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The Iraq War Will Cost Us $3 Trillion, and Much More

Another worry: This war has been particularly hard on the economy because it led to a spike in oil prices. Before the 2003 invasion, oil cost less than $25 a barrel, and futures markets expected it to remain around there. (Yes, China and India were growing by leaps and bounds, but cheap supplies from the Middle East were expected to meet their demands.) The war changed that equation, and oil prices recently topped $100 per barrel.

While Washington has been spending well beyond its means, others have been saving -- including the oil-rich countries that, like the oil companies, have been among the few winners of this war. No wonder, then, that China, Singapore and many Persian Gulf emirates have become lenders of last resort for troubled Wall Street banks, plowing in billions of dollars to shore up Citigroup, Merrill Lynch and other firms that burned their fingers on subprime mortgages. How long will it be before the huge sovereign wealth funds controlled by these countries begin buying up large shares of other U.S. assets?

The Bush team, then, is not merely handing over the war to the next administration; it is also bequeathing deep economic problems that have been seriously exacerbated by reckless war financing. We face an economic downturn that's likely to be the worst in more than a quarter-century.

Until recently, many marveled at the way the United States could spend hundreds of billions of dollars on oil and blow through hundreds of billions more in Iraq with what seemed to be strikingly little short-run impact on the economy. But there's no great mystery here. The economy's weaknesses were concealed by the Federal Reserve, which pumped in liquidity, and by regulators that looked away as loans were handed out well beyond borrowers' ability to repay them. Meanwhile, banks and credit-rating agencies pretended that financial alchemy could convert bad mortgages into AAA assets, and the Fed looked the other way as the U.S. household-savings rate plummeted to zero.

It's a bleak picture. The total loss from this economic downturn -- measured by the disparity between the economy's actual output and its potential output -- is likely to be the greatest since the Great Depression. That total, itself well in excess of $1 trillion, is not included in our estimated $3 trillion cost of the war.

Others will have to work out the geopolitics, but the economics here are clear. Ending the war, or at least moving rapidly to wind it down, would yield major economic dividends.

As we head toward November, opinion polls say that voters' main worry is now the economy, not the war. But there's no way to disentangle the two. The United States will be paying the price of Iraq for decades to come. The price tag will be all the greater because we tried to ignore the laws of economics -- and the cost will grow the longer we remain.

Linda J. Bilmes, a former chief financial officer at the Commerce Department, teaches at Harvard University's Kennedy School of Government. Joseph E. Stiglitz, a professor at Columbia University, served as chairman of the Council of Economic Advisers under President Bill Clinton. They are co-authors of "The Three Trillion Dollar War: The True Cost of the Iraq Conflict."

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