Cost of Iraq War
Source Ken Hanly
Date 06/11/05/21:55

The more-than-$2-trillion war
COMMENTARY | November 01, 2006

Two scholars, one a Nobel Prize winner, revisit their
estimate of the true cost of the Iraq war – and find
that $2 trillion was too low. They consider not only
the current and future budgetary costs, but the
economic impact of lives lost, jobs interrupted and
oil prices driven higher by political uncertainty in
the Middle East.

By Linda Bilmes
and Joseph E. Stiglitz

This article originally appeared in the December 2006
issue of the Milken Institute Review.

IN JANUARY, WE estimated that the true cost of the
Iraq war could reach $2 trillion, a figure that seemed
shockingly high. But since that time, the cost of the
war – in both blood and money – has risen even faster
than our projections anticipated. More than 2,500
American troops have died and close to 20,000 have
been wounded since Operation Iraqi Freedom began. And
the $2 trillion number – the sum of the current and
future budgetary costs along with the economic impact
of lives lost, jobs interrupted and oil prices driven
higher by political uncertainty in the Middle East –
now seems low.

One source of difficulty in getting an accurate
picture of the direct cost of prosecuting the war is
the way the government does its accounting. With “cash
accounting,” income and expenses are recorded when
payments are actually made – for example, what you pay
off on your credit card today – not the amount
outstanding. By contrast, with “accrual accounting,”
income and expenses are recorded when the commitment
is made. But, as Representative Jim Cooper, Democrat
of Tennessee, notes, “The budget of the United States
uses cash accounting, and only the tiniest businesses
in America are even allowed to use cash accounting.
Why? Because it gives you a very distorted picture.”

The distortion is particularly acute in the case of
the Iraq war. The cash costs of feeding, housing,
transporting and equipping U.S. troops, paying for
reconstruction costs, repairs and replacement parts
and training Iraqi forces are just the tip of an
enormous iceberg. Costs incurred, but not yet paid,
dwarf what is being spent now – even when future
anticipated outlays are converted back into 2006

Our Debt to Veterans

A major contributor to this long-term cost is the
medical care and disability benefits provided to
veterans. More than one million U.S. troops have now
served in Iraq. And once they leave, each is entitled
to a long list of benefits for the remainder of his or
her life. Veterans can apply for compensation for any
disabling injury or disease (physical or mental) that
occurred on active duty or any existing condition that
was made worse by military service. Benefits are based
on the extent of the disability, ranging from 10
percent to 100 percent. And, because some medical
problems do not become apparent right away, claims are
likely to be filed for years after the war is over.

There are 2.6 million veterans currently receiving
disability pay, including a sobering 40 percent of the
soldiers who served during the four-week-long Gulf War
in 1991. Accrued liabilities for U.S. federal
employees’ and veterans’ benefits now total $4.5
trillion. Indeed, our debt for veterans’ health and
disability payments has risen by $228 billion in the
past year alone.

These numbers are unlikely to fall. More than half of
the troops in Iraq have served two or three tours of
duty under grueling conditions. Moreover, depleted
uranium, used in armor-piercing artillery shells
because it is hard, heavy and cheap, was implicated in
many of the medical claims by soldiers from the first
Gulf War. And the same radioactive material was used
in the toppling of Saddam Hussein.

Note, too, that improvements in body armor mean that
an unusually high number of soldiers are surviving
major injuries, but ending up disabled. About 20
percent of survivors have suffered major head or
spinal injuries, 18 percent incurred serious wounds
and an additional 6 percent are amputees. The
estimated 7,000 veterans with severe brain, spinal,
amputation and other serious injuries will require a
lifetime of round-the-clock care.

