| Confronting Iraq:|
Hidden Costs of War
With William Hartung
Director, Arms Trade Resource Center
Tuesday, Feb. 25, 2003; 11 a.m. ET
In his recent report, "The Hidden Costs of War," William D. Hartung, predicts that a war with Iraq will have negative effects on the economy. Stock prices can go down 25 percent and the costs of war "could range from roughly $99 billion to as much as $1.9 trillion over the next decade."
William D. Hartung, president's fellow at the World Policy Institute at the New School, was online Tuesday, Feb. 25 at 11 a.m. ET, fields questions and comments about his report, "The Hidden Costs of War."
Hartung is an expert on the arms trade and military spending, and the author of "And Weapons for All" (HarperCollins, 1995), a critique of U.S. arms sales policies from the Nixon through Clinton administrations. He directs the Institute's Arms Trade Resource Center, which provides the media, policymakers, and the public with timely research and information on the issue of global weapons proliferation. He is a member of the advisory committee of Foreign Policy in Focus.
The transcript follows.
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Falls Church, Va.: To what degree did the First Gulf War impact the economy? Did it contribute to the perceived recession of the early 1990s?
William Hartung: As Yale economist William Nordhaus has noted in his study on the probable costs of a war with Iraq, the first Gulf War did contribute to the recession of the early 1990s by creating an oil price shock. This was driven in part by the uncertainties generated by the war, and in part by reductions in Iraqi and Kuwaiti production (the latter a result of Saddam Hussein's decision to have his retreating troops burn the Kuwaiti oil wells). The fact that the first Gulf War provoked a recession is interesting in the current context for two reasons. First, Jim O'Neill, an oil industry analyst at Goldman Sachs International, has predicted that because of the existing problems in Venezuelan production resulting from the strikes there and the likely disruption caused by a war with Iraq, we could face the biggest war-driven oil price and supply shocks ever in the event of a war with Iraq. Second, the first Gulf War was mostly paid for by U.S. allies -- Germany, Japan, Saudi Arabia, and Kuwait, among others, picked up roughly 88% of the costs. This time around, the costs will mostly come from U.S. taxpayers, at the expense of other priorities.
Boston, Mass.: Thank you for doing this.
My question is, if the administration cannot be convinced to try to avoid war by virtue of the religious ideals it claims to hold, can it not be convinced to do so out of enlightened self-interest?
Having shunned and offended our allies in advance of all out war, it seems to me that the post-war business will be ours and ours alone to deal with. This sounds expensive. And won't a US occupying force and provisional government established in Iraq without international support and the participation of the UN make Americans the target of more terrorism both at home and around the world?
William Hartung: I still hold out hope that some key players in the Bush administration can be made to understand that their own self-interest (including, most importantly, the prospects of a second Bush term) will not be served by launching a war on Iraq at this time. As Joseph Cirincione of the Carnegie Endowment for International Peace (www.ceip.org, look for "Non-Proliferation Project" to see his most recent analyses) has forcefully demonstrated, the United States now has Saddam Hussein in a box where he is in no position to threaten his neighbors or build new weapons as long as there are UN inspectors in the country and a increasingly sophisticated monitoring system being put in place. Over the week-end, a DC insider newsletter suggested that some key Republicans have been urging the President's advisors to find a way to back off of the war because of its growing unpopularity here and abroad, but it also noted that the President is sticking to his guns for the moment. The costs of the war -- in budgetary, humanitarian, economic, and security terms -- are likely to far outweigh any narrow benefits that may accrue to particular industries (arms and oil, for example). In fact, many oil executives are nervous about the prospects of war for their industry.
Dallas, Tex.: Has anyone in the Administration talked or even broached the subject of the costs of war -- hidden or otherwise?
