and a New Way Forward. He writes a weekly column for Forbes.

Opportunity Costs of War

When people discuss the costs of the ongoing wars in Iraq and Afghanistan, they usually focus on the government expenditures which are approaching $1 trillion since 2001. Economists argue that society makes better decisions when decisions are based on opportunity costs - which include everything that is sacrificed when a choice is made.

According to the Military Casualty Information provided by the U.S. Department of Defense, as of November 7, 2009 there were 909 deaths in Operation Enduring Freedom (in Afghanistan) and 4,349 deaths in Operation Iraqi Freedom. The number of U.S. military personnel wounded in action were 4,472 in the conflict in Afghanistan and 31,556 in Iraq. The value of these lives, and their lost contributions to society and the economy, are part of the opportunity costs of these wars.

The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11

In the September 28, 2009 Congressional Research Service report "The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11 ," Amy Belasco, a specialist in U.S. defense policy and budget issues, says the U.S. has already spent about $1 trillion on new military operations since 2001. The summary of the reports says:

With enactment of the FY2009 Supplemental (H.R. 2346/P.L. 111-32) on June 24, 2009,
Congress has approved a total of about $944 billion for military operations, base security,
reconstruction, foreign aid, embassy costs, and veterans’ health care for the three operations
initiated since the 9/11 attacks: Operation Enduring Freedom (OEF) Afghanistan and other
counter terror operations; Operation Noble Eagle (ONE), providing enhanced security at military
bases; and Operation Iraqi Freedom (OIF). Congress is currently considering the FY2010 War
request that was submitted to Congress along with DOD’s baseline request. The House passed its
bill on July 30, 2009 (H.R. 3326) and the Senate is expected to act on its version in late
September 2009. This $944 billion total covers all appropriations approved by Congress for
FY2001 to meet war needs through FY2009, the current fiscal year ending September 30, 2009.
Of that total, CRS estimates that Iraq will receive about $683 billion (72%), OEF about $227
billion (24%) and enhanced base security about $29 billion (3%), with about $5 billion that CRS
cannot allocate (1%). About 94% of the funds are for DOD, 5% for foreign aid programs and
embassy operations, and less than 1% for medical care for veterans.

As of July 2009, DOD’s average monthly obligations for contracts and pay were about $10.9
billion, including $7.3 billion for Iraq, and $3.6 billion for Afghanistan. Compared to a year ago
when the surge ended but troop levels remained high, average obligations have fallen by about
12%. Decreases in costs as troops are withdrawn from Iraq have been largely offset by increases
in costs for additional troops for Afghanistan.

The FY2010 war request totals $139 billion including $130 billion for DOD for both wars, $6.4
billion for the State Department’s foreign and diplomatic operations, and $2.1 billion for VA
medical costs for OEF and OIF veterans. Overall war funding is decreasing from the peak of
$185 billion in FY2008 during the surge in Iraq to $150 billion in FY2009. This decline reflects
primarily lower war-related procurement as DOD’s returned to a narrower, more traditional
definition of war-related costs, rather than lower troop levels since increases for Afghanistan
offset decreases for Iraq. Based on the current request, the cost of the Afghan and Iraq wars
would fall by another 8% in FY2010, a decrease that is less than the currently planned 19%
decrease in overall troop levels.

If the Administration’s FY2010 war request is enacted, total war-related funding would reach
$1.08 trillion, including $748 billion for Iraq, $300 billion for Afghanistan, $29 billion for
enhanced security, and $5 billion that cannot be allocated. Of this cumulative total, 69% would be
for Iraq, 28% for Afghanistan, and 3% for enhanced security. On August 30, 2009, General
Stanley McChrystal, Commander in Afghanistan, submitted a strategic assessment and a request
for additional troops was reportedly given to Secretary of Defense Gates on September 26 , 2009.
That request is unlikely to be vetted either within DOD and the Administration until additional
ongoing White House reviews of the strategy are completed.

In a January 2009 update, the Congressional Budget Office projected that additional war costs for
FY2010-FY2019 could range from $388 billion, if troop levels fell to 30,000 by 2011, to $867
billion, if troop levels fell to 75,000 by about 2013. Under these CBO projections, funding for
Iraq, Afghanistan and the GWOT could total about $1.3 trillion to about $1.8 trillion for FY2001-
FY2019 depending on the scenario.

The Economic Cost of War

In the March 1, 2009 New York Times article "The Economic Cost of War, James Glanz provides a range of estimates of the future U.S. costs of the wars in Iraq and Afghanistan.

Strike up the John Philip Sousa and throw confetti from the windows. The troops will be coming home from Iraq, President Obama announced on Friday, and if the mood was not quite as giddy as it was during a few of those triumphant marches down Broadway, there was at least the hint of a similar hope that an end of the war could help set the stage for a new era of prosperity and opportunity.

President Obama’s soaring speech on Friday announcing the drawdown and eventual pullout of troops from Iraq, framed by martial music and the cheering of an audience of Marines when he gave the timetable, could not help but be seen partly in an economic frame of reference: The war has cost an estimated $860 billion; Mr. Obama, as a candidate last year, repeatedly criticized such spending overseas during a downturn; and he had just unveiled his 10-year budget plan the day before.

The Iraq war has been criticized on many fronts, including whether it has really made the world safer for the United States. But with the economy in crisis, some of the sharpest doubts being expressed about it concern whether the money it siphoned from the Treasury helped set the terms for that crisis.

At the same time, history suggests that anticipation of an end to the war might help lift the mood of consumers and investors whose fears now deepen the economic problem.

