[Joint House and Senate Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 110-703
WAR AT ANY COST? THE TOTAL ECONOMIC COSTS OF THE WAR BEYOND THE FEDERAL
BUDGET
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HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 28, 2008
__________
Printed for the use of the Joint Economic Committee
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
SENATE HOUSE OF REPRESENTATIVES
Charles E. Schumer, New York, Carolyn B. Maloney, New York, Vice
Chairman Chair
Edward M. Kennedy, Massachusetts Maurice D. Hinchey, New York
Jeff Bingaman, New Mexico Baron P. Hill, Indiana
Amy Klobuchar, Minnesota Loretta Sanchez, California
Robert P. Casey, Jr., Pennsylvania Elijah Cummings, Maryland
Jim Webb, Virginia Lloyd Doggett, Texas
Sam Brownback, Kansas Jim Saxton, New Jersey, Ranking
John Sununu, New Hampshire Minority
Jim DeMint, South Carolina Kevin Brady, Texas
Robert F. Bennett, Utah Phil English, Pennsylvania
Ron Paul, Texas
Michael Laskawy, Executive Director
Christopher J. Frenze, Minority Staff Director
C O N T E N T S
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Members
Hon. Charles E. Schumer, Chairman, a U.S. Senator from New York.. 1
Hon. Jim Saxton, Ranking Minority, a U.S. Representative from New
Jersey......................................................... 4
Hon. Carolyn B. Maloney, Vice Chair, a U.S. Representative from
New York....................................................... 6
Hon. Ron Paul, a U.S. Representative from Texas.................. 7
Hon. Loretta Sanchez, a U.S. Representative from California...... 9
Hon. Brownback, Sam, a U.S. Senator from Kansas.................. 10
Hon. Lloyd Doggett, a U.S. Representative from Texas............. 12
Hon. Maurice Hinchey D., a U.S. Representative from New York..... 14
Hon. Amy Klobuchar, a U.S. Senator from Minnesota................ 15
Witnesses
Statement of the Honorable Joseph E. Stiglitz, Nobel Laureate;
Professor, Columbia University, New York, NY................... 18
Statement of the Honorable Robert Hormats, Vice Chairman, Goldman
Sachs (International), New York, NY............................ 22
Statement of Dr. Rand Beers, President, National Security
Network, Washington, DC........................................ 26
Statement of Dr. Scott Wallsten, Vice President for Research and
Senior Fellow, iGrowthGlobal, Washington, DC................... 28
Submissions for the Record
Prepared statement of Hon. Charles E. Schumer, Chairman, a U.S.
Senator from New York.......................................... 54
Prepared statement of Hon. Jim Saxton, Ranking Minority, a U.S.
Representative from New Jersey................................. 56
Prepared statement of Hon. Carolyn B. Maloney, Vice Chair, a U.S.
Representative from New York................................... 57
Prepared statement of Hon. Ron Paul, a U.S. Representative from
Texas.......................................................... 58
Prepared statement of Hon. Brownback, Sam, a U.S. Senator from
Kansas......................................................... 59
Study entitled, ``Democrat JEC Report Hints at Existence of a
Value Creation Machine: Over $1 Trillion of Estimated Costs
in Question''.............................................. 61
Report entitled, ``Financial Impact of the World Trade Center
Attack''................................................... 71
Prepared statement of the Honorable Joseph E. Stiglitz, Nobel
Laureate; Professor, Columbia University, New York, NY......... 125
Study entitled, ``Soldiers Returning from Iraq and
Afghanistan: The Long-term Costs of Providing Veterans
Medical Care and Disability Benefits''..................... 131
Study entitled, ``The Economic Costs of the Iraq War: An
Appraisal Three Years After the Beginning of the Conflict'' 152
Prepared statement of the Honorable Robert Hormats, Vice
Chairman, Goldman Sachs (International), New York, NY.......... 211
Prepared statement of Dr. Rand Beers, President, National
Security Network, Washington, DC............................... 216
Prepared statement of Dr. Scott Wallsten, Vice President for
Research and Senior Fellow, iGrowthGlobal, Washington, DC...... 220
Working Paper entitled, ``The Economic Costs of the War in
Iraq''..................................................... 222
Joint Economic Committee Report, ``War at Any Price? The Total
Economic Costs of the War Beyond the Federal Budget,'' February
2008........................................................... 253
WAR AT ANY COST? THE TOTAL ECONOMIC COSTS OF THE WAR BEYOND THE FEDERAL
BUDGET
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THURSDAY, FEBRUARY 28, 2008
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The Committee met at 9:30 a.m. in room SH-106 of the Hart
Senate Office Building, The Honorable Charles E. Schumer
(Chairman) presiding.
Senators present. Schumer, Klobuchar, and Brownback.
Representatives present. Maloney, Sanchez, Doggett,
Hinchey, Cummings, Saxton, and Paul.
Staff present: Christina Baumgardner, Stephanie Dreyer,
Anna Fodor, Chris Frenze, Tamara Fucile, Nan Gibson, Rachel
Greszler, Colleen Healy, Aaron Kabaker, Tim Kane, Israel Klein,
Tyler Kurtz, Brian Larkin, Michael Laskawy, Dan Miller, Robert
O'Quinn, Jeff Schlagenhauf, Marcus Stanley, Robert Weingart,
Jeff Wrase, and Adam Yoffie.
OPENING STATEMENT OF THE HONORABLE CHARLES E. SCHUMER,
CHAIRMAN, A U.S. SENATOR FROM NEW YORK
Chairman Schumer. Good morning, everybody. I'd like to
thank all of you for coming to our Joint Economic Committee
hearing today on the costs of the war in Iraq.
This is a contentious topic, and so I'm going to ask our
audience, of course, to be respectful of the witnesses, their
opinions, and the Committee, as we proceed.
We have a very distinguished panel, including Professor
Joseph Stiglitz, the Nobel Laureate economist now at Columbia;
Robert Hormats, a National Security Council Advisor under both
Democratic and Republican Presidents, and now co-chairman of
Goldman Sachs; Rand Beers, the president of the National
Security Network and former NSC Advisor, who has written so
many astute things on national security, and Scott Wallsten, an
economist and formerly of the American Enterprise Institute.
I'd like to take a few moments to talk about the war, its
costs, and what I believe is a turning point in our arguments
against the war, for those of us who are against it.
Then I'll recognize our Members for opening statements, and
formally introduce the panel.
Now, the case against the war in Iraq has been building for
a long time. Too many young American men and women have given
their lives or suffered terrible, life-altering injuries, with
little to show for their sacrifice.
The American people are baffled by the lack of political
progress, despite the good works of our troops, and now
Americans are trying to comprehend the eye-popping dollar
figures that this war is costing our budget and our economy.
It's becoming clear to all Americans--Republicans,
Democrats, and Independents--that by continuing to spend huge
amounts in Iraq, we're prevented from spending on important
goals and vital needs here at home.
So, the turning point is this: The lack of progress,
particularly on the political front, continues; the tragic loss
of life continues, but the cost of the war and the inability to
use those funds to help us here at home and to properly go
after the real nexus of terror, which is to the East in
Pakistan, Iran, and Afghanistan, has become the clinching
argument that we must quickly and soon change the course of
this war in Iraq.
I went to Iraq over New Years and spent time with our
soldiers. I can tell you, they're wonderful. They're awe-
inspiring.
But I can also tell you from my trip to Iraq, at least my
estimate--and I don't think this is different than many
others--that if everything worked out well and we followed
General Petraeus's general playbook, which I think is a good
one, it would take us 5 years to gain maybe a 50-percent chance
of bringing stability to Iraq--not democracy. I think democracy
is a forlorn hope at this point. It's maybe a little bit of
western arrogance to think we can impose an American style
democracy on a country like Iraq--but just stability.
Now, I would ask anybody here in this audience, of any
ideological stripe, is that your number one goal for the
country? Is it number two? Is it number three? Where does it
rank with improving healthcare, improving our education system,
gaining an energy policy that's important.
