Transcript The Economic Cost of the Iraq War

Greg Young
Aditya Mehta
Eric Garcia
3/28/2016
California Lutheran University: School of Business
1

To gain an understanding of the true costs of the
Iraq War to the United States through the
framework of an economist.
 Develop a respectable value for budgetary costs.
 Define and put a monetary value on the Social Costs.
 Macroeconomic costs- Oil, Interest on Debt, etc.

Develop an understanding of what the United
States is giving up by pursuing war in Iraq.
 Expenditure Switching.
3/28/2016
California Lutheran University: School of Business
2

What does the war mean to an average
American Citizen.
 Is there relief in sight based on the next
presidential election.
 The United States dealings with other foreign
nations. (Trade and Security Issues)
 Budget Deficit
3/28/2016
California Lutheran University: School of Business
3

Spending to date – $646 billion,
Congressional Budget Office

Total estimated spending thru 2017
 Best case $1.7 trillion.
 More probable $2.7 trillion.
Congressional Research Service estimate
3/28/2016
California Lutheran University: School of Business
4
Estimates in Percentage change per year.
Budget Change for DOD Spending
111
120
100
80
60
50
40
33
16
20
0
0
Budget Change
0
0
200120022003 2004
2005
2006 2007
Source: CRS report for Congress, updated February 8th 2008
3/28/2016
California Lutheran University: School of Business
5

The monthly “burn rate” or the war has been
rising
 4.4 billion in 2003
 8 billion in 2006
 12 billion in 2007
 to an estimated 16 billion in 2008
3/28/2016
California Lutheran University: School of Business
6

Conservative estimate
521 billion

Realistic moderate
estimate
913 billion
3/28/2016
California Lutheran University: School of Business
7
Conservative estimate
132 billion
 Realistic moderate
estimate
404 billion

 Sunk costs ?
3/28/2016
California Lutheran University: School of Business
8

Increasing
demand
for VA
support
VA Health Care Each Year, FY 2003-2008
263,000
209,308
155,272
103,544
56,703
13,822
2003
2004
2005
2006
2007
2008
Source: U.S. House of representatives budget committee, based on U.S.
department of veterans affairs.
3/28/2016
California Lutheran University: School of Business
9




Best case $422 billion
Long-term $717 billion
31% of soldiers who
have returned filed
disability claims and
expected to increase
Corporations are
required to put money
away, why shouldn’t
the government?
3/28/2016
California Lutheran University: School of Business
10

We face a rapidly rising monthly cost to fund
the war currently over 12 billion/month.
 Estimated 16 billion/month in 2008

Better estimates will follow upcoming
presidential election
3/28/2016
California Lutheran University: School of Business
11
Obama: Bring home 2 regiments of troops per
month.
 All combat brigades home within 18 months
 Cease building of permanent bases
 Protect embassy and diplomats
 Keep selected troops in Iraq to carry out targeted
strikes on al Qaeda
 Aggressive diplomatic efforts will be made.
 Provide at least $2 billion to expand services to Iraqi
refugees.

3/28/2016
California Lutheran University: School of Business
12
http://www.barackobama.com/issues/iraq/
Phased Redeployment.
 draw up a clear, viable plan to bring our troops
home starting with the first 60 days of office
 provide the highest quality health care
 Securing Stability
 American aid efforts
 direct aid to the Iraqi people
 Diplomatic Initiative
 regional stabilization group
 develop and implement a strategy to stabilize Iraq

3/28/2016
California Lutheran University: School of Business
13
http://www.hillaryclinton.com/issues/iraq/

Bolster Troops on the Ground
 Greater military commitment is necessary to
achieve long-term success in Iraq

Implement New Counterinsurgency Strategy
 More robust counterinsurgency strategy
 American forces must clear areas occupied by
insurgents, stay, and hold these areas

Strengthen the Iraqi Armed Forces and Police
 accelerate training and equipping of Iraqi armed
forces
3/28/2016
California Lutheran
University: School of Business
14
http://www.johnmccain.com/Informing/Issues/fdeb03a7-30b0-4ece-8e34-4c7ea83f11d8.htm
3/28/2016
California Lutheran University: School of Business
15

Increased Recruitment Benefits
- New sign up bonus $50000
- Illegal immigrants sign up;
$20000 quick ship bonus.
citizenship for members of immediate
family.

Increased Reenlistment Benefits
 -Experienced military personnel get up to $150000
for reenlistment.
3/28/2016
California Lutheran University: School of Business
16
Budgetary and Social Economic Costs
Total Operations to Day
$646
$646
$521
$913
$422
$717
$132
$404
$1,721
$2,680
$295
$415
Total Budgetary and Social Costs
$2,016
$3,095
Total Budetary, social, and
$2,203
$4,995
$613
$816
$2,816
$5,811
(Spent to date)
Future Operations
(Future Operations only)
Future Veterans' Costs
(Hidden Medical+ Veterans
Disability + Veterans Sosical Security)
Other Military Costs/Adjustments
(Hidden Defence + Future Defence
reset + Demobilization,
less no-fly-zone savings)
Total Budgetary Costs
Social Costs Total
Macroeconomic Costs
(Without Interest)
Interest costs
Total (With Interest)
3/28/2016
California Lutheran University: School of Business
17