Government medical facilities are currently
overwhelmed by the needs of soldiers injured in Iraq.
Some 144,000 of them sought care from the VA in the
first quarter of 2006 – 23 percent more than the Bush
administration had estimated for the entire year!
Similarly, the government projected that 18,000
returning soldiers would seek treatment for
posttraumatic stress disorder in 2006 – but the VA
treated 20,638 Iraqi war veterans for PTSD in the
first quarter alone. All told, in the past year, the
VA has added 250,000 new beneficiaries and still has a
backlog of more than 400,000 pending claims.

Rebuilding the Post-Iraq Military

Another big future obligation is the cost to “reset”
the military – that is, to restore U.S. forces to
their strength and preparedness prior to Iraq. This
will require a major capital investment to replace
military equipment depleted or destroyed by the war.
The capital cost is in addition to the operating costs
for repairs, ammunition, spare parts and fuel. For
example, the United States now has 37,000 light
military trucks in Iraq accumulating mileage at up to
six times the peacetime rate. And while there may be
no good time to replace the weapons, vehicles, medical
equipment and the like that will be used up, it’s
clear the bill will come due at a particularly bad
time – that is, in the decades during which Americans
will be wrestling with the question of how to pay for
the pensions and medical care of retired baby boomers.

Budgetary Cost of the War

Congress has already appropriated approximately $430
billion for military operations, reconstruction and
related programs in Iraq and Afghanistan. And these
cash outlays have been rising as the war has
progressed. In fiscal year 2003, the average monthly
cost of operations was $4.4 billion, while today
operations are running about $10 billion a month.

Of the million troops who have served in Operation
Iraqi Freedom, some 400,000 are reservists or members
of the National Guard – which adds an additional layer
of costs. Reservists are expensive to activate because
the military needs to start paying them full-time
salaries (instead of paying for one weekend a month).
By contrast, regular forces receive full-time salary
in war or peace. Most reservists are older and have
families, so they are paid additional compensation
while on active duty. Moreover, if they are killed,
their dependents are entitled to compensation and
benefits including housing, education loans and job

The escalating costs also reflect the vast sums that
the Defense Department has been spending to recruit
soldiers. In the past two years, the armed forces have
nearly doubled the number of recruiters, increased
bonuses to as much as $40,000 for new enlistees, and
paid special bonuses and other benefits worth as much
as $150,000 for members of the Special Forces who
re-enlist. The Defense Department has also relied on
contractors to support the war effort, which has
proved to be a very expensive way to keep the troop
count down. In many contracts, security costs
represent 25 to 30 percent of the total outlay. The
Pentagon has managed some savings – such as no longer
needing to police the “no-fly” zone that protected the
Kurds before Saddam was ousted. But on balance, the
Defense Department has increased spending by several
billion dollars annually for war-related expenses that
are over and above the sums going directly to combat

While economists don’t generally include interest on
extra budget deficits as a cost of the war – interest
payments can be viewed as transfer payments to
creditors – the budgetary reality is very different,
and thus interest costs are worth considering here.
With rising interest rates (themselves partly due to
the war, as central banks around the world work to
combat the inflation brought on by high oil prices),
these costs are soaring. The Congressional Budget
Office estimates that the interest payments on the
money borrowed to finance the Iraq war will total $264
billion to $308 billion.

We have used the CBO’s two scenarios for expected
troop deployment to make a reasonable projection of
the likely underlying costs of operations, and then
adjusted these numbers to an accrual basis in order to
reflect future costs outlined above. Looking purely at
direct costs to taxpayers, we estimate that the total
cost of the Iraq war will be in the $1 billion to $1.4
billion range under the CBO’s core assumption that the
U.S. maintains a small presence in Iraq through 2016.
Even under a more optimistic scenario – that all U.S.
troops are home by 2010, the budgetary cost of the
Iraq operation will reach nearly $1 trillion.

