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Bilmes and Stiglitz on the costs of the Iraq War
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.
Posted by Tyler Cowen on January 12, 2006 at 06:24 AM in Economics | Permalink
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Comments
Not allowed to quote without permission? I wasn't aware of that provision of copyright law.
Posted by: Matthew Cromer at Jan 12, 2006 8:12:35 AM
The request may not be legally binding, but it's a courtesy between academics.
Posted by: alkali at Jan 12, 2006 8:47:14 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.
Posted by: JoelW at Jan 12, 2006 9:05:59 AM
Would I be fair in assuming a consensus cost will be between 700B - 1.25T?
Posted by: theCoach at Jan 12, 2006 10:19:06 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.
Posted by: Brian Horrigan at Jan 12, 2006 10:38:45 AM
"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.) "
Maybe they could have estimated the existing costs (enforcing the no-fly sonze, etc), but isn't the rest purely guessing? The actual cost that are being incurred are much more solid data nad one would presume more easily processed. How valuable is it for them to make blind guesses about a What if World?
Posted by: Johnny Debacle at Jan 12, 2006 10:48:19 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.
Posted by: Nathan Zook at Jan 12, 2006 11:56:10 AM
I don't understand the convention of not quoting drafts. The only explanations I've ever heard would also ban any other kind of public response, like this blog post.
Posted by: L at Jan 12, 2006 12:52:01 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.
Posted by: Johnny Debacle at Jan 12, 2006 12:56:08 PM
I was at the AEA/EPS session where Blimes and Stiglitz presented the paper. Another presenter (Allen Sinai, Decision Economics) used a macro model (yes, he made all the apologies and caveats) to show how consumer sentiment had depressed the economy below levels it may have reached. I *think* that he said that economic growth was 1% less, but I know that he said "the war has been bad for the economy." There has been a boost from defence spending, but the losses in depressed consumer sentiment more-than-compensated. He also claimed (credibly) to be non-partisan in setting the model.
Link to the session: http://www.epsusa.org/events/aea2006.htm
Posted by: David Zetland at Jan 12, 2006 1:27:27 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.
Posted by: Mike S at Jan 12, 2006 2:11:30 PM
--There has been a boost from defence spending, but the losses in depressed consumer sentiment more-than-compensated.--
How much is caused by the steady MSM drumbeat?
Posted by: Sandy P at Jan 12, 2006 2:32:29 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?
Posted by: Alan in SF at Jan 12, 2006 4:00:55 PM
I am pretty sure that the costs are going to fall heavingly on the US, though if you consider worldwide costs, does it even out.
Posted by: cube at Jan 12, 2006 5:18:38 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.
Posted by: Friendly Fire at Jan 12, 2006 5:22:31 PM
Mr Cowan criticizes the study for including interest as a cost. When I
bought a house on a mortgage, I had to pay interest. If I have to pay it,
it is a cost. We are still paying interest on debt incurred during the
Vietnam War. Why would you exclude interest as a cost, when the war is
being funded by debt?
The Iraq War has also imposed other costs, including higher oil prices.
No one can deny that oil prices are steeply higher now than when Bush took
office. Among factors leading to higher cost is the loss of Iraq oil, in
the past available under the oil for food program.
The report apparently is intended to cover the costs on the American side.
The costs to the Iraqis should certainly be studied, and I would recommend
an article on "Precision Killing in Iraq" at www.atimes.com as a start.
Posted by: Gene Berkman at Jan 12, 2006 5:56:34 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...
Posted by: Whaa? at Jan 12, 2006 6:57:17 PM
The problem with including benefits to Iraqis is that currently, given loss of life and infrastructure damage, those are almost certainly negative so far. Making them positive requires making a big positive number for "no more bad bad dictator in charge, instead incompetent but well-meaning U.S. in charge and hopefully the civil war won't escalate". Once you go down that road the sky is the limit. I mean it might end up being true in the long run but you have no idea.
If you are going to just make up opportunity costs and so forth, why not make up an opportunity cost for not being able to stop the genocide in Sudan because your army was all tied up?
Interest costs are definitely real; interest is the price of money no? Borrowing is only free if you have a rich uncle.
I agree on the macro costs, but I also suggest looking at the list of "costs not included" toward the end of the paper. There are some big ones there.
