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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 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
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.

Oil Prices
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.

War's Benefit
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 recession.

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- month war.

Category 1991 After 1991 Total
Military personnel $4-$6 $1-$2 $5-$8
Operations and maintenance $1-$12 $0-$3 $1-$15
Replacement of major weapons $0 $5-$28 $5-$28
Replacement of munitions $1-$4 $4-$13 $5-$17
Medical costs $0-$2 $0-$2 $0-$4
Basic support costs $11 $1-3 $12-14
TOTAL $17-$35 $11-$51 $28-$86

Source: Congressional Budget Office Staff Memorandum, "Costs of Operation Desert Shield," January 1991, p. 9.

Estimates by Public Citizen, in billions of 1991 dollars.

Category Cost
Deployment $45
Occupation $15
Reconstruction aid $5
Aid to other countries $20
Added security $2
Oil prices $40
Natural gas prices $14
Loss of GNP $55
TOTAL $196

Source: James P. Love, "Costs of the U.S. War with Iraq," issued by Public Citizen on Feb. 5, 1991.

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