Economic Costs of the War

Economic costs differ from budgetary costs in three
ways. First, some costs are borne by individuals and
families or by non-federal-government agencies, and
thus do not show up in federal accounts. Second, the
prices paid by the government do not reflect the
market value of the services purchased. Third,
economic costs do not include interest payments (which
from an economic perspective can be viewed as transfer
payments), but do include long-run impacts on the
growth of the economy. Here, we have focused only on a
few of these additional costs: the loss of productive
capacity of the young Americans killed or seriously
wounded in Iraq, the loss of civilian wages that would
have been earned by those called back to duty in the
Reserves, and the macroeconomic effects that reduce

Military Fatalities, Serious Casualties and Reserves
Wage Differential

Although it is problematic to translate the value of a
life into monetary terms, economists and private
insurance firms commonly determine the “value of a
statistical life” (VSL) by inferring how much workers
demand to perform hazardous jobs (think mining or
firefighting) or how much consumers are willing to pay
to reduce risk (think mammograms or smoke alarms). In
non-military areas, such as safety and environmental
regulation, the federal government values the life of
a young adult male at around $6.5 million.

One could argue that the true cost of death and
disability for an all-volunteer army is already
reflected in military pay premiums for hazardous duty.
But we think this greatly underestimates the real
cost. First, recruits, many of whom are too young to
buy a beer legally, have little information about the
likelihood of being killed or injured, or how much
they will come to value their own safety later in
their lives. Second, many of the soldiers in Iraq are
not really volunteers. The majority serving there are
either reservists or Guard members who never expected
to go to war, or regular army personnel ordered by the
Pentagon to serve far beyond their scheduled length of

Hence, we would argue that very little of the true
cost of the deaths of American soldiers is reflected
in the budget. Using a VSL estimate of $6.5 million,
the economic cost of the American soldiers and
contractors who have already lost their lives adds up
to $16.9 billion. (We have not included the cost of
the estimated 40,000 to 100,000 Iraqis killed in the

By the same reasoning, the budgetary expenditures also
underestimate the true economic costs to the soldiers
wounded because the outlays do not include adequate
compensation for what tort law calls pain and
suffering, or additional health care expenditures by
the soldiers’ families and non-federal-government
agencies. We believe veterans, and their families,
receiving full disability payments bear costs equal to
those who die in combat, and therefore we should
assign each case a non-budgetary cost of $6.5 million
(the value of a statistical life). We assign a modest
20 percent of that figure to those who are wounded
less seriously.

There is also an economic cost in the difference
between civilian and military wages for reservists.
This difference is a cost borne by the economy and
shows up as lower productivity. In their study of the
economic costs of the war published by the
AEI/Brookings Joint Center in 2005, Scott Wallsten and
Katrina Kosec calculated that the “opportunity cost”
of using Reserve troops at current levels is $3.9
billion to date.

Note, moreover, that a disproportionate number of
these reservists work in critical “first-responder”
jobs back home – as fire-fighters, police and
emergency medical personnel. Nearly half the police
forces in the United States now have some of their
ranks deployed in Iraq, and the average length of
Guard mobilization is 480 days. It is difficult to
measure the cost of this deployment in purely economic
terms because there is a large unquantifiable
“insurance” value of having trained first responders
available for domestic emergencies. Consider, for
example, the losses associated with Hurricane Katrina
that might have been avoided if the 7,000 Louisiana
and Mississippi Guardsmen in Iraq had been home to

Macroeconomic Effects of the War

As large as the direct costs are, the indirect impact
on total economic output may be several times larger.
Consider just two sources of macroeconomic cost.

Oil Prices

The price of oil is significantly higher today than it
was before the war in Iraq. But to even begin to
assign a macroeconomic cost to this, we need to know
what the price would have been if there had been no

Commodity futures markets provide some insight. Before
the war, they were implicitly forecasting that oil
prices would remain in the range that they had been –
$20 to $30 a barrel – in spite of other, more
predictable factors affecting prices, such as strong
economic growth in China and India. Today, by
contrast, the oil futures markets predict prices will
be in the mid-$60-per-barrel range during 2006 and
2007, and fall no earlier than the year 2008.