William Hartung: Last September, White House economic advisor Lawrence Lindsey told the Wall Street Journal that he thought the war could cost .1 to .2 percent of the U.S. Gross Domestic Product, which translates to $100 to $200 billion. He also suggested that this cost was "nothing" in the context of the U.S. economy, and that in fact if a war with Iraq put more oil on the market it could actually be good for the U.S. economy. The White House quickly distanced itself from Lindsey's comments, and some press accounts suggest that his loose lips on this subject may have contributed to the decision to replace him late last year. In late December, White House budget director Mitch Daniels told the New York Times that for planning purposes the administration was assuming that a war with Iraq could cost $50 to $60 billion, but he gave no breakdown of costs, nor did he explain how that figure was arrived at. Douglas Feith, a Pentagon official involved with planning for a "post-war" Iraq, has suggested that the U.S. role could be quite extensive, perhaps lasting up to five years or more, but he has offered no estimate of what it would cost.
Indianapolis, Ind.: Some say Iraqi oil can fund some of the cost of war. Is that really a good moral position for us to take? It sounds like the country invaded has to pay for the cost of being invaded?
William Hartung: There have been suggestions by some in the administration that Iraqi oil could be used to pay some of the costs of postwar reconstruction. If that's the extent of it, it may not draw much criticism (with the big "if" that decisions on the use of Iraqi oil resources would have to be made by a government that Iraqis and the world view as legitimate, not just a front for United States interests). But there has also been talk that Turkey wants access to either cheap Iraqi oil or the oil fields in Kirkuk (in northern Iraq) as part of their price for hosting U.S. troops for an invasion of Iraq from the North; or that the United States might agree to press a post-Saddam government to honor oil concessions to Russia and/or France as a way to get them on board for the war (a prospect that seems less likely now, but may still come into play at some point); and there are clearly some in the administration who feel that developing Iraq's oil resources to the fullest extent possible in the post-war period will offer all sorts of alleged strategic benefits, such as reducing reliance on Saudi Arabia and making the United States a sort of "gatekeeper" for access to Iraqi oil. All of this is still "in play" politically, but you're right that any perception that the United States is seeking to use Iraqi oil resources for anything other than the reconstruction of the country according to plans supported by a legitimate Iraqi government will raise serious moral questions.
Ringwood, N.J.: Are we getting any money for the upcoming war from our allies (such as Kuwait)? Also, in the first Gulf War, did we have to offer cash to countries (such as we now have been asked to do by Turkey)?
William Hartung: This time around, the United States is getting very little from allies. Britain and Australia have agreed to send troops, many of which are already in the region. Bulgaria has offered to send 150 or so specialists in dealing with chemical weapons (and protection against them), but that help may come at a high price. The Bush administration has reportedly agreed to "make good," one way or another, on Iraq's debts to Bulgaria in the postwar period. That could mean U.S. taxpayer money, or it could mean diverting Iraqi oil revenues that might otherwise be put towards reconstruction.
In the first Gulf War, there were some cash payoffs and aid deals involved, but nothing on quite this scale. The United States forgave $7 billion in military debt for Egypt, and agreed to aid Turkey in dealing with the impacts of the war on its economy. Not all that was promised to Turkey was delivered, which is one of the reasons that the current Turkish government has sought a written pledge of U.S. support this time around (currently amounting to $5 billion in U.S. aid and $10 billion in U.S.-government guaranteed loans). The other thing that happened in connection with the 1991 Gulf War is that the first Bush administration (Bush 41, or George Herbert Walker Bush) made major arms sales to nations in the region that had supported the U.S., including tens of billions of arms sales to Saudi Arabia, increases in U.S.-subsidized arms exports to Israel, Egypt, and Turkey, and major sales to Kuwait, Qatar, and other Gulf states. An analysis at the time by Lee Feinstein of the Arms Control Association indicated that the United States sold arms to the region at a clip of about $1 billion per month in the two years following the 1991 war, culminating in a record arms sales year for 1993, when the United States sold $33 billion in arms, mostly to the Middle East and East Asia.
Orono, Maine: You'd think George Bush and his advisors would understand better than most people the danger of fiddling with Iraq while the economy burns down around them.
