Iraq war's creeping costs

Even at $415 billion, the war's pricetag doesn't threaten to derail the economy. But it's making a stealthy appearance in mortgage rates, fuel prices and other indicators.

By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- The Iraq war may be funded largely with Uncle Sam's borrowed cash, but don't think American consumers will escape without taking a hit in the wallet.

From steeper mortgage payments to higher fuel prices, the cost of the war is already starting to sink in.

And while the burden on the nation's overall economy is currently fairly small, the longer term effects of redirected investment and restricted borders could hurt the country's competitiveness.

The nation has spent $415 billion in Iraq and another $190 billion since 2001 fighting the "war on terror," which includes the fighting in Afghanistan, according to a recent report from the Congressional Budget Office, Congress' nonpartisan research arm.

That number could grow substantially. The CBO estimated in August that the total could hit $1 trillion by 2013 and that's if nearly two-thirds of the 210,000 troops now deployed are brought home.

On Wednesday, CBO Director Peter Orszag is scheduled to testify on Capitol Hill and is expected to say that those numbers have been revised higher.

In addition, Senate Budget Committee Chairman Kent Conrad said recently that a long-term "Korea-like" presence in Iraq could end up costing $2.5 trillion, or enough to cover half the estimated shortfall in Social Security due to retiring baby boomers.

On Monday, President Bush asked for another $42 billion for war efforts on top of the $142 billion already requested for the current fiscal year, bringing the overall total for 2007-08 to nearly $200 billion. This is extra money for the war, above and beyond the Pentagon's regular budget of about $450 billion, which accounts for about a sixth of the government's overall 2007 spending of about $2.8 trillion.

Some experts say the U.S. economy can handle the spending binge without a problem.

"A half trillion dollars sounds like a pretty big number," said Jay Bryson, a global economist at Wachovia Corp. "But in a $14 trillion economy, it just isn't all that big."

Bryson said that as a percentage of the nation's overall economic output, total defense spending is just about 4 percent.

That compares with about 7 percent during the Vietnam War, 15 percent during the Korean War and 25 percent during World War II, he said.

"People argue we can't afford this war, but that's just not true," said James Carafano, a senior fellow at the Heritage Foundation. "At 4.5 percent of GDP, this economy could do that forever."

But other economists see things differently.

"I'm not buying that argument at all," said Gus Faucher, director of macroeconomics at Moody's Economy.com, an economic consultancy. "That's a pretty big number - it's going to add up."

Faucher said one result of the war is most likely higher interest rates, as government borrowing means more bonds on the market, keeping bond prices low and yields high. Interest rates for things like home or business loans are pegged to bond yields.

While interest rates are historically fairly low, Faucher argues, they would be even lower were it not for the war.

Higher interest rates mean people pay more money for mortgages. They also mean businesses are less likely to borrow cash to invest in research or new facilities.

"It's going to have an impact on long-term growth, especially if this continues," he said.

An estimate by the Center for Economic and Policy Research put that impact at the loss of 500,000 jobs after ten years of war spending, and crimping overall economic output by $60 billion a year.

"It's draining resources away from productive sectors of the economy," said Dean Baker, co-director at Center for Economic and Policy Research. "It will be more of a drag over time."

Both Baker and Faucher concede that in the early years of the war the extra spending was probably good for the economy, which was in recession.

But any economic stimulus is now overshadowed by the inflationary pressure the war spending causes.

While business spending focuses largely on buying durable goods like buildings or computers, military spending is largely on consumable goods like food, fuel and clothes.

"Prices for goods and services would be lower" were it not for the war, said Baker. "We are paying for it."

Another drag on the economy comes not from war spending, but policies.

Since the terrorist attacks on Sept. 11, 2001, the country has tightened up visa requirements for foreigners entering the country.

The Heritage Foundation's Carafano said that it's harder for business or scientific groups to hold conventions in the United States, as well as for foreign students to come and study. Tighter restrictions have also caused big delays at the border when it comes to moving goods.

"This could make America a much less competitive place," he said.

While the Bush administration's choice to focus the war on terror in Iraq can certainly be debated, Carafano said that spending on the war on terror overall needed to be balanced against the cost of not doing anything.

"What would it cost if we had a 9/11 every year," he said. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.