What the Iraq war will cost the U.S.
Former White House economist Lawrence Lindsey ignited a furor with his estimate of the dollar cost of the Iraq war. For the first time, he tells how he came up with the number and what he thinks now.
NEW YORK (Fortune) -- The Iraq war has already cost the lives of nearly 4,000 U.S. troops, but there is another cost that is not so readily quantifiable: the economic toll. Forecasts of the cost to the U.S. have reached into the trillions of dollars, fueling a controversy over the impact on the budget and the economy. Missing from the debate until now has been the man who famously sparked it: Lawrence Lindsey, then President Bush's chief economist, who gave an estimate in 2002 that sent the Bush administration into sticker shock. Less than three months later he was out of the White House.
In this exclusive essay adapted from his new book, What a President Should Know ... but Most Learn Too Late (Rowman & Littlefield, 246 pages), Lindsey reveals how he came up with the number and what he thinks now. FORTUNE has a history of taking on such topics: In 1966 we published a landmark story researched by young economist Alan Greenspan that revealed Washington's massive underbudgeting for the Vietnam war. In the case of Lindsey's viewpoint, we think you'll find his case for the war's affordability to be a provocative one. To voice your opinion on the issue, go to fortune.com/talkback.
"Lindsey Predicted Iraq War Would Cost $100 Billion to $200 Billion." It is a line that I refuse to put on my tombstone, but there is little doubt that it will be the lead in some of my obituaries. As things turned out, my estimate was far too low. But it was far higher than other estimates that were circulating around Washington at the time, which is how I sparked a debate over the dollar cost of the Iraq war that continues today. In September 2002, as President Bush's chief economist, I committed one of the most grievous mistakes someone in government can make: I answered a hypothetical question from a reporter. The line of questioning was whether the prospective war in Iraq would be affordable, or whether the increase in government spending would drive up interest rates and sink the economy. I estimated that such a war, if it were to happen, might cost 1% to 2% of GDP and that it would not be economically damaging. Compared with the costs of possible future terrorist attacks, I said, it would easily pass a cost-benefit test. The President would have many other questions to consider, including the loss of life, but I didn't feel that money would be an issue.
For the past five years, whenever a reporter was around, despite my best efforts, the subject always came up. Washington teaches many ways to avoid answering a question, and I've probably used them all to avoid publicly commenting on the issue. Until now. Here is the true story behind my estimate of the cost of the Iraq war-and how the situation looks today.
As it turns out, I was partly right. The war has not been economically ruinous. The bill for Iraq over the past five years is now approaching a cumulative $500 billion, or about $100 billion per year on average. My hypothetical estimate got the annual cost about right, but I misjudged an important factor: how long we would be involved. As we approach the fifth anniversary of the start of the war, it's worth making a new appraisal of where we are going with this investment. Is the war's total cost going to run into the trillions of dollars, as some economists have asserted? Are those numbers meaningful in terms of what to do next? If we stick around to finish the job, are we throwing good money after bad?
Oscar Wilde's maxim about people who "know the price of everything and the value of nothing" is sometimes applied to economists. When it comes to the Iraq war, the point has validity. Some budget items can be clearly added up, like the Pentagon's plan to supplement its fleet of Humvees in Iraq with as many as 15,000 Mine Resistant Ambush Protected (MRAP) vehicles at an average cost of $1 million apiece. Other numbers are much fuzzier. Some economists have strived to produce as large a number as possible, casting a wide net to include items that have not traditionally been in the accounting of past wars, ranging from the costs of higher oil prices to an increase in military recruiting costs. While potentially interesting from an academic viewpoint, not to mention politically provocative, these estimates put too much emphasis on computing a price and not enough on putting those costs in a geopolitical context. To make a fair estimate on this scale, one has to consider the costs of the alternative, which in this case was leaving Saddam Hussein in power, as well as the possible benefits toward which we've made a huge down payment. Economically, what matters in a war is whether you win or lose. It is as simple as that.
In September 2002, six months before the invasion of Iraq, Bob Davis, a reporter for the Wall Street Journal, interviewed me in my West Wing office about what we had learned about the economic effects of the war on terror and how one should assess the economics of eliminating potential terrorist threats, particularly Iraq. At the time, it was worth considering the economic impact of a possible war in Iraq as an event that could conceivably derail the economy. The recovery after 9/11 was still fragile, so much so that I was actively agitating for an acceleration of the tax cuts passed the previous year. But no matter how one calculated the purely budgetary cost of the war, it was hard to get a number that posted a significant threat to the economy.
