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The cost of war
Three sobering assessments about the economic ramifications of war with Iraq.
February 6, 2003: 1:11 PM EST
By Kathleen Hays, CNN/Money Contributing Columnist

NEW YORK (CNN/Money) - Before he got the boot, former White House economic adviser Larry Lindsey said he thought a war with Iraq would cost $100 billion to $200 billion. But he also said the assumed U.S. victory could free up oil (remember, Iraq is second only to Saudi Arabia when it comes to proven oil reserves) which would be good for the U.S. economy.

The administration hasn't seemed eager to talk about how much a war might cost, no doubt in part because it is already proposing tax cuts that will swell the nation's budget deficit. Maybe that's one reason why Larry had to walk the plank.

The common, hopeful view on Wall Street is that a short, decisive victory in a war with Iraq wouldn't cost much and would lead to a big stock market rally, which would be good for investor and consumer confidence.

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All the more reason to take a look at some sobering assessments of what a war may entail. Here are three, all from respected analysts.

Yale University economist William Nordhaus, who will be my guest on CNNfn's Money & Markets this week, has done a masterful job of analyzing the economic consequences of a war with Iraq. In a paper published last fall, he begins by pointing out that the cost of war has often been badly miscalculated.

Abraham Lincoln's Treasury secretary estimated the direct cost of the war to the North would be $240 million (in 2002 dollars) or about 7 percent of gross domestic product, but it ended up costing $3.2 billion, about 13 times the original cost. Even as the buildup occurred during the Vietnam War, the Pentagon in 1967 underestimated the war's cost by 90 percent; the conflict dragged on until 1973 and cost between $110 billion to $150 billion.

That war ended up costing about 12 percent of GDP. The Persian Gulf War of 1990-91 was by far the cheapest war at just 1 percent of GDP. But Nordhaus thinks it unlikely that the United States will get off so cheaply this time.

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First, remember that the U.S. was able to convince its allies to foot most of the bill the last time around. That seems unlikely today.

Second, Nordhaus says there is a chance that Iraq will mount a strong urban defense strategy that would prolong the combat, boost casualties and lead to broader destruction of the country's infrastructure.

Iraq might also be able to use chemical and biological weapons, and there's the risk that a war with Iraq will spill over into the rest of the region. In fact, he says that "successfully avoiding a wider war is probably key to a rapid and relatively bloodless victory."

Third, there will be substantial "follow-on costs" like reconstruction, occupation and humanitarian assistance. Then there is the possibility of wholesale destruction of oil facilities not just in Iraq but in neighboring countries.

Spending won't end when the war does

Nordhaus comes up with two scenarios. The low-cost, quick war would total $99 billion. The high-cost, protracted war could total $1.924 trillion (!).

Nordhaus looks at the cost of fighting in Iraq. But there's a new risk the U.S. didn't worry about in 1991: an attack on U.S. soil.

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As the threat of war with Iraq increases, the question of how much a war might cost is becoming crucial. CNNfn's Kathleen Hays takes a closer look at how such a war could affect the U.S. economy.

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Former presidential hopeful and Senator Gary Hart had some frightening things to say about that possibility in a New York Times magazine piece last week. Hart was appointed in 1998 to President Clinton's Commission on National Security/21st Century, a bipartisan panel given the job of trying to envision the future of national security; the co-head was former Republican senator Warren Rudman of New Hampshire.

In its report the commission warned, "Americans will likely die on American soil, possibly in large numbers." The date of that report? September 15, 1999.

Now Hart is warning that a U.S. war with Iraq will not suppress the threat of a terror attack but instead will actually stimulate it, and, he's worried about how ready the U.S. is to prevent one from happening.

'An indefinite stay'

If you're of the mind to dismiss an academic and a Democratic pol as Bush bashers, here's one more authoritative voice. Retired General Wesley Clark in an interview last week was skeptical of analysts who expect a quick victory and a sudden flourish of democracy throughout the Middle East.

"Those predictions are incredibly overoptimistic," he said. "What we have to be prepared for is an indefinite stay in Iraq, at least 100,000 people there for the first year or two, several billion dollars a month in costs, continuing frictions and problems politically as a result of this, some casualties on a monthly basis coming out as Arab sentiment rises, and a deepening resentment of Americans from this war. "

Of course, there is another argument: that the cost of not fighting the war if that is what it comes to is even worse, as former U.N. weapons inspector Richard Spertzel said on my show last week.

"There are dangers in waiting, because I firmly believe that Iraq has longtime dealing with terrorists and very specifically al Qaeda. And I think that the risk of Iraq to the United States, the contiguous 48 states as well as Alaska and Hawaii, is from terrorists' use of the weapons of mass destruction that Iraq might present. And that is an immediate risk."

If you want to read more of Nordhaus's study take a look at Yale's web site. Watch Money and Markets Thursday, Feb. 6, at 5 p.m. because I will be interviewing him and asking if he has any updates. And Gary Hart is slated to appear on Friday to talk about the terror threat and the fact that he is thinking of running for president next year. Today, tune in to hear what Robert McFarlane, former National Security adviser under Ronald Reagan, has to say about Secretary of State Colin Powell's report to the U.N.  Top of page

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