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Iraq: The Economic Consequences of War

The United States is marching, two steps forward and one step backward, toward war with Iraq. The Bush administration has articulated its reasons for war, but has produced no official estimates of the costs. Although cost estimates are often ignored when war is debated, most people recognize that the costs in dollars, and especially in blood, are acceptable only as long as they are low. If the estimates of American casualties mount to the thousands, if the costs to the economy are major tax increases or a deep recession, or if the United States becomes a pariah in the world because of callous attacks on civilian populations, then decision-makers in the White House and the Congress might not post so expeditiously to battle.

In views of the salience of cost, it is surprising that there have been no systematic public analyses of the economics of a military conflict in Iraq. This essay attempts to fill the gap.1 We must start by acknowledging that the estimates given here are virtually certain to be wrong in some respects, for the fog of war extends far beyond the battlefield to include forecasts of political reactions and economic consequences. However, as Keynes said, it is better to be vaguely right than precisely wrong.

1.

An assessment of the costs of a war with Iraq needs to be based on scenarios for the conduct of the war, the aftermath of hostilities, the impacts on the oil market and other related markets, and the “macroeconomic” impacts, i.e., on the overall US economy. It is impossible to project detailed military strategies. However, we can describe the general contours of a “quick victory” and a “protracted conflict” and attempt to put price tags on each.

The difference between good and bad cases does not depend on who will win, for there is little doubt among military specialists that the United States will prevail if it enters with overwhelming force and is willing to persevere through all obstacles. Rather, the difference lies in the duration of the conflict, the total damage to Iraq, civilian casualties, the potential for unconventional warfare, and the spread of the conflict outside Iraq.

A study prepared by the Democratic staff of the House Budget Committee2 and other studies by private specialists such as Anthony H. Cordesman and Michael E. O’Hanlon3 lay out a plausible starting point for an analysis. These studies estimate that in order to achieve overwhelming force, the US will deploy between 150,000 and 350,000 personnel, which is approximately one half of the level deployed in the first Persian Gulf War of 1990 to 1991. Specialists provide a wide variety of scenarios for a war, including heavy reliance on Special Forces, intensive air war, and ground invasion. The tactical details are unpredictable, but they are not essential for an economic analysis.

The “quick victory” scenario would resemble the first Persian Gulf War, the Kosovo war, and the Afghanistan war. It would involve some combination of strategy and luck in which Saddam Hussein and his top leadership are captured or killed, the Iraqi army surrenders quickly, and US forces prevent the breakout of disorders in the south or in the Kurdish regions in the north. This is the “New War A” analyzed in the Democratic staff report, which envisions between thirty and sixty days of air war and ground combat, followed by two and a half months of post-victory presence by troops in the theater. It is hard to see how anything short of preemptive capitulation by the Iraqi regime could be less costly than this scenario.

A “prolonged conflict” is a situation where the dice of war roll unfavor-ably. Analysts point to a wide variety of potential complications and costs that need to be considered. These include prolonged conflict and an Iraqi strategy of concentrating forces in urban areas such as Baghdad; adverse impacts on oil markets; escalation of war by Israel; terrorist acts around the world; heavy occupation and peacekeeping costs; burdensome reconstruction costs and nation-building; costly humanitarian assist- ance; shocks to the overall US economy; and the use of weapons of mass destruction.

2.

Two conceptual points need to be made before starting an analysis. First, we are attempting to estimate the total costs to the nation, not just the budgetary costs. We are asking how much of our national output will be sacrificed by the war and its consequences—in effect, the loss of butter because of the resort to guns. Second, these estimates should count only the incremental costs of the war. The 82nd Airborne Division has to be paid whether it is in Iraq or in North Carolina. Only additional costs such as those for transport, combat pay, and the replacement cost of munitions should be counted in the cost of the war.

There have been only two detailed studies of the cost of a war with Iraq, both produced by congressional budget analysts. One was the aforementioned study undertaken by the Democratic staff of the House Budget Committee (the House study) and the second was by the Congressional Budget Office (the CBO study).4

The House study was from the “top down.” It projects the costs of the second Persian Gulf War based on the costs of the 1990–1991 conflict. The study estimated the cost of two scenarios for the war. The relevant one involves 250,000 troops. Under the House scenario, the estimated cost is between $48 billion and $60 billion excluding interest. This figure is slightly less than the cost of the first Gulf War, which ran to about $80 billion in today’s dollars.

The CBO used a different methodology, a “bottom up” approach, which calculated the prices of the different components of a war with Iraq and then invited us to add them up. The most relevant case, labeled the “Heavy Ground” option, involves 370,000 military personnel in and near Iraq.

We can compare the two congressional studies by applying the assumptions behind the House report to the CBO estimates for the different components. For what the House calls the “New War A” conflict, i.e., a short successful war, the CBO formula yields $44 billion as compared to the House estimate of $48 to $60 billion. Based on these two studies, a rough estimate is that a short and successful war would cost around $50 billion. This compares with the cost of $80 billion for the first Persian Gulf War in 2002 dollars.

