March 4, 1991
"The Cost of War"
San Jose Mercury News
By Timothy Taylor
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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
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.
Just before the fighting started in January, the Congressional Budget Office estimated
the added budgetary cost of war in the Persian Gulf. The range of cost estimates
for 1991 and later years is shown in the table below. The lower range estimates
were based on a war that would last less than a month, where U.S. losses might
include 3,000 dead and wounded, 200 tanks and 100 aircraft. The higher range of
estimates were based on a war that continued as long as six months, where U.S.
casualties reach 45,000, along with 900 tanks and 600 aircraft.
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."
Or to put it another way, the estimates are based on the views that the war goes
smoothly, but that the allies will renege on many of their promises of reimbursement,
that the United States will become bogged down in the Middle East after the shooting
stops, and that deciding to pursue war rather than an economic embargo caused
the surge in oil prices last fall.
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.
The eventual amount of these direct and indirect costs to the U.S. government
depends heavily on two factors. First, the costs of aid to Iraq and other countries
and costs of occupying Iraq might be 50 percent lower, or more, if the United
States disengages quickly from the war.
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.
If you believe that not much of an oil price increase would have occurred without
the actual threat of war, then the increase in oil prices last fall resulted from
the decision to prepare for war. Along these lines, the Public Citizen report
argues that maintaining an economic embargo (and perhaps sending some troops to
Saudi Arabia) could have succeeded in driving Iraq out of Kuwait with much less
disruption in oil prices. That belief leads their report to argue that the decision
to prepare for war caused consumers to spend $40 billion more for domestic and
foreign oil last fall.
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.
From this perspective, the sharp fall in oil prices since January is a benefit
of the war. If oil prices remain $10 a barrel lower because of the war (and they
have fallen from $35 dollars a barrel last fall to $18 a barrel now), that will
save U.S. consumers about $26 billion a year in what they pay for imported oil
alone. The lower oil prices will help hold down the prices of competing sources
of energy, and provide an economic stimulant to prod the United States out of
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.
|In billions of 1991 dollars, estimated range of one- to six-
|Operations and maintenance
|Replacement of major weapons
|Replacement of munitions
|Basic support costs
Source: Congressional Budget Office Staff Memorandum, "Costs of Operation
Desert Shield," January 1991, p. 9.
|Estimates by Public Citizen, in billions of 1991 dollars.
|Aid to other countries
|Natural gas prices
|Loss of GNP
Source: James P. Love, "Costs of the U.S. War with Iraq," issued
by Public Citizen on Feb. 5, 1991.
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