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Chat with Linda Bilmes

The economic cost of the war in Iraq

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March 19, 2008

Linda_Bilmes: Hello this is Linda Bilmes at Harvard University, I'll be chatting today about the full cost of the Iraq war for the next half hour.

orville: The war is paid in debt, right? Is this the same debt that is causing US markets to crash?

Linda_Bilmes: This is the first war that the US has fought what has been entirely financed by borrowing. It is also the first one since the revolutionary war (when the colonies borrowed from france) where we have borrowed heavily from overseas. The effect of all this borrowing is that we have added some $800bn to the national debt, and because we need to repay the money with interest, our children will be paying off the war debt for decades.

Linda_Bilmes: It is important to distinguish between the two decisions that were made: first to invade Iraq, and second, the way we pay for the war. WE have made wrong choices on both.

Linda_Bilmes: The growing national debt shrinks our options for doing things that benefit the economy, and weakens our economy generally.

war: How do you connect the cost of war to the failing us economy?

Linda_Bilmes: The war has contributed to our economic weakness in several ways. First, it is partly responsible for the fact that oil prices have increased. Before we invaded Iraq, oil cost $25 per barrel and the markets expected it to stay at that price range for a decade. The markets expected that supply would increase to meet growing demand. But the war changed that equation. Oil producers, facing uncertainty and volatility in the middle east, did not expand capacity or refining capacity.

Linda_Bilmes: Additionally the debt has weakened the economy. The entire war has been financed by debt -40% to foreign countries.

Linda_Bilmes: Additionally the money we have spent -- currently $12 BIllion per month in Iraq alone -- is not stimulating the US economy because it mostly goes to pay for fuel and laundry and contractors in Iraq and repairs by contractors and transportation costs and other things that don't benefit the US economy.

tblair: Hindsight is 20-20. But how could/should we have known in 2003 that Saddam - a man who had used WMD - did not actually have WMD? That was the key belief that led many to support the war, but nobody seems to be addressing how we learn from that.

Linda_Bilmes: Of course this is an important question. First we need to recall that we were not doing nothing in 2003. We were flying 30,000 sorties a year in the northern and southern Iraq no-fly zones to contain Iraq, and spending at least $10 billion per year on that policy (which was working).

Linda_Bilmes: The question then becomes: why did we RUSH into war, despite the advice of the International Atomic Energy Commission inspectors (who asked for 6 more months to complete their inspections), and the advice of some of our main allies, like France and Germany? You remember that there were arguments that we had to do it in March to avoid keeping troops in the 120 degree heat of summer. The fact was that not enough preparation and analysis was done at the time -- we failed to anticipate or plan for the possibility that the war would go badly and turn into an occupation. Considering all the military expertise that was ignored (people like Colin Powell), this is unforgivable.

overwhelmed: How can the government keep increasing spending on defense and wars, but not on education and helping the poor? At what point will our society collapse?

Linda_Bilmes: You ask an important question. Society has many needs, not only defense. We have epidemics of autism, of Alzheimers, of diabetes in this country (and worldwide) and the US spends almost nothing on funding research for these items. For example, the amount we spend on autism, which affects 1 in every 150 children, is $108 million -- thats what we spend in 4 hours in Iraq.

Linda_Bilmes: But lets look even more specifically at education for our veterans. When my father served in WWII in Japan, afterwards he was able to pay for his whole education on the GI Bill. But today's veterans do not have this opportunity. The amount that we pay only covers about half of tuition costs -- and doesn't pay even a modest cost of living allowance. And the servicemen need to pay $1000 deposit when they first join or they lose the right to get ANY education benefits. This lack of investment in the courageous troops who are fighting is but one example of our misplaced priorities.

quarmire: is there any way to get the UN to share in the costs of iraq? Even though it didn't back the invasion, it has a vested interest in the results....

Linda_Bilmes: The UN doesn't have money. The total UN budget is about $25 billion -- that's what we spend in Iraq and Afghanistan in one month, if you include the costs of caring for veterans and replacing military equipment.

bogie: Is the failing economy Bush's fault? Or just a coincidence? And how does the war tie in?

Linda_Bilmes: When President Bush took office, he had a budget surplus. The following year, the economy slipped, revenues dropped, and then he suddenly faced a deficit. That part of it was out of his control. But since then he has made poor decisions regarding the economy.

Linda_Bilmes: First, he cut taxes on the rich and increased spending as we went to war. In previous wars, the opposite has happened and the public has been forced to sacrifice and tighten its belts. But not this time.

Linda_Bilmes: Then, he made the decision to request ALL the money for the war through "emergency supplemental" appropriations, which is a way to circumvent the normal budget limits. Since this money exceeded the limit, we had to borrow it. And since then, the administration has requested, and Congress has approved, 25 of these supplemental appropriations all financed by debt.

Linda_Bilmes: Adding all this debt, plus interest, to our already bloated deficits has weakened the country considerably. It has not caused the current recession, but it has contributed to it, and it means that now we don't have much capacity in the budget to fix the problem.