Perhaps that is why on Friday, it was more than tempting to dredge up old images of kisses in Times Square in 1945 or Germans tearing down the Berlin Wall — and the long surges of prosperity that soon enough followed those euphoric moments, after the ends of World War II and the cold war.

But hold that parade. There are serious and possibly crippling problems with the idea that ending this war could help the cause of prosperity in any clear way. The first and most troublesome is that the continuing cost of the war is exquisitely sensitive to the precise number of troops in theater at a given time, and President Obama has said that he will remain attuned to the notoriously changeable conditions in Iraq as he carries out his plan.

Savings in Iraq will also be dampened by Afghanistan, where the plan calls for a more modest troop increase, but where the primitive transportation system can make logistics more expensive. Even if many of the Iraq war’s costs simply vanished, analysts say those savings would be too small and come too late to jolt the economy out of the crisis, though they could reduce the deficit long term, allowing a recovery to take firmer hold.

“There are a lot of red flags, basically,” said Ryan Alexander, president of the nonpartisan group Taxpayers for Common Sense, who like hundreds of other budget experts in Washington was sifting through the administration’s figures late last week. “Even in the context of the art of budgeting,” Ms. Alexander said dryly, “we have concerns that this is overoptimistic.”

The president’s defense budget does seem to get high marks across the political spectrum for its transparency in accounting for the true cost of the war; President Bush was often criticized for tucking war expenses into various line items that were hard to add up consistently. As Bob Work, a vice president at the Center for Strategic and Budgetary Assessments, put it, “People can say this budget is wrong, but it is very upfront.”

The cost of overseas conflicts, mainly in Iraq and Afghanistan, follows a fairly simple progression in the president’s budget plan: $144 billion in fiscal year 2009, $130 billion in 2010, and — in what the administration concedes are “placeholder estimates” — of $50 billion for 2011 and beyond.

Even though Mr. Obama pledged in his speech to end all combat operations in Iraq by August 2010 and have all American troops out by the end of 2011, the fairly modest dropoff in cost in the first two years is unsurprising, said Winslow Wheeler of the Center for Defense Information, a nonprofit group often critical of military spending; after all, the United States will be carrying out a corresponding increase in Afghanistan.

Beyond that, Mr. Wheeler said, the neat projections may not work out if events cause the American military to undertake more operations than expected or to keep extra troops in Iraq. The budget estimates “are a perfectly reasonable stab at it, but who knows?” he said.

Studies by two research arms of Congress reveal how much the cost depends on the timing for withdrawal. In October, the Congressional Research Service estimated that in 2006 (the latest available figures), it cost $390,000 a year to sustain each American trooper overseas. Clearly, delaying withdrawals would quickly run the tab up.

That report was followed in January by one from the Congressional Budget Office estimating how much the Iraq and Afghanistan conflicts would cost from 2010 through 2019 under two assumptions. In one, the number of troops deployed in the two countries draws down fairly quickly, to about 30,000 by 2011. In the other, levels drop to 75,000 by 2013. Both cases represent a huge reduction from the roughly 180,000 troops there now. But the difference in the cost is breathtaking: the office estimates that Congress would have to appropriate $388 billion for the case of a quick withdrawal and more than double, $867 billion, for the slower one.

Because of the huge range of possible costs, and because the logistics of withdrawal are complicated and expensive, “the basic elements of that estimate are still unresolved,” said John M. Spratt Jr., a South Carolina Democrat who is the House Budget Committee chairman and a House Armed Services Committee member.

“I have a sneaking suspicion that the near-term costs are going to outweigh the near-term savings,” said Mr. Spratt, in remarks on Friday at the Progressive Policy Institute in Washington.

Beyond all those numbers, the assertion that a war’s end has had a direct economic effect in lifting the United States out of its fiscal doldrums in the past becomes weaker the more it is analyzed, said Robert Higgs, a senior fellow in political economy at the Independent Institute in Oakland, Calif., and the author of “Depression, War and Cold War” (2006). An economic blooming, Mr. Higgs said, often is due as much to an outburst of confidence and optimism with the end of hostilities as to any particular element of industrial or economic rearrangement.

For example, part of the revival after World War II, Mr. Higgs said, can be attributed to a change in the psychology of private investors; their distrust of New Deal policies began to melt as President Roosevelt drew on wealthy businessmen to run his war effort, and then President Truman signaled that he was warmer to free-market policies than the administration of the late 1930s had been.

“It’s more complicated than the war got us out of the Depression, the way most people think it did,” Mr. Higgs said.

Simple confidence was again a factor in the economic expansion in the decade after the end of the cold war, said Paul Poast, a political scientist and author of “The Economics of War” (2006). Technological contributions to the economy like the Internet, which was developed by cold war researchers, certainly helped the expansion, Mr. Poast said. But something less definable — an overall sense that history had taken a turn for the better — was at least as powerful, he said.

“When you take away the threat of nuclear annihilation that helps things,” Mr. Poast said.

Which brings us back to that parade. President Obama may find it hard to keep the withdrawal to a prescribed timetable, and even if he can, the savings may be a drop in the bucket economically. But if he keeps the bands playing and strikes the right note in his speeches, he just may have a chance to persuade Americans that the end of a long war means better times are on the way.

History shows that if he persuades enough people, those times could actually happen. Send the marching band up Broadway.

The Opportunity Cost of War in Iraq

The August 31, 2007 article "The Opportunity Cost of War in Iraq," provides data and links to estimate the U.S. opportunity cost of the war in Iraq.