I was not privy to any war planning or detailed estimates from the Pentagon. Those were probably available on a need-to-know basis, but to do my job as economic advisor, the back of an envelope was not only sufficient but also more objective than a formal process that relied on the Pentagon. There was plenty of data to go on. The liberation of Kuwait in 1991 cost the equivalent of 1% of the GDP of the time, or about $80 billion in today's dollars. Logically, Iraq was going to cost more, given its size. The Vietnam war cost between 1.5% and 2% of GDP each year during the eight years of major American commitment, or about $600 billion. At its peak we had more than 500,000 soldiers and other military in Vietnam. The publicly available information indicated that if we went into Iraq, it would involve less than one-third as many troops, implying an annual cost of between 0.5% and 0.7% of GDP. I assumed the war could take as long as 2 1/2 years, which led me to my upper estimate of $200 billion. One can argue about whether this or any other expenditure is a wise one, but any expenditure of this order of magnitude is simply not going to roil the domestic economy.
Yet my estimate conflicted with numbers circulating in Washington that were improbably low. Administration figures were giving Congress an estimate of $50 billion or so, while Democratic staffers on Capitol Hill were putting it at between $30 billion to $60 billion. As one wag put it, "The Pentagon could spend that much on a parade."
Given my sanguine overall view, the defensive reaction of my administration colleagues was puzzling to me. Budget director Mitch Daniels described my estimate as "very, very high." The communications people were furious. The main internal criticism I got was that I was "off message." Treasury Secretary Paul O'Neill declared it was "not possible" to estimate the cost of a prospective war when the President had not yet decided to go through with it. He hadn't, but does that mean I should have waited for his decision, then made a calculation on the consequences? Suppose my analysis had come up with a different conclusion, so that after the President had made his decision I would have to tell him, "By the way, Mr. President, the decision you just made may be economically ruinous." There is a phrase for such thinking that has to do with a donkey going through a door the wrong way.
The other aspect of the "off message" criticism was not the content, but that I was discussing the matter at all. The possibility of a war in Iraq was hardly a national-security secret. We were beginning a buildup to more than 100,000 troops surrounding the country and the UN Security Council was about to unanimously warn Saddam of "serious consequences," diplomatic code for war. The whole country, indeed the whole world, was discussing the possibility, including my son's fifth-grade class. The only institution not publicly involved in the discussion and its implications was the White House. It wasn't so much that I was "off message," but that I was breaking radio silence at a time power and decision-making were becoming more centralized in the White House. My war cost estimate became part of the never-ending office politics that dominate the West Wing and was doubtless a factor in why I left three months later.
The real problem with the interview for my colleagues in the White House was not my analysis but that I mentioned a hypothetical cost of the war that might be sufficiently high to raise budgetary objects in Congress. But there was a high cost to their strategy. Five years after the fact, I believe that one of the reasons the administration's efforts are so unpopular is that they chose not to engage in an open public discussion of what the consequences of the war might be, including its economic cost. I think that having done so not only would have been good government, but would also have been good politics. Suppose the President had gone out and said, "the war might cost $200 billion." If the lower estimates turned out to be correct, no one would mind. Government almost never comes in underbudget. On the other hand, if the costs turned out to be that much or even higher, the President would be spared the refrain we now hear from critics that he "lied about the cost of the war." Putting out only a best-case scenario without preparing the public for some worse eventuality was the wrong strategy to follow. Long-term credibility is the best asset any President has, and it is too bad for the country that his credibility was squandered by the White House not being upfront about what the war might cost.
There is a widely held but utterly false belief that wars are good for the economy. Taking resources that could be used to build homes, manufacture appliances, or invent and develop new technologies and using them instead to make things that get blown up is not good for an economy. It can foster inflation and erode a nation's capital base.
The Iraq war is not on that scale, and not likely to be. Hundreds of billions of dollars is a large sum no matter how one slices it; expressing such figures in terms of GDP helps by contrasting the number to the size of the economy. But this raises the question whether a number like "1% of GDP" is large or small. For this, imagine that we are not contemporaries trying to evaluate an ongoing conflict but economic historians a couple of centuries from now deciding whether going into Iraq was worth it for America. The future historian would note that for the past century America has been one of largest military powers on the planet. This naturally involved a budgetary commitment. For some of the past century, the American military was quite small. But on average American military spending was about twice the share of GDP that it now is, about 5%. Moreover, with Iraq consuming between 15% and 20% of that figure, the future historian would likely view the entire affair as relatively minor in purely budgetary terms. That is hard for us to comprehend while living through it, but it is the way the numbers break.
