The Cost of War, Unnoticed

By Lori Montgomery
Washington Post Staff Writer
Tuesday, May 8, 2007

The global war on terror, as President Bush calls the fighting in Iraq and Afghanistan and related military operations, is about to become the second-most-expensive conflict in U.S. history, after World War II.

Since the Sept. 11, 2001, terrorist attacks, Congress has approved more than $609 billion for the wars, a figure likely to stand as lawmakers rework their latest spending bill in response to a Bush veto. Requests for $145 billion more await congressional action and would raise the cost in inflation-adjusted dollars beyond the cost of the wars in Korea and Vietnam.

But the United States is vastly richer than it was in those days, and the nation's wealth now dwarfs the price of war, economists said. Last year, spending in Iraq amounted to less than 1 percent of the total economy -- about as much as Americans spent shopping online and less than half what they spent at Wal-Mart. Total defense spending is 4 percent of gross domestic product, the figure that measures the nation's economic output. In contrast, defense spending ate up 14 percent of GDP at the height of the Korean War and 9 percent during the Vietnam War.

And this time, the war bill is going directly on the nation's credit card. Unlike his predecessors, Bush is financing a major conflict without raising taxes or making significant cuts in domestic programs. Instead, he has cut taxes and run up the national debt. The result, economists said, is a war that has barely dented the average American's pocketbook and caused few reverberations in the broader economy.

"This war is easier to manage because it's a very small portion of GDP compared to the past," said Robert D. Hormats, a managing director at Goldman Sachs and a former Reagan administration official who recently published a history of war financing. "Even the borrowing of money is relatively small compared to past wars, so the impact on the economy is relatively minor."

Like all debts, however, the bill for Iraq and Afghanistan will eventually come due. While it is unlikely to cause economic upheaval, such as the devastating inflation that followed the Vietnam War, economists foresee substantial increases in government spending to rebuild the nation's exhausted armed forces, care for its disabled veterans and cover rising interest payments.

Administration officials say those payments will be easier to afford because Bush's tax cuts strengthened the economy and boosted tax collections. But even many conservative economists are skeptical. Some worry that the bill for Iraq will come just as the baby-boom generation starts retiring, further straining a budget that will require deep cuts, higher taxes or bigger deficits.

"When you borrow to pay for the war, you feel it less," said Alan D. Viard, a former Bush White House economist who is now a resident scholar at the American Enterprise Institute. "But if you do borrow, it may be future needs you're sacrificing. There's always a sacrifice."

Borrowing is common in wartime. According to Hormats, virtually every U.S. war has required some debt. The title of his book, "The Price of Liberty: Paying for America's Wars," comes from a 1790 report by the nation's first Treasury secretary, Alexander Hamilton. Hamilton wrote that the heavy debt that helped finance the Revolutionary War was "the price of liberty" and insisted that the new nation scrupulously repay it to preserve its ability to borrow in the future.

Hamilton won that argument, and the government's commitment to repaying its debts has become a bedrock American principle. At the same time, most wartime presidents have tried to cover at least part of the cost of their conflicts by means other than debt, Hormats writes, often pushing radical changes in fiscal policy aimed at restraining deficits and inflation.

To help pay for World War II, by far the nation's most expensive, Franklin D. Roosevelt expanded the number of taxpayers from 4 million to 42 million, tripled tax collections as a percentage of GDP and slashed spending on his treasured New Deal programs. As the military budget devoured more than a third of the economy, Roosevelt also called for mass sacrifice, rationing food and gasoline, capping prices and wages and exhorting Americans to spend any money they could spare on war bonds and stamps.

Heavy government spending on the Korean War set off a bout of inflation that neared 8 percent in 1951. To pay for the war, President Harry S. Truman raised the top tax rates to 91 percent for individuals and an all-time high of 70 percent for corporations, while imposing wage and price controls.

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