Posted by: mq at Jan 12, 2006 7:08:41 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?
Posted by: Peter at Jan 12, 2006 7:50:19 PM
I am sorry but the paper is just bad economics. A few examples:
1. Iraq’s export of oil has gone down on average 0.5-1 barrels per day, something like 0.7-1.3% of world supply. Especially in the beginning the loss was compensated by Saudi Arabia, that promised to do so.
How can someone seriously argue that this caused world prices to jump by 30-50%?!? What is magic about Iraqi oil?
At any case this is not a global “cost”, it is redistribution.
If exports go up to pre 1991 levels of 3 barrels, can I assume (of course using one of those great multipliers) that the US gained 5 trillion from the war in few decades?
2. Multiplier Keynesian effects are not costs, they only change the timing of growth not actual growth. Duh. There goes half the paper.
3. In many places they is double counting. The dead and injured Americans are a cost. But this is compensated by extra pay given to soldiers to join and accept combat training. Either you remove one or the other.
The same with reservists unless you assume people are myopic and join the reserve thinking there are never going to be wars.
4. They talk a lot about lowered US combat efficiency. Sorry, whatever you think about the war, as an economist there is no industry with as much learning by doing as warfare. The combat training for 300.000 US should be in the tens of billions, if not more.
5. We all know the US incurred massive costs by showing weakness and fear of casualties (.Paper Tiger, Vietnam, Cruise missiles) I agree that the loss of credibility from the arrogant WMD mistake was huge. But if they stay the course and signal credibility and willingness to take costs this should have equally great benefits for the future.
As long as we are on the topic, let me say something that might disturb some people morally. Why isn’t anyone mentioning the psychological effects of Gitmo on terrorist recruitment? Isn’t de-glorifying Jihad about the most effective things the US can do? Or do you think the image of Holy Warriors lying in their own filth and pathetically begging Americans makes young arabs more likely to want to join?
6. Stiglitz has made the claim that “The majority of innovation comes from public investment. Where did the Internet come from? The government. Radar? Jet engines? Publicly funded.”
Now he is counting war R&D as having no benefit, as opposed to all other government R&D that to him have gigantic externalities. Credible guy this one. (I personally suspect the R&D is not worth more than investments, just pointing out his inconsistency).
There are more examples of bad thinking in the paper. Really I am sure Stiglitz is a nice guy but too political to think straight, and still living in early 60s theory.
PS. I once had a short conversation with Davis in 2004 and said I liked his war-estimate, but he was emphatic that they underestimated the costs of the war. Some economists are more serious than others.
Posted by: Teller at Jan 12, 2006 7:56:47 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).
Posted by: Edgardo at Jan 12, 2006 9:23:28 PM
Figures lie, liars figure. With a small amount of creative accounting, I am sure that anyone can come up with a completely different and much, much lower number. The real question is what does it all mean. My own feeling is that we are doing the right thing and we should pay the price we can afford it.
Tom Barnett, who is a military and foreign policy guy, not an economist, has different take. Check out his web site at: http://www.thomaspmbarnett.com/weblog/
He says that what the US chiefly exports is global security and the trade deficit is how we are being paid for it. http://www.thomaspmbarnett.com/delscenes/scene10.htm
Posted by: Robert Schwartz at Jan 13, 2006 1:38:28 AM
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.
Posted by: GFH at Jan 13, 2006 12:32:01 PM
But still no one has tried to determine if replacing a secular dictator with a shiite theocracy is a benefit or a cost.
Has the war increased or decreased the probability that Iraq will get and/or use nuclear weapons?
Has the war increased or decreased the chances that political events will disrupt the flow of oil to the OECD countries?
Has the war increased or decreased the chances of another attack on the US by extremist?
I would argue that the answer to any of these question is unknown, but it is clear that the probabilities that every one will be negative is still quite significant. The entire debate in this blog assumes that the US will be better off because of the war, but because of the incomptennce of this administration that is a very doubtful conclusion.
And if you do not know the answers to these questions you can not give a final answer to the cost-
benefit calculations.
P.S. Teller I assume you believe that the impact of Gitmo on terrorist recruitment is negative. I suggest you read why the CIA strongly disagrees.
Posted by: spencer at Jan 13, 2006 5:05:32 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.
Posted by: matt at Jan 16, 2006 7:08:21 PM