And where does it rank with foreign policy goals such as
dealing with the triad, the nexus of terror, over at the
Afghanistan, Pakistan, and Iranian theater? I don't think very
many Americans would rank it such a high priority, and yet, in
terms of the amount of money we are spending there, as well as
our focus, our energy, it is number one or number two or number
three in occupying America.
And so we have to put this in perspective. The cost of the
war has become the $800 billion gorilla in the room. The
backbreaking costs of this war to American families, the
Federal budget, and the entire economy, are beyond measure in
many ways, and it's becoming the first thing after the loss of
life that people think about and talk about.
Let me just give you some numbers: For the amount of money
the Bush administration wants to spend per day in Iraq--that's
$430 million--we could: Enroll an additional 58,000 children in
Head Start for a whole year; put about 9,000 police officers on
the streets per year; provide health insurance for 329,000 low-
income children through CHIP per year; hire 10,700 Border
Patrol agents per year. This is Iraq for one day, and these
equivalents are on a yearly basis.
We could make college more affordable for 163,000 students
per year; help 260,000 American families keep their homes, with
foreclosure prevention counselling this year.
In the Fiscal 2008 budget, we put $159 billion into Iraq,
double the amount we did for our entire transportation budget--
roads, bridges--6 times as much as what we put into the
National Institutes of Health to discover cures for diseases
like cancer and diabetes; 7 times what we spend on helping
young Americans get a college education; and 30 times as much
as we do to ensure the health--what it would cost to ensure the
health of every single child.
So, the costs are mountainous. As this world changes,
technology is changing our world and America has to adapt to
it. We're not; instead, we're taking so many of our resources
and just putting them into Iraq.
Again for what end? At best, stability in a small part of
the world, when there is so much instability in more dangerous
places, at least to the United States, elsewhere.
I've read the testimony from the witnesses, and
particularly from Professor Stiglitz. We're grateful to him
here. His book's title speaks for itself: The Three Trillion
Dollar War.
I was dismayed to learn that Professor Stiglitz had trouble
getting information from the Government about what this war is
costing us, from the Pentagon and the Veterans Administration.
And I was also tremendously disappointed to read in the
paper today that the White House has already disparaged
Professor Stiglitz and the work he has done. It's the height of
hypocrisy for an Administration that has been so secretive and
so unwilling to face the truth and the true costs of their
policies in this war, to disparage the courage and conviction
of someone like Professor Stiglitz.
So I plan to ask Senator Levin, who chairs the Armed
Services Committee, to work with me to make sure the
Administration is more transparent and forthcoming about the
billions in taxpayer money we are spending, going forward.
Professor Stiglitz estimates that, conservatively, this war
could cost $3 trillion for budget costs, alone. That is a
trillion, with a T. These estimates make our JEC estimates,
which knocked people's socks off when we did them a couple of
months ago, seem small.* His higher estimates of the total
economic costs, dwarf all other estimates, at up to $5
trillion.
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* The Joint Economic Committee Report, ``War at Any Price? The
Total Economic Costs of the War Beyond the Federal Budget,'' updated
Feb. 2008, appears in the Submissions for the Record on page 253.
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So, for this reason and others, we desperately need a
change of course in Iraq. We can't continue to police a civil
war built on age-old enmities of the various factions in Iraq;
we can't afford the costs, which are increasing exponentially,
according to expert economists; and we can't allow this
skyrocketing spending in Iraq to displace just about every
other domestic and foreign policy priority.
If you look at the President's budget this year, everything
is slashed dramatically, even Medicare and Medicaid, the
lifeblood of healthcare systems, all to make room for the war
in Iraq.
History will look up this Iraq war in two ways: I believe
it will certainly admire the bravery of our soldiers, from the
armies to the generals; it will acknowledge that going through
the Iraq process, General Petreaus's rewriting of the Army
Manual, will allow us to more effectively fight the next war.
But, at the same time, history will be amazed at the
mistakes made by this Administration in starting this war and
continuing this war for far too long.
[The prepared statement of the Senator Schumer appears in
the Submissions for the Record on page 54.]
Chairman Schumer. With that, let me call on my colleague,
Vice Chair Maloney--oh, no, sorry. I always get this wrong.
[Laughter.]
Chairman Schumer. Ranking Member Saxton.
OPENING STATEMENT OF THE HONORABLE JIM SAXTON, RANKING
MINORITY, A U.S. REPRESENTATIVE FROM NEW JERSEY
Representative Saxton. Thank you, Mr. Chairman. I
appreciate the opportunity to be here with you this morning,
and I would just say at the outset, that I'd like to welcome
our witnesses. I thank them all for being here.
Mr. Chairman, there are different views on the situation in
Iraq. You and I have had a different view, historically, on
this subject, for quite some time, and I listened carefully to
your opening statement, and nothing has changed.
So----
Chairman Schumer. Except all the additional money we're
spending and additional lives we're losing.
Representative Saxton. This is my time, and I'll reclaim
it, thank you.
The Iraq war obviously has many dimensions, including
foreign policy, defense policy, and policy related to
terrorism.
While debate about past policy in Iraq will continue, the
most important question facing policymakers, is this: What
should U.S. policy in Iraq be today and in the future?
Since the implementation of the surge strategy in Iraq, the
military situation has improved dramatically, as noted by a
variety of independent experts from the Brookings Institute, as
well as the American Enterprise Institute, and publications
such as the Washington Post.
In fact, a recent Washington Post editorial urged critics
of the war to take the success of the surge into account in
setting future policy.
And in this week's National Review, an article entitled
``Re-Liberators,'' the author writes the following:
Iraq is a mind-bogglingly complex country that defies
generalizations, except for one. Where U.S. troops have a substantial
presence, there is more security, more grass roots political activity,
and more economic progress. Hence, the success of the surge and the
imperative not to draw down too quickly, is immensely important.
The leader of the small village where this author was
writing, said this: ``We are very serious, we are going to go
all the way to the end of the path, and we don't want you
Americans to leave.''
After a year, that view of the surge is not uncommon.
However, another attempt to force a hasty retreat from Iraq is
now underway, following the many failures to do the same thing
earlier in this Congress.
Now that the surge is proving successful, a quick exit from
Iraq would be especially costly. The virtually immediate
withdrawal advocated by some politicians, is not militarily
feasible, and even a premature withdrawal could produce immense
costs, both in human terms, as well as in economic terms.
For example, if the United States withdrew quickly, the
biggest winners would include terrorists and the Iranian
regime, which is designated as a state sponsor of terrorism.
Iranian influence would further spread to Iraq, potentially
expanding Iranian military influence in the Persian Gulf,
including the Straits of Hormuz, and leading to Iranian control
of significant Iraqi oil resources.
Iran has already threatened to cutoff western oil supplies,
and in such a situation, would be well positioned to act on
such a threat.
Consider also that the scenario of a rapid U.S. pullout
could lead to a civil war in Iraq, drawing in surrounding
nations and leading to a regional conflagration.
Unfortunately, this is not a remote possibility, but
something that must be considered. The economic, military, and
human costs of this outcome to the United States and its
allies, would be enormous.
All wars impose costs in terms of life and treasure, and
the Iraq war is no exception. These costs must be considered as
the U.S. weighs its options in Iraq. In determining future
policy, we have to consider whether the situation in Iraq is
improving significantly, as well as to consider the cost and
benefits of our various other policy options.
Ss economic costs and benefits are considered, it is
important to recognize that estimates will range widely,
because they are, necessarily, based on questionable data. A
variety of assumptions and speculation about the events is also
included in most analyses. As Dr. Wallsten has warned, the data
are not of high quality and, further, each calculation requires
several assumptions.
He also has pointed out that even meticulous cost estimates
contain a great deal of error, and thus such analysis, quote,
``cannot determine whether the benefits of war exceed the
costs.''
I would note that it is important--the important elements
of Dr. Wallsten's work are also incorporated in Dr. Stiglitz's
research, which shares the same limitations.
