Cost of Iraq war and its aftermath could top 100 billion

Cost of war Daniel Altman The New York Times Saturday, March 22, 2003   NEW YORK The cost to the United States of the war in Iraq and its aftermath could easily exceed $100 billion, according to evidence massed by experts from Wall Street, Washington and academia. In the opinion of several economists and military analysts, the government's wartime spending will be just the tip of a towering iceberg. The burdens that follow - from occupation, reconstruction, humanitarian aid and checkbook diplomacy - could extend well into the coming decade. Overall effects on the economy could also stretch far beyond the bill for taxpayers. The uncertainty that preceded the war already exacted a severe cost in terms of economic growth. Changes in oil prices, insurance premiums and the attitudes of consumers and corporate leaders - all of which may depend on the war's outcome - will determine what comes next. "If we get through this without major damage to Iraqi oil facilities, and without any kind of terrorist action, and relatively quickly on the military front, I would think that would be good for the economy," said Peter Hooper, chief United States economist at Deutsche Bank Securities. The war itself is likely to cost between $22 billion and $60 billion, according to calculations made last year by the Congressional Budget Office and the House Budget Committee's Democratic staff. Peace-keeping in Iraq and rebuilding the country's infrastructure could add much more. A report to be released Monday by Taxpayers for Common Sense, an advocacy group, priced a possible five-year deployment of 50,000 troops - the American share of a 100,000-strong force - at $66 billion. The United Nations Development Program has estimated the cost of humanitarian aid and economic recovery, including rebuilding infrastructure and civil institutions, at about $10 billion a year for at least three years. Taxpayers for Common Sense put the total cost of the world's engagement with Iraq at $544 billion, spread over 10 years. But the United States may not have to bear all of that cost. "There's starting to be some evidence that we're going to have some friends come in on this, it's just a question of how much they're going to contribute," said Keith Ashdown, the group's vice president for policy. Some European countries have talked about offering aid, he noted, but only Japan has made a firm commitment, of about $1 billion. The Bush administration has stayed tightlipped about the cost of the war and reconstruction since December. At that time, Mitchell Daniels Jr., the White House's budget director, mentioned a range of $50 billion to $60 billion for military costs - far lower than earlier estimates of $100 billion to $200 billion made by Lawrence Lindsey, formerly the White House's top economic adviser. Both the White House and the Pentagon refused to offer any definite figures Friday, but Claire Buchan, a White House spokeswoman, said that the administration would send a budget request to Congress shortly. She added that some funds for postwar aid and homeland security would be included alongside wartime spending. For the economy as a whole, the effects of the war could range from mildly positive to, if the war turns sour, strongly negative. But the most severe repercussions so far appear to have stemmed from the uncertainty that preceded the war, and the high oil prices that came with it. "In terms of growth in the first half of the year, we're going to be somewhere in the vicinity of 2 percent" at an annual rate, Hooper predicted. Without the war-related uncertainty, he said, the economy would probably have been able to expand at an annual rate of 3 percent in the first half. Most analysts agree that a "war premium" partially accounted for the run-up in oil prices in recent months. The strike in Venezuela's oil industry, which has reduced global supply, makes isolating the war's effect difficult, though. Edward McKelvey, a senior economist at Goldman, Sachs, said that he had heard figures of $7 to $10 a barrel for the premium in the first quarter of this year. A premium of $10, he said, would cost consumers about $50 billion a year. Still, he cautioned, "you don't have any really good sense of where the baseline was." A recent estimate by the Center for Strategic and International Studies put the premium far lower, at $2 or $3. Blaming the war for weaker retail sales and a lack of hiring might be a step too far, though, McKelvey said. "How much of that's war uncertainty, and how much of it's other stuff? We would tend to go with other stuff." In any event, the war premium appears to be disappearing. Oil prices have dropped to about $27 a barrel from a peak of about $38 on March 7. If this trend holds, the war's indirect impact on the economy could be minimal, according to a study by William Nordhaus, a professor of economics at Yale University. In a worst-case scenario, which now looks less likely, a price spike could cost as much as $391 billion over 10 years. "Looking at the extent to which oil prices have dropped in the last couple of days, and the stock market balance has risen, it's so far going according to a relatively optimistic script," Hooper said. But he warned that the optimism could be short-lived. "If Iraq is resolved successfully, there are other potential geopolitical clouds on the horizon."