Economic woes sank Bush the elder in 1992. Do you get a sense of any fear among administration officials that the scenario may repeat itself in 2004? Or is the feeling that the election is far enough away that a recovery - and a political boost -is likely?
William Hartung: To some degree, I think President Bush is a true believer on Iraq, as are some of his key advisors (like Paul Wolfowitz at the Pentagon). Putting aside whatever messy political or economic motives may be part of the picture, I think the President truly believes that the United States can transform Iraq and begin the democratization of the Middle East by launching a war at this time. To me, this messianic element of the administration's policy is almost the scariest part of all, in that it is less subject to practical assessments on questions like what will the war do to our economy and our diplomatic standing in the world.
Charlottesville, Va.: With the looming costs of war that you speak of, how viable is Bush's costly economic plan, tax-cuts and all?
William Hartung: The tax plan, which is currently slated at $670 billion in cuts over ten years (not counting increased interest on the debt generated by the cuts), is on a collision course with the costs of the war. Independent assessments by the Congressional Budget Office, the Democratic Staff of the House Budget Committee, and William Nordhaus of Yale suggest that a war with Iraq could cost anywhere from $50 to $200 billion. These funds are NOT included in this year's $399 billion military budget request, nor are they reflected in the Pentagon's longer-term budget projections, which call for the military budget to top $500 billion by the end of this decade. With the "on-budget" deficit (not counting the Social Security surplus) slated to run at $400 billion or more for the next five years, something will have to give. We will either face cuts in non-military domestic spending, or large deficits that may undermine the stock market and the value of the dollar, or a huge budget "train wreck" early in the next decade when the costs of retirement for the baby boomer generation start scaling up. The tax cut issue can be dealt with separately from the costs of war, and key Republicans like Senator Grassley of Iowa have already raised some questions about it. But a sounder budget strategy would look at the tax cuts, military spending increases, the costs of a "preemptive" war strategy, and potential cost increases for homeland security and try to come up with some strategic budgetary priorities.
Fairfax, Va: The business of selling weapons carries a great deal of risk. I have the impression that in the 1980s the business exploded -without careful consideration of the potential consequences.
I found 24 U.S. companies on the net that aggressively sold weapons to Iraq in the 1980s. I may be wrong, but it seems the DOE was involved too.
From your perspective, should the CEOs of these companies be held accountable on some level?
The former School of the Americas down in Georgia trained a lot of criminal types who were armed by the U.S. I fear that the countries to our south are going to be a real problem in the near future; in conjunction with the Middle East, and North Korea, and we seem to be doing a good job recently at alienating China too.
William Hartung: I think it would be hard to hold the CEOs of companies that sold militarily useful equipment to Iraq in the 1980s accountable, since in most cases they were simply carrying out the policies of the Reagan and Bush the elder administrations. As Michael Dobbs of the Washington Post reported a few months back, Donald Rumsfeld went to Iraq in the mid-1980s as a special envoy of the Reagan administration and sought "normal" relations with Saddam Hussein's regime at a time when it was already using poison gas in its war with Iran. From 1985 to 1989, the Commerce Department cleared licenses for $1.5 billion worth of dual use items (equipment that could be used for military purposes, such as weapons manufacturing, as well as for civilian objectives) for Iraq, of which $500 million went to Iraq before it's 1989 invasion of Kuwait. One company, Consarc, which made high temperature furnaces that were suitable for sensitive military projects such as building ballistic missile nose cones, actually asked the Commerce Department whether it really made sense to be selling that kind of stuff to Saddam Hussein, and Commerce Department officials basically said "sure, it's good business." In late July of 1989,shortly before the Iraqi invasion of Kuwait, the furnaces were about to be loaded on ships in the port of Baltimore to go to Iraq when the White House vetoed the sale, mostly due to pressure from officials OUTSIDE of government, including former non-proliferation officials who had served in the Pentagon during the Reagan administration. So, if there are people to be held to account for aiding and abetting Saddam Hussein back in the 1980s, we'd probably need to look at our own government first. But the officials involved will no doubt argue that Iran was perceived as the greater threat then, so we were simply helping "the enemy of our enemy." Some day, our government needs to learn that swapping arms and technology for short-term military objectives has far too many unforeseen costs to make sense as a routine policy instrument.