In their 2005 paper, Dr. Wallsten and a co-author,
acknowledged the inherent ``imprecision,'' of the cost
estimates, but they provided a significant analytical framework
for the policy debate.
It is important to repeat their warnings regarding this
inherent imprecision which makes it impossible to determine the
relative costs and benefits of the Iraq war.
In closing, I would just note this: Last week, the
Washington Post covered the new attack advertising on the Iraq
war, sponsored by the Democratic Senatorial Campaign Committee.
I would like to think that the timing of this ad campaign, this
hearing, and the Iraq pullout vote this week, is a remarkable
coincidence, but I'm sorry I can't draw that conclusion.
[The prepared statement of Representative Saxton appears in
the Submissions for the Record on page 56.]
Chairman Schumer. Vice Chair Maloney.
OPENING STATEMENT OF THE HONORABLE CAROLYN B. MALONEY, VICE
CHAIR, A U.S. REPRESENTATIVE FROM NEW YORK
Vice Chair Maloney. Good morning. I thank my colleague and
friend, Chuck Schumer, for holding this hearing to examine the
economic cost of the Iraq war, and I want to welcome our
distinguished guests, many of whom have served in Government,
and thank them for their service and for their testimony here
today.
Over the past 5 years, the President has requested some
$665 billion from Congress to fund the war in Iraq.
The more than $180 billion that the President wants the
Government to spend on Iraq just this year, including interest
on war debt, totals almost half a billion dollars a day.
But the untold story, one every American needs to hear, is
that the costs of this war go well beyond these budget numbers.
At my request last year, the Joint Economic Committee prepared
a report showing that if the President's 2008 funding request
is approved, the full economic cost of the war will total $1.3
trillion--just by the end of this year.
This figure includes the hidden costs of deficit financing,
the future care of our wounded Veterans, and disruption in our
oil markets. And if the war continues, the costs will only
mount higher.
In his new book, Dr. Stiglitz estimates that the total
economic price tag for the war could reach $3 trillion to $5
trillion over the next decade, if we remain in Iraq.
The numbers may feel abstract, but the costs are real.
The burden of the war debt handed down to our children is
real. It's been called the Iraq 100-year mortgage.
The lost opportunities to invest here at home in jobs--
green technologies, roads, bridges, healthcare, and education--
are real. And the nearly 4,000 lives, almost 200 from New York
State alone are real.
We are all paying for the colossal costs of this war, one
way or another.
Last year alone, the President asked Congress to spend more
on the Iraq war than the $130 billion our Nation spends
annually on the entire American road and highway system. At a
time when our levies and bridges are crumbling, as we saw
during Katrina, we cannot afford to stop investing in our
infrastructure.
And the President has been squabbling with Congress about
money for children's healthcare when about 3-months' worth of
Iraq war spending would have covered the entire 5-year S-CHIP,
Children's Health Insurance Program funding increase he vetoed
last year.
The Administration is reportedly negotiating for an
indefinite U.S. troop presence in Iraq. We know we cannot
continue the continued loss of life. The economic costs have
also become unbearable.
The JEC report has estimated that the difference between
staying the course with our current troop commitment in Iraq,
versus a more rapid drawdown favored by many Congressional
Democrats, is about $1.8 trillion in additional economic costs
over the next decade.
That is above and beyond what we've already spent on the
war, and it's money that will continue to be diverted from
important national priorities.
A productive debate over the long-term economic impact of
the war and its cost to future generations is long overdue.
It's no surprise, however, that this is a debate that the Bush
administration would rather hide from.
OMB Director Nussle took issue with our JEC report last
year. Chairman Schumer and I wrote to invite him to appear
before this Committee to present the Administration's estimates
of what the full economic cost of the Iraq war have been so far
and will be going forward. Not surprisingly, Director Nussle
has not responded to our open invitation.
I want to call on the Administration to produce their own
estimates, as we and many of our witnesses have done, and
appear before this Committee to have a productive dialog about
this critical issue facing our Nation.
Again, Mr. Chairman, I thank you for your hard work on this
and so many other issues.
[The prepared statement of Representative Maloney appears
in the Submissions for the Record on page 57.]
Chairman Schumer. Thank you, Vice Chair Maloney. We're
going to have opening statements for any Member who wishes to
make one, just being careful of the time.
So, the next person in the order of people who came in is
Representative Paul. Welcome back.
OPENING STATEMENT OF THE HONORABLE RON PAUL, A U.S.
REPRESENTATIVE FROM TEXAS
Representative Paul. Thank you, Mr. Chairman. I appreciate
you holding these very important hearings, and appreciate the
panel appearing today. I realize that the issue here is the
cost of war, but it's hard for some of us to think about the
war without thinking about policy, as well.
And this is something I've put a little bit of thought into
and think it's a very serious problem. Nations, when they go to
war, generally, especially with our country, people resist it.
The large majority don't want to go to war. They have to be
convinced of it, so then there has to be threat buildup and
say, well, we will be threatened, and the people join in and
they are willing to go along with the war.
But the war doesn't end easily and quickly, and if it's
prolonged, people turn against the war, and that's where we are
today, just as we were in the 1960s, because what they realize
is, it's very costly in terms of lost lives and serious
injuries, but then there is the cost of paying for the war.
We've gone through that cycle, and something has to give.
Some of us who have argued strongly against going in there in
the first place really will win this argument, that we will
have to leave no matter what the strength of the opposition is
on the argument, because we won't be able to afford it.
And this is what we're coming to, because our ability to
afford the war will be measured in terms of the value of our
currency, and that is, obviously, going down.
But Randolph Bourne, during World War I, wrote a paper and
he called it ``War Is the Health of the State'', and this is
one reason why I have been alerted early on to be very cautious
about going to war, because I don't like a big state, because
if you have an omnipotent state, you undermine personal
liberties, and that, of course, should be our greatest concern
in a free country, protecting personal liberties.
But also, there are some myths, I think, economic myths
associated with war, because you hear too often that war is
good for the economy. And we certainly heard that. This came
out of getting out of the Depression.
I don't happen to believe that the war ended the
Depression. People didn't feel good until after the war was
over.
I remember rationing and a lot of other things, so war does
not end--it's not healthy for the economy. I think it's very
damaging to the economy because we always have to pay for it.
And there was a study made not too long ago, and the result
of the study showed that all wars lead to inflation.
I mean, this was the claim, and whether he's absolutely
right or not, I don't know, but generally speaking, if you
think of our history, even from the Revolutionary War on, we've
had inflation, which means the people are never required to pay
for the war.
Maybe if they were required to pay for the war there
wouldn't be so many wars. Direct taxation to pay for a war
would end it rather quickly because we couldn't afford it, but
if we can pass it off to the next generation, we seem to be
able to get away with it.
So we tax as much as we can, and then we borrow as much as
we can, and then we still don't have enough money to run the
war, so we resort to the true source of the high cost of
living, and that is the inflation of the monetary system.
And it's been notorious, back to Roman times. Then they ran
out of productive capacity to fight the wars, the clipped their
coins and diluted the metals.
Now, it's more sophisticated. We just create credit and
print the money and we pay these bills. Then who gets stuck
with the bills? It's the middle class and the poor, because
they get hit with the high cost of living.
This is where we are today. Unfortunately, the tragedy with
the middle class today, is being recognized, but the blame
isn't being put on the right spot, because they'll say, well,
if we just redistribute more money, we're going to help the
poor. I don't see that as an answer.
But paying for a war, of course, is very important. In the
1970s, we had to pay a high price for guns--and butter in the
1960s--and we nearly had a collapse of the dollar in 1979 and
1980, and we're facing that same situation once again, although
I think it's much worse because I think we're not nearly the
productive Nation that we used to be, and I think our
international debt and our domestic debt and national debt is
so unbelievable that we have to quickly come to our senses.
We have to take recognition that Osama Bin Laden has been
quoted as saying that he doesn't mind us being over there one
bit, because he believes he can financially drain us. This is
frightening to me, that we have fallen into a trap, and I am
scared to death that we will financially drain ourselves and
end up in a really tough situation of not only loss of our
financial well being here, but the undermining of our
liberties. I yield back.