An even more challenging leap to the perspective of the future historian comes in the consideration of the human cost. Since 2003 nearly 4,000 U.S. troops have been killed in the war, and nearly 30,000 wounded. We Americans view every life as precious, and each of our service members who dies represents a huge personal tragedy for his or her loved ones. But our future historian would not necessarily regard the Iraq toll as a turn toward callousness toward our citizens in uniform. In the past century American military fatalities during wartime totaled about 620,000, or an average of 6,200 per year in a nation with an average population of about 165 million. In the century before that, American fatalities averaged about 3,800 per year in a country with a population that averaged only about 30 million. One reason is better medical care, which lowers the fatality rates of those who are wounded but leaves many who would otherwise have died with long-term disabilities.
Specialized care for wounded soldiers is one of many expenditures and social costs that some economists have swept into the accounting in an effort to get a bigger perspective. One of the first was from Yale's William Nordhaus, who in 2002 gave two estimates: a low number of $99 billion for a short, favorable war and a high figure of $1.9 trillion for a case in which "the U.S. has a string of bad luck or misjudgments." He acknowledged that such estimates were "virtually certain to be wrong." In 2006 economists Linda Bilmes and Joseph Stiglitz estimated that "the true costs may exceed $2 trillion," including a major increase in the cost of oil. The Congressional Budget Office last October gave an estimate of $1.2 trillion to $1.7 trillion for the entire war on terrorism, including Iraq and Afghanistan, through 2017; a month later the Democratic majority on the Joint Economic Committee pushed that number to $3.5 trillion as a high-side estimate. While many of those costs can reasonably be connected to the war, some of them are dependent on so many other variables that it enters the realm of the cosmic to tie them all together into one pricetag. Simply adding up the costs doesn't reach a sum that tells you on its face whether the war is worth it. Moreover, a 15-year cost estimate needs to be compared with 15 years of economic output, which will total $300 trillion.
If the Bush administration was less than candid about the cost of the war, the war's current critics are conveniently forgetting that there were costs involved in not going to war. If Saddam had not been deposed, it is not as if the power players of the Middle East would be currently sitting around some campfire singing "It's a Small World After All." Nor is it likely that we would have no troops in the region. To understand the true cost of the war, budgetary or otherwise, one has to go back to consider what the realistic alternative was at the time.
In late 2002 the U.S. had more than 60,000 troops stationed in the countries around Iraq to back up UN Security Council resolutions. Hans Blix, the UN's weapons inspector, credited those forces as being the reason he was getting even limited co-operation from Saddam. In the congressional debate about authorizing the war, the opponents' position was that we should continue with the UN inspection process, which required U.S. troops to stay on the scene. It was presumed that Saddam did have weapons of mass destruction (WMDs), not just by President Bush, but by the National Intelligence Estimate and the spy agencies of many other countries. It would have taken a long time to convince a skeptical world that Saddam's noncompliance with 17 UN resolutions was innocent. Under the alternative scenario of the time American forces would have been stationed around Iraq for years, many of them in harm's way.
The true cost of the Iraq war, therefore, is not the pricetag we see in the papers, but the cost of that conflict relative to the alternative scenario on offer. We would have still stationed half to three-fourths as many troops as we now have in Iraq in neighboring countries. The cost of stationing them there would be lower than what we now pay but would still be substantial. The continuous use of air power would have been necessary to police the no-fly zones established in the ceasefire of the first Iraq war. Increased surveillance of the Iran-Iraq and Syria-Iraq borders would have been necessary to limit terrorist migration. While we did not find WMDs in Iraq, there was plenty of evidence on the ground to suggest that Iraq would have developed them if it had had the opportunity, as it had in the past. Hence, the real alternative to the war was probably eternal vigilance and a large troop commitment. I don't claim that my back-of-the-envelope calculations would be any better than they were in 2002, but it seems plausible that not invading Iraq would probably have cost at least a third as much as we ultimately spent on deposing Saddam.
