Globalist Analysis

Iraq: Long-Term Costs and Benefits

How do economists think about winning the war against Saddam Hussein's Iraq?

What are the costs and benefits to war with Iraq?

Takeaways


Many Europeans believe that America has fought the war primarily to control Iraq's oil reserves. However, these conspiracy theorists evidently overlook the fact that Iraq's oil production is worth only about $25 billion per annum — while the war will probably cost over $100 billion.

It will probably also cost another $20-30 billion to restore Iraqi oil output to its 1979 peak of 3.5 million barrels per day. Ultimately, Iraqi oil itself is no bargain.

The truth is that the United States has fought the war because it viewed Saddam Hussein as a long-term threat to the security of the region.

And the United States wants to promote democratic values in the Middle East.

There will be advantages to controlling Iraq's oil. But they will be modest in comparison to the cost of the war — and the political and economic risk associated with it.

The main cost of that political and economic risk will be felt in the financial markets. After all, that is where such risk is priced. What possible future costs will those markets register?

Financial markets will continue to be concerned about the cost of the war. They are paying especially close attention to its potential impact on both the U.S. budget deficit and the current account deficit.

At this stage, foreign holdings of U.S. securities are now equal to 71% of GDP.

And the U.S. dollar will always be vulnerable to perceptions that U.S. fiscal policy will further depress national savings — and expand the current account deficit.

What about the Iraq war? Will it add to perceptions of U.S. weakness in this context?

The war could easily expand the U.S. budget deficit by $100 billion. That sounds like a lot.

Compared to previous wars in U.S. history, however, the cost is modest. The Second World War cost 33% of GDP. The Korean War cost 5% of GDP — and the Vietnam War cost 12% of GDP.

The current war with Iraq will cost the United States about 1% of its GDP. The cost of the occupation is unlikely to exceed 0.3% of GDP per annum. Ultimately, financial markets are likely to conclude that the financial risk to the United States is smaller than they first believed.

But there is good news for the U.S. Treasury, as well. The defeat of Saddam Hussein and his sons will also reduce the long-term costs of containment in the region.

The cost of the containment policy was higher than many people realize.

Prior to the war, the United States devoted about 30,000 troops, 30 ships (including a carrier battle group) — and about 250 aircraft to patrolling the region.

That was a long-term, permanent cost. So the $100 billion spent in 2003 for the war against Saddam Hussein will result in substantial savings in the future.

Ultimately, I view the direct financial costs for the war as surprisingly affordable. There may be much to debate in terms of politics — and the path to real and lasting peace in Iraq is still likely to be rocky.

But from the point of view of U.S. finances, the war is finished. It is simply not a big enough event to make a dent in the U.S. economy.

 A History of U.S. War Costs
Conflict Total Direct Cost (in 2002 $bn) % of Annual GDP
World War II 1941-1945 2,896.3 33
Civil War 1861-1865 62.0 21
World War I 1917-1918 190.6 12
Vietnam 1964-1972 494.3 12
Revolutionary War 2.2 8
Korean War 1950-1953 335.9 5
War of 1812 1.1 4
Spanish War 1898 9.6 3
Mexican War 1846-1848 1.6 1
First Gulf War 1990-1991 76.1 1
Concept and copyright: The Globalist. Source: David Hale

About David Hale

David Hale is a Chicago-based macroeconomist and chairman of David Hale Global Economics, Inc.

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