[The prepared statement of Representative Paul appears in
the Submissions for the Record on page 58.]
Chairman Schumer. Thank you, and thank you for respecting
the time limits.
Representative Sanchez.
OPENING STATEMENT OF THE HONORABLE LORETTA SANCHEZ, A U.S.
REPRESENTATIVE FROM CALIFORNIA
Representative Sanchez. Thank you, Mr. Chairman Schumer. I
really appreciate you having this hearing.
I think that it's an incredibly good time to talk about the
real costs of this war. I mean, I've been talking about it for
the whole time, but I think a lot of Americans really don't
understand what it is costing us to be in Iraq.
And as a majority of Americans now realize, it probably
wasn't a good idea to go into Iraq the way we went into Iraq,
without enough allies, without people paying a fair share, if
we're supposed to be the top cops around the world, or supposed
to put in democracy someplace.
And, unfortunately, the cost is in the lives of our people
over there; the cost is in the opportunity costs of not being
able to spend that money here on the domestic front, to improve
the lives of our people; the cost is in the way the world views
us and how that sets us up for other conflicts, an inability to
diplomatically settle differences among other countries, or
with us, so I think there's a lot of cost to this war going on.
I would also say that I didn't vote for this war, I didn't
vote to go into this war. It costs us $3 billion a week to be
in Iraq, and that's pretty much the operating costs of that
war.
It doesn't take into account--and I sit on the Armed
Services Committee--it doesn't take into account, that we're
stressing our military, in particular, our Army and Marines, to
a point where people don't want to be in those Services.
It costs us more to recruit people to get into those
Services. Families of our military are being affected.
All of the costs of planes and automobiles and tanks and
sitting in that fine dust in the desert, none of that has been
accounted for and what it will take to replace that.
And, you know, few--about 6 months ago, we held some top
secret hearings within the Armed Services arena, about what it
would take to bring back the readiness of our military, and I
can't speak too much about that, except that some of it was
leaked to the New York Times, so it appeared in print, so I can
say that it would probably take us about 5 years to get back to
the readiness that our military was at before we even began
this Iraq war, and that's if we had no conflict on our hands,
if we were out of Iraq and we had unlimited resources to throw
at the readiness issue.
So, you know, I have seen this from a lot of different
areas, as to what is happening to our country with respect to
that. And Americans need to know what it is costing them.
By the way, most Americans don't realize that when the
President put in three sets of tax cuts and when the President
said go out and spend, that's what you can do for the war, they
don't really realize that, pretty much, we're on--we've
borrowed all this money.
They have not--the American people have not paid for this
war yet, and that will end up on the shoulders of the next
generation or generations.
And it's reflected in the world that's seeing this.
They're beginning to understand that the economic
instability that is happening out of Washington, DC--how is
that reflected?
Well, the euro is 50 percent up against the dollar. In
other words, the dollar is devalued; the devaluation is
happening to the dollar, and there's a reason why.
Let me just end by saying, Mr. Chairman, what is $3 billion
a week? What does that get you? What does that mean? These
numbers are so huge.
I would like to say that I've been in Congress for 12
years. For the last 12 years, I've been flying into Washington
Dulles. That place is always a mess; it's been under
construction for the whole 12 years. The little bus goes
different ways, each and every time that I come, every single
week.
One day, I went down to the carousel. I had a staff member
with me; they pulled off their baggage. I was sitting around
waiting for the first time and there's that thing, sorry for
the dust, but we're trying to improve the place.
It says we're going to put in a new big runway; we're going
to put in a mattress system here; we're putting in a new
terminal; we're doing this; we're doing that; everything is
going to look great; it's going to take another 2 or 3 years.
It's already been 10 years, and it says--and all of this is
going to cost us $3 billion.
Imagine how much we could have done for our country, with
just $3 billion, 1 week's worth of money that we spend. Thank
you, Mr. Chairman.
Chairman Schumer. Thank you, Representative Sanchez.
Senator Brownback.
OPENING STATEMENT OF THE HONORABLE SAM BROWNBACK, A U.S.
SENATOR FROM KANSAS
Senator Brownback. I normally fly out of National Airport.
During the week of 9/11, I flew out of Dulles.
That's the only place I could get a plane out of. There was
no crowd there on that Friday, it was eerie.
There wasn't anybody around, there were only a few planes.
I flew on a plane that had eight people on it.
I think 9/11 had an enormous cost on this country, has a
continuing, ongoing, increased insurance cost for a number of
buildings that people are having to protect now, concerned
about planes flying into them.
It seems as if security has some value to it, and a lack of
security has a cost associated with it to our economy. That is
one of the things that troubles me about the report today from
the Majority Staff and some of the assumptions made.
I appreciate the hearing. I think there are some real
questionable methodologies involved in this study, but I think
that at the root, what troubles me the most, is that we're just
not putting any value on security and on keeping on offense.
Maybe that's just not something we possibly can do.
Perhaps it is. I don't know. Economics, it seems to me, is
a science that makes a lot of assumptions, so there ought to be
some assumption of what staying on offense and security is
worth.
I don't like war. I've got a nephew that's a Marine, that's
now over in Iraq. He's a wonderful young man. I don't like the
idea of him being over there. We're proud of him, we're proud
that he's there.
We want him to have the best equipment; we want him to be
there as safe as possible, yet we're very, very pleased.
He's the first member in our family to go into the military
for a number of years, and yet he's providing something of
economic value, too.
I don't know how you make those assumptions.
I appreciate knowing how the conclusions were arrived at in
this report, although we only got them late yesterday
afternoon. I must note that we continue to believe, that I
continue to believe that the report's methodology and
assumptions are, at the very least, controversial and
debateable--very controversial and highly debateable.
Moreover, by making really just some standard economic
assumptions, slightly differently, over a trillion dollars of
war cost estimated in the report, vanish. With results this
sensitive to reasonable changes in economic assumptions, it
seems that use of the findings in this report to guide policy,
would not be warranted.
As an example of questionable assumptions used in the
report, let me note that the report asserts that war costs have
been debt-financed and a portion borrowed domestically; 60
percent displaces private investments that would have generated
a 7-percent real rate of return, which, according to analysis,
seems to be riskless.
It would have been more proper to do this evaluation using
the risk-adjusted rate of return, which, in real terms, would
be on the order of 3 percent. In any case, taking the report's
assumptions to heart, we're informed that there are riskless
private investment opportunities available that pay 7 percent
returns.
Using the report's methodology, we also learn that
effectively, every dollar of Government borrowing or tax
revenue displaces around two dollars worth of social value.
Now, perhaps we should take this to heart also, and immediately
begin to cut spending, taxes, and borrowing, and let's allow
our private citizens to enjoy the 7 percent real rates of
return that are evidently available to everyone.
I've got a more detailed statement** addressing questions
in this, but let me provide a couple of questions that the
Majority Report can be--I would hope, would address, and would
look at.
---------------------------------------------------------------------------
** See ``Democrat JEC Report Hints at Existence of a Value Creation
Machine: Over $1 Trillion of Estimated Costs in Question,'' in the
Submissions for the Record, page 61.]
---------------------------------------------------------------------------
These are just really questions. Should the present Social
Security system be scrapped in favor of a system of personal
accounts, given the assumptions put in the report on Government
spending and using these funds. According to the report's
methodology, the answer would be yes.
Do the deficit-financed tax cuts, create a net benefit for
the economy? Using the report's methodology, apparently, the
answer is yes.
The report totally ignores economic savings and benefits
that may have resulted from attacks or disruptions that have
been prevented by our efforts in Iraq and Afghanistan? As I
noted at the outset, I guess that's the thing that probably
troubles me the most.
I note that according to some estimates, the economic cost
to the United States associated with the tragic attacks on 9/
11, centered here and in the Chairman's State of New York,
amounted to the loss of life, well over $\1/2\ trillion of
economic activity, and millions of lost jobs, like what
happened at Dulles Airport the week after the attack when I was
flying out of there.