Washington, D.C.: Which country in the mid east benefits the most from this war with Iraq? Israel of course. Thus, maybe we can withhold some of the billions of dollars in grants that we give them every year to help pay for this war.
William Hartung: Ariel Sharon and key members of his Likud party support war on Iraq. Sharon has even suggested that Iran should be next on the military hit list. But it is not clear that this view is uniformly held throughout Israel, nor will Israel benefit economically from a war with Iraq. Like President Bush and his hard-line advisors who see eliminating Saddam Hussein as opening the way to a more secure Middle East, Sharon and his advisors are driven more by their ideology than by any hope of financial or other gain from a war with Iraq. If the U.S. were to use leverage with Israel, it would make more sense to focus it on getting a peace framework between Israel and the Palestinians back on track than "punishing" Israel for a war with Iraq that President Bush wants to carry out in any case.
Laurel, Md.: For a war with Iraq to cost $1.9 trillion over the next decade as you postulate, does that not represent nearly 50% of expected U.S. defense spending over that time period?
Separately, what is your estimate of the cost of inaction - weapons inspections, responses to increased terrorism, military deployments to create compliance, and the loss of Iraqi lives and productivity?
I think your previous point that Hussein is "in a box" is a good one, but would this "box" exist without a credible threat of military action?
William Hartung: The $1.9 trillion figure is derived from the "worst case" scenario sketched out in William Nordhaus's analysis. Nordhaus looks at budgetary costs -- for fighting the war, for post-war reconstruction and peacekeeping, for humanitarian assistance, and so forth; but he also looks at impacts on the larger economy. A large part of his $1.9 trillion estimate is composed of impacts from an oil price shock ($778 billion, I believe), plus several hundred billion in costs due to reduced economic growth. So the budgetary element of his high end cost is probably less than one-half of the $1.9 trillion figure, and it would be stretched out over a decade. Some of those funds (for reconstruction and humanitarian aid) would come out of other agencies, not the Pentagon.
Your point about the costs of inaction is a good one. One's estimate of those costs depend in large part on whether you think sanctions and monitoring will work better than war. War could also provoke terrorist attacks (and in the short-term, an upswing in attacks is expected). Sanctions and monitoring, if they are pursued with the same persistence and enthusiasm that the Bush administration has put towards building a coalition toward war, can, in my view, disarm Saddam Hussein at far less cost than going to war. You're right that the threat of force got the inspections process going again, but it's not clear that we need to have 150,000 troops camped out in the Persian Gulf to make that threat credible. The real issue is whether Washington can keep itself (and its key allies) focused on a credible, sophisticated, ONGOING sanctions and monitoring effort. That's the real challenge.
Virginia: Are you an economist?
William Hartung: I'm an expert on government spending with a background in philosophy and a minor in economics. I have been studying and writing about the economics of military spending since the late 1970s, when I was a researcher at the New York-based Council on Economic Priorities. I view my role as one of translating economic analysis to a level that is relevant and useable by citizens, policy makers, and the media. I have a number of economists who serve as informal advisors to my project. If you want to see a statement by a prominent group of economists on the issue of the costs of a war with Iraq, you should look for the statement put out recently by Economists Allied for Arms Reduction (web site: www.ecaar.org). It is being circulated for signature by academic economists and has already been signed by several Nobel laureates.
Toronto Canada: By your analysis if the economic risks are so high and uncertain, is there a way out for the current administration to pull out? And what about the costs already incurred and being incurred on daily basis in the buildup?
William Hartung: The only way I see for the Bush administration to pull out would be to get a second UN resolution (or increased inspections and monitoring) and then "declare victory" by arguing that without U.S. pressure, the inspectors would never have gotten back in, Saddam Hussein's remaining prohibited weapons would not have been dismantled, and so forth. Whether the Bush administration will take that path remains to be seen. A few months ago, there were key players in the administration who had been willing to entertain that option.
