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Two major policy initiatives dominate in the Bush Administration. One is the confrontation with Iraq, in which the President seems likely to get what he wants, either by threat or by war. The other is an effort to rejuvenate the economy with a series of dramatic tax cuts.
Both are controversial, and both have their merits. Yet to listen to the Administration you'd never guess that the two have anything else in common. They do, however, and it's a big mistake not to acknowledge that, since the cost of war with Iraq and, more important, how America pays for it, will dramatically affect the economy. Lawrence B. Lindsey, the recently dismissed White House economic czar, briefly threw out a back-of-the-envelope price tag of $100 billion to $200 billion, assuming that the U.S. and its allies win a quick victory. Yet the White House quickly distanced itself from that guesstimate.
VIETNAM'S LESSONS. You might, too, if you looked at the cost of wars past. The price has varied greatly throughout U.S. history, but the Vietnam War is instructive. In the mid-1960s, as now, the U.S. was the world's preeminent economic and military power. Back then, policymakers also had an incentive to play down the outlays required to fight the North Vietnamese. The official line was that the war would be short and costs contained. Yet the Pentagon's initial estimates undershot by 90% the $494 billion in total direct costs the U.S. absorbed while losing in Vietnam.
Far more significant, the indirect economic impact of fighting in Vietnam marked a fundamental turning point in the post-World War II economy. The U.S. government tried to maintain support for an increasingly unpopular war by spending more on both guns and butter. The effect was to unleash chronic inflation that took a quarter of a century to bring under control.
Almost as bad, the federal budget deficit started its long climb to the unprecedented levels of the 1980s and early '90s. And the economic troubles unleashed by a guns-and-butter public policy contributed to bringing the long productivity boom of the '50s and '60s to an end.
EDUCATED GUESSES. Of course, so many imponderables are involved when it comes to any war that it's impossible to accurately predict the damage before it starts. Yet that doesn't mean it isn't worth trying, so that everyone understands what the nations will face when the bill for a war in Iraq -- if it happens -- comes due.
Under the auspices of the American Academy of Arts & Sciences, a group of distinguished scholars has prepared a thoughtful research paper that tries to calculate the cost. They've come up with a wide range -- from $99 billion under the most optimistic assumptions to a worst-case total of $1.9 trillion. Neither total, they note, takes into account the benefits of disarming Saddam Hussein or of removing him from power if he has indeed developed weapons of mass destruction.
The final tab, the authors note, would depend upon the conflict's duration, the total damage to Iraq, whether the fighting turns unconventional, and whether it spreads outside of Iraq. The study is called War with Iraq: Costs, Consequences, and Alternatives, and it's authored by Carl Kaysen, professor of political economy at MIT; Steven E. Miller, director of the American Academy of Arts & Science's program on science, technology, and global security; Martin B. Malin, director of the international security program at Harvard University's Kennedy School of Government; William D. Nordhaus, an economist at Yale University; and John D. Steinbruner, professor of public policy at the University of Maryland. Whatever the figure, they conclude, the U.S. could unquestionably afford to wage the contemplated war.
COME CLEAN, GEORGE. That leaves just one issue to be resolved: How candid should the Administration be with the American people on what the effect would be on them? Probably a lot more upfront than it has been so far.
Even as the President waxes eloquent about the wonders of tax cuts, he needs to start coming clean about the financial sacrifices that taxpaying civilians will make if the regular army and reservists go marching off to battle. Bush's newly assembled economic team has a clear set of orders: Sell tax cuts to Congress and the electorate.
If the price of war in Iraq starts escalating, however, to $200 billion, $400 billion, $1 trillion, how does the government propose to meet the tab? By borrowing and sending the budget deficit into the stratosphere? By cutting government spending on just about everything else? By rescinding tax cuts and maybe levying a surcharge on the wealthy? By depreciating the currency with that old standby and enemy of the people, inflation?
GOOD NEWS. In short, at the same time they're selling their economic agenda, the President and his minions need to be honest about its implications for their military agenda. Despite the economic downturn, a slow recovery that feels too much like a recession and a bear market that has mauled investor portfolios, much has gone right with the economy over the past decade.
Productivity, the key to higher standards of living, has been strong for the past seven years, recently reaching an annual pace of 5.6%, the best in 36 years, according to economists at Merrill Lynch & Co. High-tech innovation and organizational advances have transformed the American workplace into a lean machine as competition for markets and profits has heated up in a global economy. And overall prices are stable in the U.S.
How durable these gains turn out to be could depend largely on how well the Administration meshes its two major policy initiatives over the next few months. Can it come up with an approach that balances the need to stimulate the economy with a foreign policy strategy that could commit the U.S. to a major Middle East conflict? So far, neither its efforts nor its candor are heartening.
The Costs of America's Major Wars
Total Direct Cost Percent of
billions of 2002 dollars Annual GDP
Revolutionary War (1785-83) $2.2 63%
War of 1812 (1812-15) $1.1 13%
Mexican War (1846-48) $1.6 3%
Civil War (1861-65)* $62.0 104%
Spanish American War (1898) $9.6 3%
World War 1 (1917-18) $190.6 24%
World War 11 (1941-45) $2,896.3 130%
Korea (1950-53) $335.9 15%
Vietnam (1964-72) $494.3 12%
Persian Gulf War (1990-91) $76.1 1%
*Combined Union and Confederate costs
DATA: War with Iraq: Costs, Consequences, and Alternatives, by Kaysen,
Miller, Malin, Nordhaus, & Steinbruner
Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over Minnesota Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online
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