Nobel-prize winning economist Joseph Stiglitz and Linda Bilmes have been working on establishing a more accurate figure for the cost of the war. In early 2008 they published articles that asserted the true cost will be $3 trillion. In this weekend's Washington Post they published an update, in which they state that further investigation has persuaded theythat the cost will be even higher.
The new analysis includes these costs: we're still embroiled in Afghanistan which probably would not be so if we hadn't diverted our attention to Iraq; the wars were accompanied by tax cuts which caused a sharp rise in the federal debt which means higher interest payments; the price of oil jumped after the invasion of Iraq which slowed the world economy; and the global financial crisis was worse than it would have been and we had fewer options to combat it.
When the United States went to war in Iraq, the price of oil was less than $25 a barrel, and futures markets expected it to remain around that level. With the war, prices started to soar, reaching $140 a barrel by 2008. We believe that the war and its impact on the Middle East, the largest supplier of oil in the world, were major factors. Not only was Iraqi production interrupted, but the instability the war brought to the Middle East dampened investment in the region.
In calculating our $3 trillion estimate two years ago, we blamed the war for a $5-per-barrel oil price increase. We now believe that a more realistic (if still conservative) estimate of the war's impact on prices works out to at least $10 per barrel. That would add at least $250 billion in direct costs to our original assessment of the war's price tag. But the cost of this increase doesn't stop there: Higher oil prices had a devastating effect on the economy.
There is no question that the Iraq war added substantially to the federal debt. This was the first time in American history that the government cut taxes as it went to war. The result: a war completely funded by borrowing. U.S. debt soared from $6.4 trillion in March 2003 to $10 trillion in 2008 (before the financial crisis); at least a quarter of that increase is directly attributable to the war. And that doesn't include future health care and disability payments for veterans, which will add another half-trillion dollars to the debt.
The global financial crisis was due, at least in part, to the war. Higher oil prices meant that money spent buying oil abroad was money not being spent at home. Meanwhile, war spending provided less of an economic boost than other forms of spending would have. Paying foreign contractors working in Iraq was neither an effective short-term stimulus (not compared with spending on education, infrastructure or technology) nor a basis for long-term growth.
Instead, loose monetary policy and lax regulations kept the economy going -- right up until the housing bubble burst, bringing on the economic freefall.
Saying what might have been is always difficult, especially with something as complex as the global financial crisis, which had many contributing factors. Perhaps the crisis would have happened in any case. But almost surely, with more spending at home, and without the need for such low interest rates and such soft regulation to keep the economy going in its absence, the bubble would have been smaller, and the consequences of its breaking therefore less severe. To put it more bluntly: The war contributed indirectly to disastrous monetary policy and regulations.
The Iraq war didn't just contribute to the severity of the financial crisis, though; it also kept us from responding to it effectively. Increased indebtedness meant that the government had far less room to maneuver than it otherwise would have had. More specifically, worries about the (war-inflated) debt and deficit constrained the size of the stimulus, and they continue to hamper our ability to respond to the recession.
With the unemployment rate remaining stubbornly high, the country needs a second stimulus. But mounting government debt means support for this is low. The result is that the recession will be longer, output lower, unemployment higher and deficits larger than they would have been absent the war.