US indebtedness at end of 2008 excess of
$900 billion
Including cumulative interest on the debtfinanced war borrowing, exceeds $1.1 trillion
3/28/2016
California Lutheran University: School of Business
18




3,988 US soldiers have been killed in combat
Government pays $500,000 to families (death
benefit + life insurance)
Value of a Statistical Life (VSL) $7.2 million
Rough estimate of loss to U.S. economy is
$28 billion due to loss of labor resource
3/28/2016
California Lutheran University: School of Business
19


29,395 soldiers have been injured
Value of Statistical Injury (VSI) – lost to the
economy $6.1 million each
3/28/2016
California Lutheran University: School of Business
20



Going through equipment six to ten times
faster than normal peacetime rate.
$250-375 billion to rebuild the entire armed
services
404 Billion - Stiglitz
3/28/2016
California Lutheran University: School of Business
21

Adverse effects
 Higher oil prices
 Growing deficits
 Expenditure switching towards Iraq
 Supply-side effects of lost resources

Iraq war expenditures crowd out government
investments.
3/28/2016
California Lutheran University: School of Business
22




Individuals are risk aversive
9/11
Safety
Trade barriers
3/28/2016
California Lutheran University: School of Business
23
A significant proportion of
the increase in the price
of oil resulted from the
war
Yearly Basket Price
1995
16.86
1996
20.29
1997
18.68
1998
12.28
1999
17.48
2000
27.6
2001
23.12
2002
24.36
2003
28.1
2004
36.05
2005
50.64
2006
61.08
2007
69.08
2008
3/28/2016
92.15
© 2008 Organization of the
Petroleum Exporting Countries
California Lutheran University: School of Business
24
A realistic moderate estimate assumes that $10
per barrel is the price increase due to the war &
and the duration of these high oil prices is 8
years.
 The U.S. imports around 5 billion barrels a year.
 A $10 per barrel increase translates into an extra
expenditure of $50 billion per year.
 Over the 8 years projected in the realistic
moderate estimate, that is $400 billion extra
expenditure on oil imports.

3/28/2016
California Lutheran University: School of Business
25




Spending $50 billion more on oil every year leads
to a reduction in American GDP & incomes.
The extent to which a change in oil imports
translates into a change in total output is the oil
import multiplier.
The realistic moderate estimate uses a multiplier
of 2
GDP has gone down $50 billion x 2 or $100
billion, for 8 years – and we arrive at a total
estimated reduction in GDP of $800 billion
3/28/2016
California Lutheran University: School of Business
26




Increased government spending of say $1 million,
increases national output by an amount greater than
$1 million, by a factor which is called the expenditure
multiplier.
Multipliers used to measure the effect of spending on
GDP differ according to the type of spending.
In a realistic moderate estimate we use a multiplier of
0.4
Switching just $800 billion over the 15 years we
project we will be engaged in Iraq, to domestic
investment would result in an increased GDP of
$800 billion x 0.4 or $320 billion
3/28/2016
California Lutheran University: School of Business
27


No fly zone no longer enforced
Money to be spent on schools, transportation going
to war
Alternative Ways to Spend the $432 Million We Spend In Iraq Every Day
People Insured through SCHIP
Current
Potential
Enrollment
Enrolemnt
Per Year
Per Year
6,400,000
513,000
909,200
58,000
5,000,000
163,700
Border Patrol Agents
12,300
10,700
State and Local Police
580,700
14,200
6,800,000
9,300
Head Start Participants
Pell Grants
Teachers
3/28/2016
California Lutheran University: School of Business
28
Cost in Billions
Oil Price Impact
Budgetary Impact
Subtotal Macro Economic
Costs
3/28/2016
Best Case
Macroeconomic Costs
Realistic- Moderate
$187
$0
$800
$1,100
$187
$1,900
California Lutheran University: School of Business
29

Best case $1.7 trillion
 More probable $2.7 trillion




Health Care: Long-term $717 billion
Demobilization: $12 Billion per month
Future Operations: $717 Billion
U.S. Debt after 2008: reaching $900 billion
3/28/2016
California Lutheran University: School of Business
30
Costs of planning war
All costs borne by other countries, including Iraq
All costs of increased insecurity
Consequences of Loss of credibility
Value of reduced capability of responding to
national security threats elsewhere in the world
 Value of reduced capability of responding to
domestic situations (Hurricane Katrina)





3/28/2016
California Lutheran University: School of Business
31

http://www.hillaryclinton.com/issues/iraq/

http://www.barackobama.com/issues/iraq/

http://www.johnmccain.com/Informing/Issues/

Stiglitz, Joseph, and Bilmes, Linda. The Three Trillion Dollar War. New
York London: W.W. Norton & Company, 2008.

Organization of the Petroleum Exporting Countries, 2008

Wallsten, Scott. “The economic cost of War in Iraq”. AEI Brookings Joint
Center for Regulatory Studies, “2005”

Congressional Budget Office, http://www.cbo.gov
3/28/2016
California Lutheran University: School of Business
32