Neither report provides estimates of the costs of a protracted war. These costs would depend upon the length of the conflict, the extent to which it spread to other countries, and the additional resources devoted to carrying on the war. Consider, as a reasonable high estimate, a case in which neighboring countries refuse basing and overflight rights to the US and Iraq pursues an urban defense strategy. In this situation, the conflict might drag on for a year, and the US might need to devote 50 percent more resources than it would in the “heavy ground” war analyzed by the CBO. In that case, the cost would rise from $50 billion to around $140 billion. While much larger, these costs would still be only around 1.5 percent of GDP—on the scale of the Mexican or Spanish-American Wars rather than the more costly Vietnam or Korean Wars.

The two congressional studies are valuable contributions to public awareness of the costs of a military conflict. But they are incomplete. In addition to the direct military costs of a war in Iraq, further expenses are virtually inevitable after a conflict. The estimates that follow sum up the major identifiable costs to the United States for the decade following the start of a war, that is, from 2003 to 2012.

The first category, of course, concerns the need to install a substantial occupation and peacekeeping force in Iraq for a lengthy period after the war. There is no evidence that the American people are prepared for the potential scale of the operation. The CBO estimates that occupation will cost between $17 billion and $45 billion per year, which is approximately $250,000 per peacekeeper per year. This figure is at the low end of the estimated cost of US peacekeepers in Kosovo; it might actually underestimate the cost if the post-combat environment in Iraq is hostile and its dangers resemble those on the West Bank more than those in the Balkans.

The duration of the occupation-peacekeeping effort is unpredictable. The occupation of Japan lasted seven years, while the US has stationed more than 30,000 troops in South Korea for a half-century. It is difficult to see how a successful occupation of Iraq could be less than five years and it might easily extend for two decades. While there are no public estimates of the total, an estimated minimum total cost would be $75 billion with a maximum cost of up to $500 billion; these figures would be consistent with peacekeeping operations in the Balkans and the size and scope of the task in Iraq.5

When some degree of order has been imposed, the US and its coalition partners must turn to reconstruction and nation-building. What are the goals for Iraq, and how would these goals be accomplished? Would the “regime change” be followed by turning over the task of selecting leadership to a loya jirga, as in Afghanistan? Would the US install an occupation regime like those in Germany or Japan after World War II, imposing a Western-style constitution, a free press, free elections, and all the other infrastructure of Western democracy? Would the US introduce a new Marshall Plan for democracies of the Middle East?

Scholars who have studied the history of nation-building caution that the process is difficult, costly, and fraught with dilemmas. Recent examples of US attempts at nation-building, including in Haiti, Bosnia, and Afghan- istan, indicate that the United States has not discovered any formula for quick and inexpensive success. The length of the nation-building effort is highly uncertain, but it is hard to see how a serious attempt to turn Iraq into a modern democratic society could be accomplished in less than a decade.

Reconstruction and nation-building costs will be largely determined by the ambitions for postwar Iraq. If Iraq is to attain a per capita GDP equal to Egypt or Iran, and if one half of the capital stock requires rebuilding, this would imply reconstruction needs of about $800 per capita, or a total of $20 billion. This estimate is close to post-conflict rebuilding estimates by the World Bank for Lebanon, East Timor, and Bosnia, which required approximately $1,000 per person.6

A more ambitious plan would be a “Marshall Plan for Iraq.”7 Recall that the Marshall Plan cost the United States $13.3 billion over a four-year period. This amounts to about 4 1/2 percent of today’s GDP, or $450 billion. At today’s income levels, the assistance amounted to about $2,000 per person, or $500 per person per year, in the recipient countries, more than twice the size of the figure of $800 per capita cited above.

  1. 1

    This essay is an abbreviated version of a longer study available at www.econ .yale.edu/~nordhaus/iraq.html.

  2. 2

    Assessing the Cost of Military Action Against Iraq: Using Desert Shield/ Desert Storm as a Basis for Estimates, an analysis by the House Budget Committee, Democratic Staff, September 23, 2002.

  3. 3

    Anthony H. Cordesman, Iraq’s Military Capabilities in 2002: A Dynamic Net Assessment (Center for Strategic and International Studies, September 2002); Michael E. O’Hanlon, “Three Months to Baghdad,” The Washington Times, August 30, 2002.

  4. 4

    Congressional Budget Office, “Estimated Costs of a Potential Conflict with Iraq,” September 2002, available at www.cbo.gov.

  5. 5

    The low and high numbers assume, respectively, peacekeeper costs of $200,000 to $250,000 per peacekeeper per year, with the number of peacekeepers from 75,000 to 200,000, and for a period of five to ten years. We set ten years as the outer limit of the estimates in this study.

  6. 6

    World Bank, “Afghanistan: World Bank Approach Paper,” November 2001; available at worldbank.org.

  7. 7

    This was discussed in Roger D. Carstens, “A Marshall Plan for Iraq,” The Washington Times, August 5, 2002.

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