The loss of economic activity alone, is more than the cost
of direct spending in Iraq and Afghanistan to date. If our war
efforts prevent another tragedy like the one on 9/11, prevent
it here in Washington, prevent it in New York, prevent it in my
home State of Kansas, tremendous benefits are obtained by
nephew being on the ground there in Iraq.
Mr. Chairman, I must remark for the record, that I think
there are a number of things that aren't properly valued. I do
want to associate myself with one comment you made at the
outset, about the problem of Iran and the great challenge that
Iran presents to us, because, I think, as we look down the
road--and we don't even have to look down the road, as we look
now we can see that it is the centerpiece, the lead funder of
terrorism as a state, around the world.
I agree with you, that this is a significant problem.
Do we encourage them or not, by pulling out of Iraq now,
and the likelihood of it being taken over by Shiite
fundamentalists?
Does that help stabilize our situation overall? I think
these are unknowns, but I would certainly not want to risk
them.
I look forward to questioning some of the panelists. I
appreciate your being here, so we can go through some of this,
but I think there's a lot of questions in this report.
Thank you, Mr. Chairman.
[The prepared statement of Senator Brownback, along with
the report, ``Democrat JEC Report Hints at Existence of a Value
Creation Machine: Over $1 Trillion of Estimated Costs in
Question,'' appear in the Submissions for the Record on pages
59 and 61 respectively.]
Chairman Schumer. Thank you, Senator Brownback.
Representative Doggett.
OPENING STATEMENT OF THE HONORABLE LlOYD DOGGETT, A U.S.
REPRESENTATIVE FROM TEXAS
Representative Doggett. Thank you, Mr. Chairman, and thanks
to our witnesses. Of course, we know well by now, that
9/11 has absolutely nothing to do with the topics that we're
discussing today, other than providing the most dramatic phony
excuse for this unwise war.
We approach the fifth anniversary of President Bush's
tragic choice to launch an invasion of Iraq. And as the time
has past, the excuses for the war have shifted and shifted
again, and so has the cost.
In September of 2002, we remember that White House Economic
Advisor Lawrence Lindsay, estimated that the war could cost as
much as $100 to $200 billion. Mitch Daniels, over at OMB, said,
oh, that's very, very high, not a penny over $50 or $60
billion.
And, of course, most people think that Mr. Lindsay's
message's frankness, even though it was wildly optimistic, was
the main reason that he was dismissed from his White House job.
Defense Secretary Donald Rumsfeld and Mr. Wolfowitz,
essentially said that it would be something under $50 billion,
paid for with Iraqi oil, and about the only cost that American
taxpayers would have, would be the brooms to sweep up the rose
petals.
Well, we've reached 2008, and we're fortunate to have all
of our witnesses. I've followed, particularly, the work of Dr.
Stiglitz and his associate, Linda Bilmes, who testified
recently before our House Budget Committee, who has estimated,
originally, a war costing $2 trillion, that was criticized by
the Administration.
I will say that I will agree with President Bush about one
aspect of his criticism of your work, because you said we don't
go to war on the calculations of green-eye-shaded accountants
or economists. And that's right. He didn't go to war on
calculations. He entered this ideologically driven conflict on
miscalculations, misleading figures, and chronic repression of
the truth, a picture that started before the war and continues
through this morning.
We hear some sobering testimony today from all of our
witnesses. What could even one, just one of the trillions of
dollars involved here, do for America? Eight million housing
units; 15 million public school teachers; healthcare for 530
million children a year; scholarships to a university for 43
million students.
Think of the impact that might have had, in a positive way,
on our economy. And bringing it closer to home, since everyone
has someone that they care about, who's got cancer, 2 weeks in
Iraq would pay for the entire cancer research budget of the
National Institutes of Health for a year.
But we know the real cost of this war, is not just the
money we're hemorrhaging, but the blood of the brave and the
blood of tens of thousands of innocent civilians who have been
caught up in this conflict.
And the real cost is also measured around the globe.
Frankly, we've had some important candor from Admiral Fallon,
who noted, as head of Central Command, within the month, that
the reason we've got so many problems over in Afghanistan with
the resurgence of the Taliban, is, to use his term, because,
quote, ``we've had a little bit of neglect after the invasion
of Iraq, as resources were diverted there.''
A little bit of neglect, a little bit of misallocation of
resources? What a tragedy.
And one of the reasons this war costs so much, that we're
apparently paying for both sides or all sides. We are arming
all sides in a civil war, the Pentagon can't keep track of the
weapons that it supplies there.
The Government Accountability Office estimated, last
August, that 30 percent of the weapons are unaccounted for,
that the have lost track of 190,000 AK47 assault rifles and
pistols give to Iraqi security forces.
It doesn't take an accountant with green eye shades, to see
that there is no accountability in Iraq.
And the real cost of this war, it's also paid every time we
go to the gas pump, as we've seen the cost of oil go up and up
and up.
The President can veto our attempts to end this costly,
bloody, and unnecessary conflict, but he cannot repeal the laws
of economics. American families will be footing this bill for
this war for generations, with compounded interest on the
borrowed money, long, long after President Bush returns to
Texas to clear brush full time. Thank you, Mr. Chairman
Chairman Schumer. Thank you, Representative Doggett.
Before I recognize our next speaker, Representative
Hinchey, I would ask unanimous consent that the full statement
of Congressman Paul be added to the record, and unanimous
consent that any other statements from Members here or not
here, be added to the record at this point.
[Prepared statements appear in the Submissions for the
Record; See Table of Contents for listing.]
Chairman Schumer. Representative Hinchey.
OPENING STATEMENT OF THE HONORABLE MAURICE HINCHEY, A U.S.
REPRESENTATIVE FROM NEW YORK
Representative Hinchey. Mr. Chairman, I want to thank you
very much for holding this very necessary hearing, so that we
in this Congress and the people across the country, can begin
to better understand the costs that are associated with this
illicit invasion and subsequent disastrous military occupation
of Iraq, which is being called a war, but which is not a war at
all. It is just that, an illegal activity followed by military
occupation over the course of the last now almost 5 years.
I want to thank all of you gentlemen, all four of you,
very, very much, for being here with us today, for helping us,
in the context of your testimony, and the people of our
country, draw better attention to this issue and to understand
it more effectively.
There is no question that there have been very serious
negative economic impacts of this illegal activity by this
Administration, with regard to the engagement in Iraq, as has
been said.
One of those issues is the price of energy and the price of
food, both of which now have jacked up so high that it's
causing disastrous consequences for middle-income, lower-
middle-income, blue and white collar working people all across
this country.
The decline in the value of the dollar, has been a major
contributor to the increase in the cost of oil and the price of
gasoline at the pump. And the value of our dollar is extremely
low, and the ability to overturn that, is going to be very
difficult.
What are the economic consequences? We now have 47 million
people without health insurance--more than that, more than 47
million people without health insurance in our country,
struggling with their lives.
We have now more than 37 million people living below the
poverty level, and all of that is having a disastrous
consequence on this economy.
And as a result of the way in which this Administration has
not just managed this war, but managed the American tax code,
we now have the greatest concentration of wealth in the
wealthiest 1 percent of Americans, that we have had in this
country since 1929, interestingly enough.
There are some people who might point out that we could
very well be on the edge of depression here. There's no
question that we're on the edge of recession; the only question
involved in that, is, how deep is that recession going to be?
How long is it going to last? What will be the financial
impacts of that recession on our economy?
What are we going to do to be able to deal with this
economic issue more effectively? As my colleague, the Senator
who left just a few moments ago, suggested, there definitely is
a motivation on the part of this Administration, for increasing
this huge national debt, which is now up above $9 trillion, and
for depressing the economy in this way.
What is that motivation? In my opinion, the motivation is
to enable them to come back with the argument that we are in
such dire economic circumstances, that we can't afford the most
essential cultural ingredients for many people in our country--
Medicare, Social Security--they want to undermine both of those
programs, and they'd like to eliminate them, if they could.
