FPIF Talking Points:

The Economic Costs of a War with Iraq

By Miriam Pemberton
September 13, 2002

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"[Starting a war with Iraq] is clearly a decision that is motivated by George W Bush’s desire to please the arms and oil industries in the United States of America."
—Nelson Mandela

If a clear case was made for why an attack on Iraq were necessary—if it had attacked the U.S., for example—the issue of economic cost would not arise. The U.S. constitution defines providing for the common defense as the government’s first mandate. To fight a just war, the U.S. would spend whatever it would take to wage it. But when the nation has not been attacked, when the other justifications proffered for going to war are as murky as they are, when there is much dissension within the government and in particular within the military about the wisdom of an attack, and when the idea of doing so has virtually no support from our allies, it makes sense to weigh the economic costs into our deliberations. Here are a few facts to consider:

• Each time news reports create the impression that an attack is certain, oil prices spike.1 Following the 1990-1991 Gulf War, oil prices doubled, and stayed high for the better part of a year.2 A repeat would create ripple effects throughout our economy; all the airlines, for example, may need a bailout.
• Estimates by Wall Street analysts indicate that just a $10/barrel rise in oil prices—half the amount of the last Gulf War effect—would over a year’s time reduce U.S. GDP growth by about half a percent and add nearly one percent to inflation.3
• Large tax cuts and military spending increases have turned budget surplus into deficit, just as they did during the Reagan years. The projected deficit for FY 2002—$157 billion—is already well over one percent of GDP.4 As the deficit grows, increases in the public cost of borrowing will put pressure on long-term interest rates, and crowd out private-sector borrowing. The consumer spending that has been buoyed by extremely low rates financing purchases like home mortgages and new cars is likely to dry up fast. All point to slower growth, and may trigger a recession.
• Eighty percent of the costs of the last Gulf War were borne by our allies. This time it appears so far the U.S. would be going it alone. The last time the price tag was $80 billion. No one believes that this time it would be that cheap.
• While the Gulf War was largely financed by others, the U.S. paid dearly to win political and logistical support from other countries. For example, the U.S. had to give Turkey about $5 billion in debt forgiveness and other financial benefits to secure their reluctant support for the war.5 This time, with most countries openly opposing a U.S. war, the price tag for any type of cooperation is likely to be much more expensive.
• With the budget surplus gone, these costs would inevitably create deeper deficits and likely put out of reach initiatives like Medicare drug coverage and new funding for education and environmental protection.6
• Nor are the quick in-and-out scenarios for the war plausible. Following a war, the U.S. must be prepared to maintain a protracted military presence lasting years, not months. Scott R. Feil, retired colonel and expert on post-conflict reconstruction, recently estimated that the cost of security forces in the first year could cost up to $16.5 billion. Feil estimates that the U.S. might pay $1-2 billion per year after that. These estimates do not take into consideration the costs of a destabilized Middle East on the world economy. It can be said with certainty that they would be massive.
• Growth deceleration in the American economy is already underway: the first quarter annualized rate of five percent had by the second quarter dropped to 1.1%.7 In a climate of more oil price hikes, and more deficit spending to finance war and its aftermath in Iraq, all on top of increased spending for the war on terrorism, it is hard to envision how our economy has any hope of rebounding.

Notes

1. For example, on August 26th, the price of oil on the U.S. market jumped by sixty-five cents a barrel following Vice President Cheney's speech that day. See Howard Schneider, “Iraqi Envoys Courting Support in Syria, China,” Washington Post, August 27, 2002.
2. See Patrick E. Tyler and Richard W. Stevenson, “Profound Effect on U.S. Economy Is Seen From a War Against Iraq,” The New York Times, July 30, 2002.
3. See Sharif Ghalib, “Costs to U.S., world of Iraqi Invasion Exceed Those of Gulf War,” Oil Daily, August 9, 2002.
4. Congressional Budget Office, “The Budget and Economic Outlook: An Update,” August 2002.
5. See Ivan Eland, “Top 10 Reasons Not to 'Do' Iraq,” The Cato Institute, www.cato.org.
6. Patrick E. Tyler and Richard W. Stevenson, op. cit.
7. Sharif Ghalib, op.cit.