We went into Iraq with a set of goals in mind, but most of them were intangible. We need to consider whether we achieved our objectives, or other benefits, to know whether it was worth the cost. While no WMDs were found in Iraq, the U.S. demonstrated its willingness to go to war over them. Shortly after Saddam fell, Libya's ruler Muammar Qadaffi decided to reveal that he had a stockpile of WMDs-along with a nuclear weapons program-and that he would like to give them up voluntarily and abide by the norms of international law. The timing of his conversion made it clear that he had learned some lessons from Saddam's defeat. Moreover, the National Intelligence Estimate released in December concluded that Iran probably suspended its nuclear weapons program in 2003, around the same time as the Libya move. This latter finding is controversial, with no certainty regarding whether Iran has since restarted the program it denied ever having. But if the estimate is correct, the timing of Iran's decision to suspend its program, bowing to what the intelligence estimate called "international pressure" with 150,000 American troops suddenly next door, suggests that at least some good was done on this front.
In Iraq the war toppled an outlaw regime that not only had been flouting international law but had been a systematic abuser of human rights. It's fair to claim that America cannot afford to liberate all the people who live under oppressive regimes, but the causes of human freedom and dignity have certainly gained by his downfall.
These intangibles are real but are hard to quantify against the costs. It is certainly true, I would argue, that the net costs of the Iraq war are much lower than war critics maintain, or even than the usual budgetary accounting suggests. Each individual must make up his own mind about whether these imperfect successes justified the cost. Most voters don't believe they do, given the evidence to date, polls say. But to those skeptics I offer one more argument in favor of Iraq passing the cost-benefit test.
A key aspect of good decision analysis is the question "What if I'm wrong?" The administration and much of the world intelligence community turned out to be wrong about Saddam's WMD program. The costs of that error are now clear. But what if the administration had decided to leave Saddam alone and, in turn, he had had WMDs? The costs to the world would have been much higher.
A war for home territory is the most expensive one to lose, but even though the American heartland is not directly at stake, there are still huge consequences to whether the U.S. is perceived as winning or losing in Iraq. Like it or not, a number of significant countries in the region depend on the perception that America would block any threat to their peace and security. A precipitate American withdrawal suggesting a lack of American commitment to the region or, worse, the perception that America had been defeated, could lead to a major regional realignment. Most countries in the gulf would have to reconsider their security situation and choose either between rearmament (including the acquisition of nuclear weapons) or cooperation with Iran, which would be happy to fill the vacuum left by an American defeat or withdrawal. This would ultimately cost us in ways far beyond the ability of dollars to measure.
On the other hand, an American success in Iraq could also change the course of history in the Middle East, where the U.S. has made huge investments in security over many decades. A stable Iraqi government selected by its own people would be a first in the Arab world. It would suggest that there is a third alternative to the current choice between repressive regimes and Islamic fundamentalism. It may have been naive to think it would happen in one or two years, and the administration can probably be faulted for not changing its occupation strategy sooner, but the initial success of the U.S. surge in troop levels shows that the decision is not yet out of our hands.
Whether we win or lose will come down to our perseverance and our willingness to learn and adapt as a result of our mistakes. It was former Secretary of State Colin Powell who cited the so-called Pottery Barn rule in warning President Bush about America's commitment after the invasion: "You break it, you own it." Well, we own it. Whether or not we like the decision to have invaded in March 2003 is immaterial now. This is difficult for an economist who deals with figures all the time to admit, but when it comes to war, the dollar cost is hardly a major concern. I am not a military expert. It's the military's judgment that should determine whether to double our investment or take our losses and go home. If our military leaders think we can ultimately prevail, we should stay. If we ultimately cannot, we should leave. It's as simple as that.
This has been the case in all our wars. World War II ultimately cost about 140% of GDP. Would FDR have thought, "Well, the war is worth it at 130% of GDP, but not at 170%"? In terms of the damage it did to the American economy and the American heartland, or simply in terms of the number of dead, the Civil War dwarfed all the others. But Lincoln certainly never took a pencil to do a cost-benefit test. Nor did John F. Kennedy when he said, "We will pay any price, bear any burden ... to assure the survival and the success of liberty." Had any of these leaders done that, they would have fallen into the trap that the economics profession is so often accused of: They would know the price of everything and the value of nothing.
Adapted from What a President Should Know...But Most Learn Too Late, by Lawrence B. Lindsey with Marc Sumerlin, published by Rowman & Littlefield Publishers, Inc. Copyright 2008 by Lawrence B. Lindsey and Marc Sumerlin.