And that's part of the motivation for increasing this debt,
slowing down this economy. So we have an awful lot to deal with
here.
This 1 percent now has, as I think I mentioned, something
in the neighborhood of, I think, 38 percent of the wealth of
our country in the top 1 percent. The top 5 percent has close
to 60 percent of the wealth, largely as a result of the
misspending of this Administration and the way in which they
have altered the tax code.
We, this Congress, must have the courage to stand up to
this situation, address it properly and effectively, so that we
can turn it around and begin to have a set of economic
circumstances in America that deal with the needs of the people
of this country.
So I thank you very, very much for being here, and I am
very anxious to hear what you have to say. Thank you very much.
Chairman Schumer. Thank you, Congressman Hinchey. Last, but
certainly not least, is Senator Klobuchar from Minnesota.
OPENING STATEMENT OF THE HONORABLE AMY KLOBUCHAR, A U.S.
SENATOR FROM MINNESOTA
Senator Klobuchar. Thank you very much, Mr. Chairman.
In the time it will take me to give this opening statement,
the Iraq war will cost our country another $1.2 million.
That's $1.2 million every 4 minutes, adding up to $430
million every day, $12 billion every month. I don't think this
hearing could have come at a more crucial time.
The President seems intent on leaving the current situation
for the next Administration to resolve.
Unfortunately, our soldiers in the field don't have the
luxury of sitting back while we staying endlessly in this war,
with no plan to end it in sight.
I don't think we can continue to give this President a
blank check. We will ensure the safety and well being of our
troops, which is so important for me. I have a brother in the
National Guard, and we must plan for a reasonable withdrawal.
I heard some of my colleagues talk about the cost of
treasure. They talk about something is priceless. What is this
treasure we're talking about?
First of all, we know, by some estimates, looking at both
the direct and indirect costs of the war, that it's about $1.5
trillion. Second, there is the lack of accountability and money
that has just disappeared.
Last year, military officials admitted that contracts worth
over $6 billion to provide essential supplies to troops in Iraq
and Afghanistan, are under criminal investigation and $88
billion in contracted programs are being audited for financial
irregularities.
Three top auditors overseeing reconstruction projects in
Iraq, reported that of the $57 million awarded in contracts,
they investigated, approximately $10 billion has been wasted.
Another $4.9 billion was lost through contract overpricing and
waste, and $5.1 billion was lost through unsupported contract
charges. That's the treasure, that's the price.
What other price is there? Well, there's the price of our
standing in the world and what we've lost in terms of the work
that we could be doing elsewhere in the world.
And then there's the price of our soldiers. I went and
visited Iraq in March, and I saw firsthand, the bravery of the
Minnesota troops. They would come up to me in the cafeterias
and they'd come up to me in the airport tarmacs, and they
didn't complain about a thing; they didn't complain about their
equipment or their tour of duty, which had been extended over
and over again, or the weather.
They just asked me if I'd call their moms and dads when I
got home, to tell them they were OK.
And when I talked to their moms--I talked to over 50
parents--I saw the other cost of the war, because they told me
a few things that the soldiers over there didn't want to talk
about, and that was their families waiting and waiting for them
to return, the loss of jobs, especially for these National
Guard members and Reservists, who were only supposed to go over
maybe for 3 or 4 months, and then they have their livelihoods
at home, which can't wait a year, can't wait 2 years.
They talked about how some of them had come home and found
out that their education benefits that they were supposed to
get, their full education benefits, weren't there. The average
age of a soldier in Vietnam, was 19; the average age of the
Minnesota National Guard is 33. Half of them have kids.
It's a different kind of war. When you look at the cost----
[Protest placards displayed.]
Chairman Schumer. Could we have order? The rules of the
Committee are no--thank you.
Senator Klobuchar [continuing]. When you look at the cost
of this war, you look at the price tag, you look at the money
that has actually been wasted because of a lack of
accountability, and you look at our standing in the world, but
you also have to look at the cost for these brave men and women
who've done everything they're supposed to do--they deposed an
evil dictator, they're guaranteed free elections in Iraq. That
is the price of this war. Thank you, Mr. Chairman.
Chairman Schumer. Thank you, Senator Klobuchar.
Now we're ready to hear from our witnesses, and I first
want to introduce each of them. First, professor Joseph
Stiglitz is university professor at Columbia, chair of Columbia
University's Committee on Global Thought; he was awarded the
Nobel Prize in 2001; he was chairman of President Clinton's
Council of Economic Advisors, before becoming chief economist
and senior vice president of the World Bank.
He is the author of numerous books and articles, including
his latest book, which I've already mentioned, and is most
relevant for our discussion today, ``The Three Trillion Dollar
War.'' Dr. Stiglitz received his Ph.D. from MIT.
Dr. Robert Hormats is vice chairman of Goldman Sachs, and
an international managing director of Goldman Sachs. He has a
lengthy record of public service. He's served in both
Democratic and Republican administrations as Assistant
Secretary of State for Economic and Business Affairs;
Ambassador and Deputy U.S. Trade Representative; and Senior
Deputy Assistant Secretary for Economic and Business Affairs at
the Department of State.
He's the author of numerous books, as well, including ``The
Price of Liberty: Paying for America's Wars From the Revolution
to the War on Terror.''
Dr. Hormats holds a Ph.D. in international economics from
the Fletcher School.
Mr. Rand Beers is currently president of the National
Security Network. Before joining the NSN, he spent over three
decades in public service, again, under both Democratic and
Republican administrations.
From 1988 to 1998, Mr. Beers served on the National
Security Council staff at the White House, as Director of
Counterterrorism and Counternarcotics, Director for
Peacekeeping and Senior Director for Intelligence Programs.
More recently, he was Special Assistant to the President
and Senior Director for Combating Terrorism at the NSC. He also
has a distinguished record of military service as a Marine
officer and Rifle Company Commander in Vietnam.
Dr. Scott Wallsten is currently a vice president of
research and a senior fellow at the iGrowth Global, as well as
senior fellow at the Georgetown Center for Business and Public
Policy, and a lecturer in public policy at Stanford University.
He's been a director of communications policy studies and
senior fellow at the Progress and Freedom Foundation; a senior
fellow at the AEI Brookings Joint Center for Regulatory
Studies, and a resident scholar at AEI.
In addition, Dr. Wallsten has served as a economist at both
the World Bank and the President's Council of Economic
Advisors. His research has been published in numerous academic
journals; his commentaries have appeared in newspapers and news
magazines around the world, and he holds a Ph.D. in economics
from Stanford University.
Gentlemen, you may each proceed. We'll start from my left
with Dr. Stiglitz and work our way over to the right.
I guess that's appropriate here----
[Laughter.]
Chairman Schumer [continuing]. And your entire statements
will be read into the record.
Dr. Stiglitz.
STATEMENT OF THE HONORABLE JOSEPH E. STIGLITZ, NOBEL LAUREATE;
PROFESSOR, COLUMBIA UNIVERSITY, NEW YORK, NY
Dr. Stiglitz. First, thank you for this opportunity to
discuss the economic costs of the Iraq war with you. March 19
marks the fifth anniversary of what was supposed to be a short
venture to save the world from the threat of weapons of mass
destruction, which simply weren't there.
It is now the second longest war in America's history, and
after the all-encompassing World War II, the second most
costly, even after adjusting for inflation.
In terms of cost per troop, it is by far the costliest,
some eight times as expensive as World War II.
Before turning to the cost beyond the Federal budget, which
is the subject of these hearings, I want to make three
prefatory remarks:
We went to war to fight for democracy, but democracy is
more than just periodic elections. It involves broader notions
of democratic accountability. Citizens have the right to know
what they are spending their hard-earned dollars on.
They have a right to know what their Government is doing
and the consequences of its actions. Over the past 2 years, I
have worked with a colleague at Harvard, Linda Bilnes, to
estimate the full cost of the Iraq war.