As for costs already incurred, the Congressional Budget Office suggested that deploying a substantial force to the region in advance of war could cost $9 to $13 billion. Some significant portion of those costs have probably already been spent. Aid and arms deals premised on the war going forward can probably be "walked back" -- for example, Turkey won't need $15 billion in aid to deal with the impacts of the war if the war doesn't happen. Some smaller portion of the money being used to "recruit" allies for war could probably be usefully spent in bulking up the inspections and monitoring process and giving countries in the region economic incentives not to break the arms and technology embargo on Iraq. But that implies a shift in course from the current Bush policy.
Vienna, Va.: Yesterday, Post reporter Rajiv Chandrasekaran said that Iraqis are 50/50 split on the U.S. invasion. That many do want a better government and economy (said when the government isn't monitoring what they say to foreigners).
William Hartung: That seems quite possible. Saddam Hussein is a repressive dictator who has run his country into the ground economically and repressed his people throughout his reign. There are two questions that occur to me: 1) Is there a way to get rid of Saddam Hussein without resort to a military intervention? and 2) Under what circumstances is it legitimate to overthrow a government, however repressive it may be? These aren't simple questions by any means, but at a minimum it seems to me that U.S. intervention in Iraq requires explicit authorization by the UN Security Council. Otherwise, there could be no end of wars to displace repressive regimes, nor would there be a way to determine with any degree of international legitimacy which regimes deserved such treatment.
Saint Louis, Mo.: What would be the cost to the US economy if one of our major cities was struck with a chemical, biological, or a dirty nuclear bomb and hundreds of citizens were killed?
William Hartung: The cost of a chemical, biological, or dirty bomb attack could reach hundreds of millions or more if the contamination was widespread. Or, as Greg Easterbrook has pointed out in a recent essay, if the record from past efforts to use chemical or biological agents hold true, the impacts could be far narrower and less costly. The attacks on the World Trade Center, which did not involve any of the above-mentioned weapons, cost billions of dollars. But I hope you're not trying to equate the costs of going to war with Iraq with the costs of a terror attack using chemical, biological, or radiological weapons. A war with Saddam Hussein's regime is just as likely to INCREASE the likelihood of such an attack on the United States as decrease it. The administration's attempts to show an operational link between Saddam Hussein and Al Qaeda have been unpersuasive. And last fall CIA Director George Tenet told the Senate Intelligence committee that the ONLY circumstance in which analysts at the agency could envision Saddam Hussein trying to use chemical or biological weapons for a terror attack on a U.S. target was in the event of a U.S. attack on Iraq, as a last-gasp desperate effort at revenge. So, the cost issues only take us so far. The real question boils down to what set of policies are most likely to protect us from future terrorist attacks. President Bush has not made a convincing case, in my view, that war with Iraq will make us safer from such attacks in the future.
Laurel, Md.: If the "cost of war" includes a 25 percent decline in the stock market, would there not also be, upon the war's end, a "peace dividend" making up all those losses and much more?
William Hartung: An assessment by the Center for Strategic and International Studies done last year suggested that a war in Iraq could spark a "relief rally" in the stock market. The longer-term impacts depend on a number of factors -- will Hussein sabotage Iraqi oil wells on his way out the door? Will the costs of reconstruction and peacekeeping, plus additional "preemptive" wars, lead to longer term budget instability? What will become of the big tax cut plan? And so forth. But there is certainly a scenario that some economists have sketched out (a bit wishfully, in my view) that a quick, decisive war with Iraq could be just what the economic doctors ordered. I think this view understates the possibilities for further instability and war in the post-intervention period. But the truth is, none of us can predict with any degree of certainty what the mix of costs and benefits will be. All we can do is look carefully at the possible scenarios and decide if we think the costs and risks are worth it.
Washington, DC: Will the costs of war reflect the amount we are sending to Turkey in exchange for using their bases?
