Bilmes and Stiglitz on the costs of the Iraq War

by on January 12, 2006 at 6:24 am in Economics | Permalink

I’m not allowed to quote this paper without their permission, but here is the link.  Here is a summary.

I’ve read the paper through once.  All goes well until the authors count the interest payments on the debt as an extra cost.  I say count the expenditure once and do not adjust for how it is financed.

Starting on p.14, the authors consider macroeconomic costs; if not for the war our rate of growth could have been higher.  In particular these costs stem from higher oil prices, higher defense expenditures, and increased insecurity.  This part of the paper is highly speculative.  Our economy has done fine, and it is not clear that the residual problems are due to the war.

Before counting macro costs, the authors estimate the costs of the war to run about $700 billion and $1 trillion dollars.  This appears well-founded but the higher estimates (about twice that) do not.  Note, of course, that none of this considers the costs (and benefits) to the Iraqis.  Returning to the American side, the authors do adjust for the costs of running the pre-war no-fly zones, but they do not attempt to estimate what other costs would have been incurred in the absence of invasion.

Comments are open, especially for those who have read at least part of the paper.  Analysis is welcome, but general or polemic opinions on the war will be deleted.

Addendum: Anthony Battey directs my attention to another paper on this topic.

1 Matthew Cromer January 12, 2006 at 8:12 am

Not allowed to quote without permission? I wasn’t aware of that provision of copyright law.

2 JoelW January 12, 2006 at 9:05 am

There is another paper on this subject from the AEI-Brookings Joint Center:

http://aei-brookings.org/publications/abstract.php?pid=988

And it includes a calculator so that you can adjust your own assumptions in.

3 Brian Horrigan January 12, 2006 at 10:38 am

Gentlemen,

I am disappointed in the new work by Stiglitz, as I was three years ago
comparable work by Nordhaus. It is important for economists to view
impartial and objective assessments of the cost of an activity, both
the mean and the distribution of the costs. Without such information,
policymakers cannot make appropriate decisions. Of course, the military
needs to make comparable assessments about casualties.

Both Stiglitz and Nordhaus used their cost analysis to make partisan
points, which I believed were arguable but outside the realm of their
analysis.

Neither Stiglitz nor Nordhaus provided any analysis of the costs of NOT
removing Saddam Hussein. What kind of economist doesn’t know about
opportunity cost? But another way, what were the benefits of removing
Saddam Hussein. Neither Nordhaus nor Stiglitz would even bother to
mention even possible benefits. (I have to wonder if that they would
have written differently if a Democrat had invaded Iraq.)

Fortunately, some fine economists have considered both the costs and
benefits of the War In Iraq. Topel, Murphy, and Davis, all at the U of
Chicago Business School, put out any analysis almost three years ago.
Here is the link to the relevant page:

http://gsbwww.uchicago.edu/fac/steven.davis/research/

It is sad that it has gotten so little publicity. Maybe you could give
it a boost.

4 Nathan Zook January 12, 2006 at 11:56 am

Well, that’s how you earn the big bucks.

If an economist argues to lower taxes, he makes a statement about a What if World.

If he argues to raise them, he makes a statement about a What if World.

If he argues to keep them the same, he makes a statement about a What if World.

Furthermore, since the information is plainly being used in an environment dominated by politics and ideology, the failure to consider factors which will be brought up by people analyzing the work means that the work is not serious.

5 Johnny Debacle January 12, 2006 at 12:56 pm

“Furthermore, since the information is plainly being used in an environment dominated by politics and ideology, the failure to consider factors which will be brought up by people analyzing the work means that the work is not serious.”

My reaction is to say that none of the work used in that theater is serious, and most all are just seeking better polieconomic weapons for their arsenal against the other side.

6 Mike S January 12, 2006 at 2:11 pm

ThatUoC study is not so great. It systematically

1. underestimates the costs. We’ve seen a huge discrepency in what their estimated costs were and actual costs so far. There were more accuarate estimates out there, and they chose not to use them.
2. overestimates the benefits. In particular, I find their assumptions about growth and discount rates to be almost comically misinformed. Long term growth of 3%? Discount rate of 5%? Nah, way too low for both factors, unless you assume that the US govt will foot the risk. If the Iraqis had to borrow money on their own, it might be a little higher than a 5% rate.

I find lots of their guesstimates conveiently skewed. There were more accuarate estimates out there, and they chose not to use them. I don’t see that in the Stiglitz study. He just applied standard analysis to this problem and expressly stated he was only looking at the economic costs.

Additionally, the UoC study has one huge, huge problem for US taxpayers. It looks at costs and benefits from a global view. However, American taxpayers are footing essentially the entire bill. Yes, there is a overall net benefit removing any dictator. But who pays? Just taking their argument on face value, its basically a huge transfer of dollars to Iraq from the American people. I can tell you that I would rather see that money spent here in the good ole USA or even better saved.

Lets assume they are both extreme partisans and have present the most skewed, but still reasonable case for costs and benefits. If you use the UoC estimates of costs of contaiment at $630B, and the Stiglitz costs of 1.1B, it doesn’t look so good.