One explanation is that the instability in the Middle
East brought about by the Iraq war has increased the
risk of investing in the region. But because costs of
extraction are so much lower in the Middle East, high
oil prices have not stimulated a commensurate supply
response elsewhere. If political stability is
restored, the reasoning goes, prices will fall and
investments in high-cost liquid fuels elsewhere in the
world – think heavy oil in Venezuela or tar sands in
Canada – will prove to be losing ventures.

We believe, accordingly, that the best estimate of the
impact of Iraq on oil prices is a large proportion of
the $45-a-barrel increase since the war began.
Nonetheless, we offer a conservative calculation based
on the assumption that only a small fraction of that
amount – $5 to $10 – is due to Iraq. Given U.S.
imports of roughly five billion barrels a year, a
$10-per-barrel increase translates into an extra
expenditure of approximately $50 billion. Americans
are poorer by that amount. If merely a $5 price
increase persists for five years, this generates a
conservative estimate of $125 billion in costs. More
plausibly, if we base our estimates on a $10 price
increase, and assume (as futures markets believe) it
extends for at least six years, the cost is $300

Most macroanalyses assume that one must reckon with
more than just these direct supply-side effects if the
economy is prone to operating below full capacity. The
increase in oil prices means Americans have that much
less to spend on other goods – including goods made in
the United States. This in turn leads to a reduction
in aggregate demand, and the reduction leads to lower
economic output. Standard macroeconomic models suggest
an “oil multiplier” of around 1.5 (achieved over two
years). Thus, assuming that the economy remains below
its potential, our cost estimate rises to $450

Budget Reallocation

The macroeconomic costs associated with the increased
expenditure on the war are more difficult to estimate.
If we were not spending the money on Iraq, would we be
spending it on something else? Would we have had the
same deficit, but just more tax cuts? Would the
Federal Reserve have stopped raising interest rates
sooner if it wasn’t worried about the inflationary
effects of higher oil prices – and thereby made
recession in 2006 less likely?

Here, we offer a very conservative estimate of these
macroeconomic effects using an “expenditure-switching”
model. Spending money to hire, say, Nepalese workers
in Iraq provides little indirect stimulation to the
American economy – far less than would have been
provided if the money had been spent on investments in
schools or roads (or, for that matter, on houses and
cars) in the United States. In estimates presented
last January, we put the cost of budgetary impacts
(including expenditure switching and the impact on
future productivity) at $450 billion.

$2 Trillion and Counting

The total costs of the war, including the budgetary,
social and macroeconomic costs, are likely to exceed
$2 trillion. As large as these costs are, an equally
large set of costs have been omitted. We have not
included the costs borne by other countries, either
directly (as a result of military expenditures) or
indirectly (as a result of the increase in the price
of oil.) Then there are the intangible costs – the
cost of our reduced capability to respond to national
security threats elsewhere in the world, and the cost
of rising anti-American sentiment in Europe and the
Middle East. Americans have long taken pride in
fighting for human rights. But our credentials have
been badly tarnished by the Iraq war, leading to a
sharp decline in America’s “soft power.” On issues
from trade negotiations to global warming to the
international criminal justice system, this decline
will have a continuing impact on the United States’
ability to have its point of view prevail.

Last Thoughts

In responding to cost-based criticisms of the invasion
and occupation of Iraq, the Bush Administration argues
that one does not go to war on the basis of
calculations by bean counters. After all, Franklin
Roosevelt did not wait to respond to Pearl Harbor
until his budget analysts could assay the costs and
benefits. But, with Iraq, America had a choice of
whether and when to attack. If there ever was a
“project” that should have been subject to careful
scrutiny from all perspectives – including the
economics – this was it.

Just as going to war was a matter of choice, staying
in Iraq is also a matter of choice. There may be costs
associated with leaving. But there will be costs
associated with staying. Every day we stay in Iraq we
accrue costs that will be reflected in budget outlays,
lost productivity and individual pain and suffering
for decades to come. We need to ask: are they
outweighed by the benefits?

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