55_triob: What did you think about Alan Greenspan's comments that the war was all about oil?

Linda_Bilmes: I do not agree that the war was entirely about oil. But oil is an important consideration in understanding what happened and the consequences.

Linda_Bilmes: At the outset, the administration thought that Iraqi oil revenues would increase to the point where they would pay for the war. Exactly the opposite has happened. Iraqi oil production plummeted, and although it is now higher again, and Iraqi oil revenues have increased due to the rising price of oil, this money is not being used to offset our cost of fighting this war. Some say there is rampant corruption and this money is ending up in Swiss bank accounts. I don't know if thats true or not -- but certainly we are not yet reaping financial benefits from Iraqi oil profits.

Linda_Bilmes: But overall, to the extent we did invade Iraq to protect US oil supplies, the effort has backfired as the war led to increased prices which have transferred money out of the hands of consumers and businesses and put it in the hands of oil producers including Kuwait, Saudi Arabia. Venezuela and Russia.

niceguyeddy: Haven't tax revenues, since the Bush tax cuts, reached all time records due to the stimulus involved?

Linda_Bilmes: People feel like they have received a "tax cut" but this is not accurate, because we have borrowed money to pay for it. Its just like spending more every month and putting it on your credit card. You have more money to spend but where does it come from? And in this case, its like spending more money and putting in on your child's credit card -- so eventually he will get stuck paying it off - plus interest.

hammer_009: With no end in sight to the war, can our economy recover when we continue to spend $3 trillion every five years (or whatever)?

Linda_Bilmes: Luckily we are a wealthy country. Even if our standard of living were to decrease by 5 or 10%, we would still be back to where we were in the 70s and 80s -- still very well off compared to the rest of the country.

Linda_Bilmes: But the country will be saddled with all this extra debt, which will make it more difficult for us to afford things we need -- like roads, bridges, airports, flood controls, schools, and health care. In order for the US to stay preeminent into the future, we need to make long-term investments in these kinds of things, and the war spending and borrowing makes it much much harder to find a way to do this.

Paul_G: Have you read Nir Rosen's article in the Rolling Stone? http://www.rollingstone.com/politics/story/18722376/the_myth_of_the_surge It questions the viability of depending on local Sunni groups who actually want to overthrow the current Iraqi government. Based on this, last month's legislation seems irrelevant.

Linda_Bilmes: I have not read the article. The issue of the US surge, from a financial perspective, is that we will still have 8000 more US troops in Iraq at the end of the surge than we had at the beginning. So the question is how long can we sustain this wear and tear on our forces?

Linda_Bilmes: Already 1.7 million young men and women have been deployed, with one-third of them for 2 or more tours of duty. A tour is 15 months long these days, so some of these troops have been there for 30 months or more. Even in a recent survey of senior military officers, 88% of the officers said that the US forces are under unbearable strain. 60% said our military is now weaker than it was 5 years ago. We know that we have lowered health, education and ethics standards to meet recruiting targets. We are paying captains $150,000 re-enlist bonuses to stay in the Army but we are still losing them fast.

Linda_Bilmes: The real question is how long can we sustain this level of effort and wear and tear on our personnel?

tblair: How do you compare the costs of the alternative that didn't actually happen, i.e. leaving Saddam in power? For example, how much less costly might WWII had been if Britain had prepared earlier in the 1930's like Churchill wanted to?

Linda_Bilmes: In our book we deducted the cost of enforcing the no-fly zones from the cost of war, because arguably the Pentagon has saved this money.

Linda_Bilmes: But the question about preparation is that we didn't do it. We did not prepare militarily, financial, or in terms of veterans care for this war. The lack of preparation, and the fact that the war has gone badly, has led to the incredibly high costs.

we_are_paying: So why are we paying for basic needs for Iraq, when we are not providing them for ourselves? In a recent article we are spending $4.7b for stateside civil projects, $13.4b for Iraq to have basic needs they have not had in 25 years? http://www.hq.usace.army.mil/cepa/pubs/feb08/story3.htm They are not even helping to pay for any of this. All of this money would be better spent for ourselves.

Linda_Bilmes: In terms of our economy, we would be much better off if we invested in roads and schools at home. These have a positive multiplier in our economy.

Linda_Bilmes: In Iraq, much of the money we spend is to pay foreign contractors from the Philippines or Nepal or Sri Lanka to work on construction projects, often in difficult security conditions. Not only does this investment not benefit the US economy, but it also fails to meet our objectives which is to provide employment for unemployed Iraqi men (who may otherwise join insurgency factions). The US contractors in the region have, naturally, a different objective, which is to minimize costs, so they don't have an incentive necessarily to employ local personnel.

Linda_Bilmes: I have to go now - to all interested participants, our book is called "The Three Trillion Dollar War: The True Cost of the Iraq Conflict", (co-authored with Nobel laureate Joseph Stiglitz). The book is available nationwide.

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