We published our initial study in January of 2006, and I
would like that paper to be entered into the record.
Chairman Schumer. Without objection.
[The study, ``Soldiers Returning from Iraq and Afghanistan:
The Long-term Costs of Providing Veterans Medical Care and
Disability Benefits'' appears in the Submissions for the Record
on page 131.]
Dr. Stiglitz. We published a second study concerning the
cost of providing medical care and disability benefits to our
returning Veterans, in January 2007. I would ask for that also
to be entered into the record.
Chairman Schumer. Without objection.
[The study, ``The Economic Costs of the Iraq War: An
Appraisal Three Years After the Beginning of the Conflict''
appears in the Submissions for the Record on page 152.]
Dr. Stiglitz. We have now published a book, ``The Three
Trillion Dollar War,'' which estimates the cost, the true cost
of the war, including the veterans' costs and the impact on the
U.S. economy.
We should not have needed to write this book, and when we
came to write it, it should have been a far easier task. The
Administration and Congress should have provided these numbers
to the American people.
Five years after the beginning of this war, you should not
be funding this war with emergency appropriations, which escape
the normal budget scrutiny. We should not have had to resort to
the Freedom of Information Act to find out how many Americans
have been injured in this war.
This Administration has said that it will provide
everything that our troops need. We should not have had to use
the Freedom of Information Act to discover that more than 3
years ago, senior officers in the Marines were already sending
urgent requests for MRAPs, which would have saved the lives of
a large fraction of those killed, if we had provided these
vehicles for them at that time.
The second remark is that the budgetary costs themselves,
have been enormous, far, far larger than the some $50 billion
that the Administration estimated at the beginning of the war.
We are now spending that amount on operations alone every 3
months.
But the costs to the Federal budget are far larger than the
day-to-day operational costs. The war has raised overall
military costs. We have to pay more to recruit and retain our
troops, and even with these increased expenditures, standards
for troops have had to be lowered.
It will also be costly to restore our military to its pre-
war standing, both in terms of personnel and material.
There are costs hidden in other parts of the budget.
Not only are the direct costs of contractors high, but we
are paying for their insurance, for death benefits and
disability.
The most important costs that go well beyond the
operational costs are the expenditures required to provide
healthcare and disability for returning Veterans. These are
likely to be very, very high. We will be paying these bills for
decades to come.
Almost 40 percent of the 700,000 who fought in the 1-month-
long Gulf War have become eligible for disability benefits, and
we are paying more than $4 billion a year for disability
benefits from that short war.
Imagine then, what a war that will almost surely involve
more than 2 million troops and will most surely last more than
6 or 7 years will cost. Already, we are seeing large numbers of
returning Veterans showing up at VA
Hospitals for treatment, large numbers applying for
disability, and large numbers with severe psychological
problems.
My third prefatory remark is this: We will be facing these
budgetary costs for decades to come. Even the CBO methodology,
which looks 10 years into the future, is too short for these
liabilities which we have incurred.
In the case of World War II Veterans, VA expenditures
peaked more than four decades after the cessation of
hostilities. Furthermore, because the Administration actually
cut taxes as we went to war, when we're already running large
deficits, this war has effectively been entirely financed by
deficits.
There has been much discussion of unfunded entitlements in
recent years. This war has created a new unfunded entitlement--
future benefits of Iraq Veterans that may total half a trillion
dollars or more.
The focus of my remarks today, however, is on the large
costs that go beyond these budgetary costs. We classify these
into two categories: microeconomic costs and macroeconomic
costs.
We have consistently understaffed, under-invested, and
underfunded the medical and disability programs that serve our
veterans. As a result, our servicemen and women returning from
the battlefield in Iraq often face a new battle with the
bureaucracy to get the benefits to which they are entitled and
which they deserve.
When they cannot get the healthcare to which they are
entitled, or they have to wait months just to schedule an
appointment to see a VA doctor, those who are fortunate enough
to have families who can afford to do so pay for it on their
own.
This doesn't diminish the cost to society; it just shifts
the burden from the Federal budget to these people who have
already sacrificed so much.
There are many other ways in which the costs to society
exceed the cost to the budget, often by considerable amounts,
which we detail in our book.
I have so far emphasized the direct economic costs and
there has already been a lot of discussion about the
opportunity costs, the diversion of funds that could have been
used in so many other and better ways. I would be remiss,
however, if I did not note that there are other costs in the
long run, like the squandering of America's leadership role in
the international community, which I hope will be discussed a
little bit later.
Finally, I want to turn to the macroeconomic costs: First,
I want to dispel a widespread misconception that wars are good
for the economy, a misconception that arose from the role that
World War II may have played in helping the United States
emerge from the Great Depression.
But, as Congressman Paul pointed out, that was perhaps not
an accurate account of what actually happened. But at least
since Keynes, we know how to maintain the economy at or near
full employment, in far better ways. There are ways of spending
money that stimulate the economy in the short run, while at the
same time leaving it stronger for the long run.
This war has been especially bad for the economy. Some of
the costs are only becoming apparent now; many we will face for
years to come.
There are four major categories of impacts. The first is
through its impact on oil prices, which, at the beginning of
the war, was $25 a barrel and now is $100 a barrel.
In our estimates, we are very conservative and only
attribute $5 to $10 of the increase to the war, and we assume
the price increase will last for only 7 to 8 years. We think
those assumptions are unrealistically conservative.
For instance, futures markets today expect that the price
will remain in excess of $80 a barrel for at least the next
decade.
Money spent to buy oil is money not available to be spent
here in the United States. It's as simple as that. Lower
aggregate demand leads, through a multiplier, to lower national
income.
The second impact arises from the fact that Iraq
expenditures do not stimulate the economy in the short run, as
much as expenditures on, say, infrastructure or education, that
are so badly needed here at home.
The third impact is that, both directly and indirectly,
through the mounting deficits, Iraq expenditures are crowding
out investments that would have increased America's
productivity in the future.
The mounting Iraq war debt has meant that we have had to
borrow more and more money from abroad, and America, as a
country, is far more indebted to others than it was 5 years
ago.
Until recently, it was a surprise to some that in spite of
these obvious ways in which the Iraq war was weakening the
American economy, the economy seemed as strong as it did. Was
there something after all to the old adage about wars being
good for the economy?
To me and to other serious students of the American
economy, there was, however, an obvious answer: These
weaknesses were being hidden, just as much of the other costs
of the war were being hidden from easy view.
The exposure of these weaknesses, was, it seemed to me,
just around the corner, perhaps even more than the long vaunted
victory that remained elusively just around the corner.
The macroeconomic effects were being hidden by loose
monetary policy, a flood of liquidity, and lax regulation.
These allowed household savings rates to plummet to zero, the
lowest level since the Great Depression, and fed a housing
bubble, allowing hundreds of billions of dollars to be taken
out in mortgage equity withdrawals that increased the
irresponsible consumption boom.
The cost to the economy of this downturn will be enormous.
We do not know, of course, how long or how deep the downturn
will be, but it's likely to be the worst than any we have
experienced in the last quarter of a century.
Even if growth this year is .8 percent, as the IMF
forecasts, and next year growth starts to resuscitate to 2
percent, and in 2010, returns to its potential growth of, say,
3.5 percent, which would be a quicker recovery than most would
expect, the total lost output over those 3 years, the
discrepancy between the economy's actual output and its
potential, will amount to some $1.5 trillion.
America is a rich country. The question is not whether we
can afford to squander $3 trillion or $5 trillion. We can, but
our strength will be sapped.
We will be less prepared to meet the challenges of the
future, and there are huge opportunity costs. Some of our
children will not have the medical care that they should have a
right to, a right every citizen born in a country as rich as
ours should have. Some will bear the scars for life.
We are not investing as we should in technology and
science.
Economists are fond of saying that there is no such thing
as a free lunch. It is also the case that there is no such
thing as a free war. This is not the first time that an
Administration tried to enlist support for an unpopular war, by
trying to hide the true and full cost from the
American people, and this is not the first time that
America and the American economy has suffered as a result.
