Stiglitz the Nobelist Gets Math Wrong on Iraq War

March 5 (Bloomberg) — Three trillion dollars is the amount that Nobel Prize winner Joseph Stiglitz puts as the cost of the Iraq war. In a new book with Linda Bilmes of Harvard's John F. Kennedy School of Government, the Columbia University economist argues that the Bush administration has underestimated outlays for the war by hundreds of billions of dollars.

"The Three Trillion Dollar War" offers a valuable reminder that wars usually cost more than budget figures suggest. Still, the profs are off the mark when it comes to their larger charge that this conflict is necessarily darkening the U.S.'s future.

Stiglitz and Bilmes start with legitimate points. The first is that the administration hasn't done a good job with numbers. In the run-up to the Iraq invasion, Larry Lindsey, then a top economic adviser to President George W. Bush, dared to hazard that the conflict might cost the egregious sum of $200 billion. Someone or other tried out $300 billion.

Defense Secretary Donald Rumsfeld appeared soon after on television, dismissing numbers in that range as "baloney." As the years passed, of course, it became clear that even the Lindsey estimate was far too low. Just last month, the Congressional Budget Office said the U.S. has already spent some $750 billion on Iraq, Afghanistan and the war on terror, with more to come.

To arrive at their $3 trillion, Stiglitz and Bilmes start with oil. They carefully note that a good share of the quadrupling of oil prices is a result of non-war reasons such as Chinese and U.S. demand.

'Significant' Boost

The war, they determine, accounted for $5 or $10 of the per-barrel rise from $25 just after the war started to $100 today, a share they deem "significant." They also argue that Washington is vastly underestimating medical care for veterans, that over their lifetimes we will spend as much on the veterans as we have on the war to date.

In their best-case scenario, under which the U.S. presence in Iraq drops to 55,000 non-combat troops by 2012, the total budgetary costs for the conflict add up to $1.7 trillion. They posit that a more realistic figure would be $2.65 trillion.

When a U.S. soldier dies, the authors write, the Pentagon pays something like $500,000 to families in insurance and death benefits. Stiglitz and Bilmes claim that a more accurate price would be $7 million — the Pentagon fails to consider the lifetime earning and spending power lost when a soldier dies.

"Instead of paying for the war in Iraq, we could have fixed the Social Security problem for the next half-century," the authors say, and America would have had "a smaller mountain of debt."

'Vast and Huge' Cost

Non-budgetary and interest costs are an important part of the Stiglitz calculation. The authors worry about the deficit. The conflict's costs, they say, "are certain to be vast and huge and will continue for generations."

The rebuttal to this argument starts with oil. Professor Steven J. Davis of the University of Chicago Graduate School of Business challenges as "unwarranted" their argument that even $5-$10 of the per barrel increase is because of the war.

The 2003 drop in oil production by Iraq accounted for less than 1 percent of world production. Overall, world oil output went up from 2002 to 2006.

The authors' description of the war's cost as "vast" or "huge," conjures images of unprecedented financial sacrifice. But by the standard method of calculating costs of wars, defense spending as a share of gross domestic product, Iraq's price is improbably modest.

Back in 1986, the year before Ronald Reagan threw out his "tear down this wall" challenge to Mikhail Gorbachev, defense spending was 6.2 percent of the U.S. economy, according to the Congressional Budget Office. In 1968, the year of the Tet Offensive in Vietnam, it was 9.5 percent.

'Peace Dividend'

In 2005, 2006, and 2007, defense spending was about 4 percent of GDP — as low as during the early 1990s, when the U.S. was enjoying the "peace dividend" after the Soviet Union's collapse.

As for the budget deficit, it is likely to range between 2 percent and 3 percent of GDP this year, a humdrum level nothing like the heroic 30 percent deficit Washington ran as it prepared for D-Day.

Yet it is the Stiglitz-Bilmes "what-would-have-been" argument that will prove most contentious. Back in 2006, Davis and two colleagues made their own counterfactual case, seeking to analyze the costs of the theoretical alternative to war against Iraq: containment of Saddam.

Davis found that the costs of containment in Iraq would have been big. In certain situations, they even would have been "in the same ballpark as the likely costs of the Iraq intervention."

Good News

In a phone request for an update of his paper this week, Davis said sending additional U.S. troops last year, the "surge," increased costs enough to make the war yet more expensive — but not by trillions of dollars.

And where in the "Three Trillion" calculus does the new good news fit in, such as the International Monetary Fund's prediction that Iraq's GDP will increase by 7 percent this year?

The message of this book is that the war can be blamed for America's failure to reform domestically. If this is true, then Washington would have used the period of 1991 to 2001 to rewrite Social Security and Medicare. It didn't.

Democrats and Republicans will both find the Iraq-as-budget-buster argument convenient. That doesn't make it compelling. It is also disingenuous. There are a number of reasons to oppose the war in Iraq. Just don't say we can't afford it.

(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)

© Copyright 2008 Bloomberg

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To book Amity Shlaes for a speaking engagement, contact Jamie Brickhouse at the Red Brick Agency, 646.281.9041.
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