Let'stalk about the economics of the war. We're told that it's frightfully expensive (perhaps $1 billion a day) and that perhaps we ought to pay for it with a surtax. Please, keep cool. Yes, the war may ultimately cost tens of billions of dollars, but as wars go, it will be relatively cheap. And this is not the right moment for new taxes.
The important thing about the war's cost is that it's not very important. The stakes in this war are lives and the long-term question of whether the Middle East becomes more -- or less -- stable. By comparison, the economic burdens are modest. The United States can easily afford a longer war if that would minimize casualties. And the United States is rich enough to maintain a military presence in the Persian Gulf if that would enhance postwar stability.
What's lost in all the panicky talk about price tags is the enormousness of the U.S. economy. As an economic contest, this war is already an unfair mismatch. Even when Iraq is pumping oil, its gross national product (perhaps $60 billion or maybe less) roughly equals the output of Kentucky. This is about one-hundredth the size of the U.S. economy (1990 GNP: $5.5 trillion). The idea that America's economic base can't support this war is absurd.
The worries partly reflect our obsession with budget deficits. But the deficit preoccupation obscures larger issues. The major economic effects of the crisis so far have involved psychology, not deficits. Anxiety and high oil prices have depressed consumer spending and business investment, worsening the recession.
The truth is that the United States is now fighting this war out of its hip pocket. By itself, the war spending isn't large enough either to cripple the economy or -- the other bit of conventional wisdom -- immediately end the recession. There's a paradox here. Over the years, weapons prices have risen, and defense costs have fallen. A new F-15E fighter costs a hefty $50 million. Nevertheless, military spending (about $300 billion annually before the war) runs at roughly 5.5 percent of GNP. By contrast, it approached 40 percent of GNP at its peak in World War II, 14 percent in the Korean War and 9 percent in the Vietnam War.
The Gulf war is in another league. Consider some cost estimates from the Congressional Budget Office. The CBO examined two possibilities: a short war involving about 3,000 dead and wounded and the loss of 200 tanks and 100 aircraft; and a much bloodier war with 45,000 casualties and the destruction of 900 tanks and 600 aircraft. In fiscal 1991, these two wars were estimated to increase government spending by $17 billion and $35 billion respectively. Replacing all lost weapons would raise the totals -- over a number of years -- to $28 billion for the shorter war and $86 billion for the longer war.
Even the highest estimate is tiny compared with the cost of past wars. In today's dollars, the Vietnam War cost $570 billion and World War II $3.1 trillion, says Stephen Daggett of the Congressional Research Service. What's blunting the war's cost is that, unlike Vietnam or Korea, the United States has not had to mobilize. With the exception of 193,000 reservists, the war is being fought by the professional military from its existing arsenal.
Some war costs will also be absorbed by depleting that arsenal, which was intended to deter a now improbable land war in Europe. The military has 15,400 tanks. "If we lose 400 tanks, we're not going to replace them," says Alexis Cain of the Defense Budget Project. Finally, foreign contributions -- assuming they materialize -- will help. Japan last week pledged $9 billion. One report from Tokyo had the United States and Japan each paying 20 percent of war costs, with Saudi Arabia, Kuwait and other countries picking up the rest.
The classic challenge of war economies is preventing spending booms and runaway inflation. Rather than raise taxes, governments sometimes pay for wars by printing more money. In part, this happened in the Vietnam War. By late 1965, Lyndon Johnson's economic advisers urged him to raise taxes. But Johnson didn't propose a surtax until 1967, and Congress didn't pass one until 1968. Between 1964 and 1969, inflation jumped from 1.3 to 5.5 percent.
The danger of rising inflation is muted now. In the 1960s, the extra defense spending fed an economy near "full employment." Today there's a recession and rising unemployment. Even when taxes are raised, they usually don't cover all war costs. In World War II, the national debt nearly quintupled. Taxes paid only 43 percent of costs. Rationing forced Americans to funnel idle funds into government bonds. The idea was to spread war costs over more years by repaying the debt later through budget surpluses.
The trouble today is that we already have huge deficits. The current deficit -- $300 billion or more -- seems to say that last fall's budget agreement achieved nothing. This is misleading. A big part of the deficit now reflects temporary costs: up to $110 billion for deposit insurance (mainly S&Ls); perhaps $25 billion or so for the recession (it lowers taxes and raises spending) and an unknown amount for the war. With time, these will disappear. Meanwhile, the budget agreement's tax increases and spending cuts will shrink the remaining deficit, which is probably about $160 billion.
Here's where the war could derail things. About a third of the deficit reductions in the budget agreement stem from permanent cuts in the size of the military. By 1995, the Bush administration had expected to reduce the number of service men and women from 2.1 million to 1.7 million. Cuts are still possible. On the eve of war, Defense Secretary Dick Cheney canceled the Navy's A-12 aircraft.
But unfortunately, wars upset plans. We cannot now tell what the postwar Persian Gulf will demand of us. All we can surmise is that the war's current costs are bearable but that they will complicate matters later. We were arguing about guns and butter before the war. After the war, we will still be arguing about them.