7 Alan in SF January 12, 2006 at 4:00 pm

I’m sure it’s difficult, probably impossible, to quantify the costs of the huge decline of “Brand America,” but these are real costs, and potentially huge.

And note to Sandy P: By steady MSM drumbeat, do you mean reporting the fact that we’re at war? Should they stop?

8 Friendly Fire January 12, 2006 at 5:22 pm

But according to the President of the World Bank, Iraqi oil was to pay for the war and it would be over in weeks.

9 Whaa? January 12, 2006 at 6:57 pm

I’m also lost on the theoretical underpinning of ignoring the interest cost. I mean, if we raised taxes to pay for it, we’d certainly consider those effects in the macroeconomic portion, right? In fact, if this economic model was widely used, you’d expect to see a bunch of big new spending programs, while at the same time seeing big tax cuts

Wait a second…

10 Peter January 12, 2006 at 7:50 pm

I was at the ASSA session where Stiglitz et al. presented evidence on the cost of the war. There’s a lot to say, but I’ll keep it short.

1. B&S include a “value of life” measure to attach an economic cost to the US casualties of the war. This is in addition to the cost of pulling reservists away from their jobs where they may have accumulated human capital. As it happens, I wrote a book criticizing the value of life literature, and I think my conclusions still apply: the theory is indefensible, the empirical work tendentious, and the whole enterprise borders on a category error. Since then I’ve worked with techniques to calibrate DALY’s (disability-adjusted life-years) economically, and I think this is a better approach, theoretically and empirically.

2. The biggest item that carries B&S from the relatively (emphasis here) small direct budgetary cost to the larger economic cost is the macro impact of higher oil prices. Sorry: I think that higher oil prices are the one desirable result of the war. Yes, there are macro costs due to the means by which the oil “tax” is collected and the proceeds squirreled away, but there are substantial gains from cutting back on the pollution and stock externalities associated with profligate (below true cost) fossil fuel use. And perhaps the war has underlined the risk of investing in capital goods and infrastructure that depend on low energy prices, speeding up our transition to a more sustainability-oriented capital stock. So: the war may be achieving in an inefficient way what the stalemated political process is unable to achieve more rationally.

3. Leaving out the physical and human destruction of Iraq is unconscionable. In matters of war and peace the accounting convention of excluding all economic effects beyond one’s borders is ethically horrendous. We *are* imposing our decisions on the people of Iraq; how can we put aside the price they are paying?

11 Edgardo January 12, 2006 at 9:23 pm

I challenge Stiglitz and Bilmes (+ Nordhaus) to estimate both the benefits and the costs of US intervention in WWII and then apply the same methodology to assess US intervention in Iraq (the latter with projections of costs and benefits for the next 50 years). Even better, I challenge them to submit a methodology for both assessments to be approved by a Tyler Cowen committee (anyone who has provided professional advice on cost-benefit analysis of wars knows how difficult is for two economists to agree on a methodology).
Tyler: On your views on Argentina. Sorry, I think your visit was too short to know the real Argentina (I hope next time you can visit La Plata as I suggested you).

12 GFH January 13, 2006 at 12:32 pm

Professor Keith Hartley’s comments on the cost of war, “…”If, at the outset, the Americans anticipated the Iraq operation would cost $100 billion, they could have given Saddam Hussein and his family $20 billion to go, $50 billion to Iraq and still have had $30 billion left over. The UK would not have been involved, no-one would have died and no buildings would have been destroyed…” illustrate some Robert McNamara-style thinking. First, Saddam with $20 billion is still Saddam and able to create much mischief, regardless of his political standing or physical location. Second, Iraq without Saddam is still in the hands of the Baathists, i.e., the Arab version of the Nazis. Third, the military infrastructure of the Baathists/Nazis would remain intact. In short, Hartley makes the unwarranted assumption that a bad lot will deal in good faith.

Hartley’s comments offer a nice illustration why university professors are not political leaders or generals. I’ve encountered a few generals with Ph.Ds, mostly in the “hard sciences,” but I’ve never encountered a university professor who was also a general. Likewise, I can’t recall many political leaders, good or bad, who were/had been university professors.

13 matt January 16, 2006 at 7:08 pm

To the ‘bad economics’ guy, they are calculating cost to the US, not global cost, so to say that it’s ‘not a global cost but a redistribution’ is, to be charitable, a very stupid misunderstanding of what they are saying and more likely a deliberate mischaracterization. Price spikes are of course caused by uncertainty as much as by direct drops in production and the uncertainty in global oil prices is pretty directly attributable to the war. Your argument on the timing of growth is horseshit, clearly growth now is better than growth in the future. The extra pay given to soldiers for death and injury in no way compensates us for the costs of replacing them. The idea that US forces have dramatically increased in fighting efficiency as a result of the Iraq war would be laughable if it were not presented in the context of so much similarly tendentious and laughable twaddle; in that context I have to label it as sinister and deceptive.

14 linda October 10, 2006 at 8:54 am

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