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March 4, 1991 WAR IS not an activity that lends itself to cost-benefit analysis. What price should be put on the costs of bomb damage or oil spills, on the risks of terrorism from political extremists, or on the injuries and lives lost? On the other side, how can anyone place an economic value on the benefits to Kuwait and other nations of the Middle East of giving Saddam Hussein a swift kick? Or on the benefits of deterring future aggressors? Although decisions about war ought to emphasize moral and political calculations, economic considerations still matter. Along with everything else a war does and is, it is also a government spending program and a shock for the economy as a whole. The hardest part of calculating the costs of fighting a war is that it requires making adjustments for the costs of not fighting. For example, just paying and feeding 400,000 soldiers and occupying their time would cost tens of billions of dollars. But that's the cost of having an army, not the additional cost of deciding to use it in the Persian Gulf. CBO Estimate As the war has turned out, the costs of operations and maintenance, along with replacing major weapons and munitions, will probably be on the low side. Thus, a reasonable estimate of the direct costs of war might be about $40 billion, although the eventual amount depends on whether or not the government decides to replace every single weapon that was used in the war. Of course, the direct budgetary costs are only a portion of the economic costs of war. Public Citizen, a consumer advocacy group founded by Ralph Nader, recently published a report that attempts to assess these broader costs. Unlike the non-partisan Congressional Budget Office, Public Citizen is very partisan indeed. But even if its estimates veer to the high side, its report is helpful in identifying costs that might otherwise be overlooked. Their list, upper right, of costs includes the largest factors, although (of course) it does not include some other hard-to-quantify factors that may also prove important. The Public Citizen report was published in early February, so it also provided a range of cost estimates based on different projections of how the war might go. The estimates presented in the table are based on a scenario of "low-cost war accompanied by increased world political tensions and difficult occupation." Premises Deployment, or direct military costs, the first item on the list, is estimated at $45 billion, which is toward the middle of the CBO estimates. The next four items on the list are indirect costs that may follow from war. For example, if the United States leaves behind an occupying force of 100,000 troops to control Iraq for three years, it would cost about $15 billion. If the United States ends up paying to rebuild Iraq, as it has subsidized Panama and Grenada and most other countries it has fought, the cost could reasonably be $5 billion over the next five years. Assistance promised to other countries to help in building the coalition against Iraq could run to $20 billion, according to the Public Citizen report. For example, the United States has already forgiven $7 billion in loans to Egypt. Added security costs of $2 billion include the extra precautions that are being taken by travelers, airports and police, as a result of Iraq's threat to respond to war with terrorist attacks. Variables The second factor is the financial assistance promised by allies. With Kuwait, Saudi Arabia, Japan and Germany leading the way, other countries have pledged $53 billion in assistance. However, only about $15 billion of that has been received. If most of the rest of the checks come in (potentially a big if) and if the United States can avoid being mired in the Middle East (another big if), the U.S. government won't have to lay out much extra money. The most important economic effect of the war does not result from its effect on the budget, but from its effects on oil prices. This effect is also the trickiest to consider, because it requires thinking about what the price of oil would have been if Iraq had invaded Kuwait without being confronted by war. There are many possibilities. For example, Iraq might just have pumped Kuwaiti oil and taken the money, without attempting to change the price. Or once Iraq controlled Kuwait's production, it might have attempted to hold down price and push up supply a bit. But the most frightening scenario is that after taking over Kuwait, Iraq would have aimed at seizing additional oil fields with a view toward raising oil prices substantially. If Iraq could have dictated the oil production of Kuwait (directly) and Saudi Arabia (either directly or by threat), it would have controlled fully one-half of the world's proven oil reserves. Oil Prices Because higher oil prices raise the demand for other sources of energy, the price of other sources of energy rises too, which is the source of $14 billion in additional costs for natural gas in the Public Citizen report. Since the higher oil prices helped to cause the current recession, the decision to fight rather than embargo also takes the blame for $55 billion in lost GNP. However, if you believe that Saddam Hussein was intending to push the price of oil very high, and that the economic embargo was not going to stop him, then the U.S. decision to fight was a necessary step to keep oil prices from going up and staying sky-high. War's Benefit In the brightest outlook about the economic costs of the war, the allies will come through with most of their pledges of support; the United States will disengage quickly from the Middle East; and the war deserves credit for removing Saddam Hussein's hands from the jugular vein of the U.S. economy. I am congenitally opposed to optimism. But after watching the air and land war proceed so much better than I had feared, perhaps it is time to resign myself to some further happy news.
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© 2010 Timothy Taylor |