William Hartung: William Nordhaus's estimates, which are the most comprehensive to date, do not explicitly incorporate the costs of recruiting allies, which he describes as a 'negative allied contribution." My quick estimate is that promises to Turkey, Israel, Egypt, and Jordan alone amount to roughly $30 billion in grants and U.S.-government backed loans to help them cope with the economic and security impacts of a war. That's roughly half of the $50 to $60 billion in TOTAL costs that White House budget director Mitch Daniels cited just a few months ago for the costs of the entire conflict. More recently, administration officials have said that they won't even disclose the full list of countries (43 or so, the administration claims) that have offered some sort of support for the war, because they "don't want to out them if they don't want to be outed," as one administration source put it. This suggests that without pressure from Congress, we're not going to know what the costs of "coalition building" for war are until after the fact.
Toronto,Canada: Will a US-led war in Iraq weaken the position of the dollar as the dominant currency in world trade? If so, could the ability of the US economy to manage its fiscal and trade deficits be compromised?
William Hartung: The dollar has been dropping against the Euro recently, and uncertainty about the war and the U.S. role in it has been cited as one key reason for that. Analysts differ as to whether this will be a longer-term phenomenon. Some assert that once the U.S. goes to war, uncertainties will diminish and the dollar will rally. Others suggest that if the war is perceived as the U.S. "going it alone" (which may mean paying most of the costs, not just whether or not there's a UN resolution), troubles for the dollar could persist. Looming behind the short-term issue of the costs of war in Iraq is the longer-term question of whether the United States will have an unpredictable policy of "preemptive war" mixed with a policy of accelerating tax cuts -- if that turns out to be the case, the role of the dollar as the preferred reserve currency could be challenged, with severe implications for the U.S. balance of payments and the resilience of the U.S. economy.
Charlottesville, Va.: As we discuss the economic impact of a war in Iraq, one cannot help but think of what comes next. With several other conflicts looming, such as DPRK, and the ever-present War on Terrorism, I wonder if this new "Age of Preemptive War" to eradicate the world's "evildoers" will send us into a long-term depression. Your thoughts?
William Hartung: Some in the Bush administration seem intent on launching an "age of preemptive war," including John Bolton of the State Department, who recently made comments suggesting that Iran, North Korea, and other "rogue states" might be "next" after Iraq. However, as we have seen with the growth of domestic and international opposition to war with Iraq, a policy "vision" is one thing, and implementing it is another. Whether or not we have a 'war without end' policy may depend in large part on whether the citizens of the United States will sit still for such a policy in the longer-term.
Arkport, NY: I'm currently student teaching in a rural area of Western New York and the potential of an upcoming war has taken up many class discussions. How do you feel the economic situation that will result from a possible war could be related to the young people of our country, especially those so distant from any major city?
William Hartung: The economics of war are a hard topic to deal with for any audience, and as some of the other questioners today have pointed out, some arguments can be made on both sides of the issue (costs of war versus costs of "inaction"). I think for students some tradeoff numbers may be useful for illustrative purposes. For example, how far would the funds we may spend on war with Iraq go towards improving education in this country, or strengthening non-proliferation programs designed to keep nuclear weapons out of the hands of terror networks and aggressive regimes. I have done some examples of trade-offs in my report on the "Hidden Costs of War," which is available on-line at www.fourthfreedom.org. Another good source for this kind of information is the National Priorities Project at www.nationalpriorities.org. In using these kinds of illustrations, it is important to note that it is no simple matter to transfer funds destined for war to other domestic or international purposes. All sorts of political factors and value judgments are involved in deciding on federal priorities, which is part of what makes the politics of the federal budget such an interesting topic.
William Hartung: I'm going to sign off now. My apologies to those whose questions I didn't get to; perhaps another time. Feel free to consult our web site at www.worldpolicy.org/projects/arms for access to our latest research, or to e-mail my colleague Frida Berrigan at email@example.com if you would like to receive our e-mail updates on security issues, which come out roughly once every two weeks.
That wraps up today's show. Thanks to everyone who joined the discussion.
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