The Cost of Not Liberating Iraq

Doing an economic cost-benefit analysis is more complicated than you think.

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Was Iraq worth it? That's the economic question Democrats are again highlighting because of Gen. David Petraeus's congressional testimony this week. And implicit in that question is the assumption that even if the surge works and Iraq someday ends up as a democratic capitalist, antiterrorist ally of America, the price has been too high—whether that price is $500 billion, the amount currently spent on the war, or the $1 trillion to $3 trillion that some economists like Joseph Stiglitz are forecasting the conflict will eventually cost U.S. taxpayers. (Those high estimates include every possible related cost, such as higher oil prices and future medical care for our injured warriors.)

OK, the numbers are what the numbers are. But let me add some perspective. If the high number is correct, then the Iraq war will have cost as much as World War II, in inflation-adjusted dollars. Keep in mind, though, that WWII cost twice as much as the nation's total gross domestic product in the 1940s, while Iraq would be the equivalent of maybe a quarter of the modern U.S. economy. And as a pure matter of economic and scenario planning, this all strikes me as a bit simplistic, anyway. A few observations:

1) It should be tough for anyone to take seriously the financial concerns of politicians—of either party—who are doing nothing about the $2 trillion in additional long-term liabilities (that is the number former U.S. Comptroller General David Walker cited to me last week) that Medicare and Social Security are racking up every additional year that no action is taken. ("Neither party is too good at math," Walker joked.) By my back-of-the envelope calculation, the cost of doing nothing on these issues during the span since we invaded and liberated Iraq works out to some $10 trillion.

2) Any decent cost-benefit analysis would examine not only the current situation but also the potential costs of other scenarios. That's what professional scenario planners at companies like Shell do. A continued policy of containment would probably have big costs as well.

Indeed, a 2006 study from three economists at the University of Chicago's business school concluded just that. It looked at the costs of everything from compelling Iraqi compliance with a rigorous process of weapons inspections and disarmament to an eventual regime-changing war with Iraq in the future. Factoring in all those contingencies, the authors find that a containment policy would cost anywhere from $350 billion to $700 billon.

What's more, a continued containment policy might also have translated into higher oil prices anyway if Iraq was seen to be gaining in military might despite our efforts to box it in. And if our troops were not tied down in Iraq, maybe war with Iran would be more likely, the possibility of which would also boost oil prices.

3) And just to emphasize the complex nature of doing a cost-benefit analysis, let's assume that the Iraq war is playing a big role in the current high price of oil. Aren't high prices spurring more interest in alternative technologies that could reduce possible climate-altering carbon emissions and push America toward energy independence? As jurist Richard Posner pointed out a while back on the blog he cowrites with Nobel laureate Gary Becker:

My own view, moreover, is that higher oil prices are a very good thing from the standpoint of combating global warming, though I would prefer to see them brought about by high taxes on fossil fuels, which would have the additional benefit of reducing the wealth of oil-producing nations.

4) The U.S. economy has performed quite well during the five years of the Iraq war. CNBC's Larry Kudlow—a Friend of the Blog—runs a few of the numbers:

Real GDP has increased by 16 percent, or 3 percent annually. The unemployment rate has hovered below a historically low 5 percent for quite some time. Nearly 10 million jobs have been created. Household net worth has increased by $20 trillion. Industrial production has expanded by 13.5 percent. Even home prices, despite the current correction, have increased by 20 percent. Global GDP has averaged nearly 5 percent annually. The capitalization of the world's stock markets increased 159 percent, or $35 trillion. Meanwhile, new emerging-market economies saw their stock market index collectively rise by 223 percent.

Iraq war (2003-2011)