The inflationary episode that America went through
beginning in the late 1960s, was at least partly a consequence
of President Johnson's failure to fully own up to the costs and
adjust other taxes and expenditures appropriately.
This time, the underlying economic situation is different,
and, accordingly, the consequences have been different, but in
many ways, even more severe.
The budgetary costs of this war have been huge, but the
costs that go beyond the budget, are at least as large and the
meter is still ticking. Every year of this war has seen the
costs rise.
But even if they stay where they are, staying another 2
year, will add, conservatively, another $500 billion to the
total tally. No one can know for sure, whether, when we depart,
things will get better, as most Iraqis seem to believe, or
worse.
No one can know for sure whether staying an extra 2 years
will make the chaos that might follow less or greater.
But it is your solemn responsibility to make the judgment,
is this the best way of spending $500 billion? Is it the best
way to strengthen America's capacity to meet future challenges,
to promote democracy around the world, to help create the kind
of world here and abroad that we would like our children to
inherit?
Is it the best way of providing for our security? For too
long, this Congress and this Administration have approached the
problem by dribs and drabs, a little more today might just do
the trick, a little more later will help us turn the proverbial
corner.
But as the late Senator Dirksen said, a billion here, a
billion there, and pretty soon you're talking about real money.
Today, we would have to say that a trillion here, a
trillion there, and pretty soon, you're talking about real
money.
Even a rich country ignores costs of this magnitude at its
peril.
[The prepared statement of Joseph E. Stiglitz appears in
the Submissions for the Record on page 125.]
Chairman Schumer. Thank you, Professor Stiglitz.
Dr. Hormats.
STATEMENT OF DR. ROBERT HORMATS; VICE CHAIRMAN, GOLDMAN SACHS
(INTERNATIONAL), NEW YORK, NY
Dr. Hormats. Thank you very much, Mr. Chairman and Members
of the Committee. I want to start by associating myself with
Joe Stiglitz's point that this is a very valuable hearing,
because it presents an opportunity to discuss an issue that has
not received sufficient consideration--the true cost of the
war--and, beyond that, that there are hidden costs of the war
that the Committee described in its report, and that Joe has
put so eloquently in a book that he has just published.
Let me just make a few broad points, and then try to
address a couple of the issues that were raised to by Members
of the Committee. In my view, democracies function best when
policies are based on the informed consent of the governed.
Here, I emphasize the word, ``informed.'' In most wars,
there is a tendency to underestimate the cost of that war at
the outset, in part, because of wishful thinking that the war
will be short and cheap, and, in part, because leaders often
cannot immediately judge the true costs of the war, at the
outset of that war.
This was certainly the case during the Civil War, World War
I, the Vietnam War, and others. But there was generally a very
candid, open, and robust debate in the Congress and among the
American people, about how to pay for a war, once its cost
became apparent, and, in some cases, even anticipation of
rising costs.
During this war, there has been a surprising absence of
vigorous public or Congressional debate over war costs and how
to pay them. In large measure, that is because the war
represents only a small portion of American GDP, roughly 1
percent annually in direct budgetary terms, compared to World
War II, which was about 40 percent of GDP, at its peak; the
Korean War, about 15 percent; Vietnam around 10.
So, paying for the current war has not appeared to impose
large visible costs on the American economy, although, as I
shall point out later, and Professor Stiglitz has mentioned
just now, that is a deceptive illusion.
Also, in other wars, higher taxes and elevated borrowing
that pushed up interest rates, as in the case of, say Vietnam,
forced Americans to come to grips with the cost of the war and
political leaders to feel a greater sense of accountability
about war costs.
This war, so far, has seen taxes lowered, and has had no
direct or immediate impact on interest rates. In fact, for the
better part of this war, the Federal Reserve was cutting
interest rates and long-term bond rates were quite stable.
Moreover, the fact that this war has been financed entirely
by emergency budget supplementals, that circumvent the normal
budget process, has meant that the Executive Branch and the
Congress have been able to skirt the issue of tradeoffs in the
budget.
There is a great deal of unnecessary and non-essential
spending, including climbing numbers of earmarks, that has
occurred, despite the increasing costs of the war, a
development that never before has occurred in American wartime
history.
Normally, when America goes to war, non-essential spending
programs are reduced to make room in the budget for the higher
costs of war. Individual programs that benefit specific
constituencies, are sacrificed for the common good.
FDR himself slashed, or removed from the budget entirely,
many of his pet New Deal programs. And taxes have never been
cut, in the entire history of the United States, during a major
American war.
For instance, President Eisenhower adamantly resisted
pressure from Senate Republicans to cut the income tax during
the Korean War.
Let me make a couple of points about how leaders have
addressed specifics. Let me just quote a couple of thoughts
that are worth keeping in mind.
FDR, in his State of the Union speech after Pearl Harbor,
in January 1942, said, ``War costs money and that means taxes
and bonds and bonds and taxes; it means cutting luxuries and
other non-essentials.''
Higher taxes, as well as cuts in luxuries and non-essential
spending, have been hallmarks of fiscal policy during every war
in which the United States has engaged, until now.
The Iraq war, as Joe indicated, has been paid for in a very
different way. It's the first war during which taxes have been
cut and non-essential spending has increased, and, quite
substantially, at that.
It has meant that the bond part of FDR's equation, i.e.,
Federal borrowing, has been the sole source of funding for the
costs of this war. That has made it easier for Americans to
avoid coming to grips with the cost of the war, because no
popular programs were cut, no new taxes were levied, no
inconvenience to anyone, except our troops and their families,
who are suffering mightily from this war.
Let me just make a few specific points relating to what
Members of the Committee have mentioned, and then I'll
conclude. One is the ``opportunity costs'' of the war.
This is a very important point, and let me quote someone
who you might not normally think of in this context--Dwight
Eisenhower. I think this statement makes an important point.
Said Eisenhower, ``Every gun that is made, every warship
launched, every rocket fired, signifies, in the final sense, a
theft from those who hunger and are not fed and those who are
cold and are not clothed.''
This is not a pacifist speaking; this is the Supreme Allied
Commander of World War II. He wasn't saying, ``don't go to war
if you need to.'' Obviously, he supported World War II with
enormous enthusiasm, with great historic success.
He was saying, when you go to war, understand the
tradeoffs, understand the tradeoffs. If it is a war of choice,
as the Iraq war has been--not Afghanistan, but Iraq--understand
the tradeoffs, the choices that you're going to make.
The second comments goes to the point that Congressman Paul
mentioned, and that is the debt that is built up in a war. This
goes back to President Washington, who urged Congress and his
fellow citizens to ``Discharge the debts which unavoidable
wars. . . '' he meant the Revolution ``may have occasioned, not
ungenerously throwing upon posterity the burdens we ourselves
ought to bear.''
I think that message often tends to be forgotten in our
country.
Let me just make a couple of final points in terms of
recommendations.
It seems to me that there are four or five points that are
well worth recognizing, as we try to learn the lessons of this
war. This has been a bitterly divided country over this war,
but it seems to me, there are a few lessons that should be able
to unite us as we try to figure out how to do it better next
time.
One is, avoid paying for wars almost exclusively by
supplementals. This distorts the entire budget process.
Even during Vietnam, where the Administration, Johnson and
McNamara, tried to do this, the Senate leadership--the Senate
was Democratic, White House was Democratic--the Senate leaders
went to the President and said, you cannot continue to do this.
And even, the Vietnam war, which was mis-financed and non-
transparently financed, only about 25 percent of that war was
financed by supplementals, because the Congress went to the
President and said stop doing this, it distorts the budget
process. Lyndon Johnson, who was not exactly an easy guy to
convince, understood that he was losing credibility by doing
this.
Second, cut way back on unnecessary spending when you go to
war. This should have been done after 9/11. In fact, domestic
spending rose, earmarks rose, and the same thing prevailed
after the beginning of the Iraq war in 2003.
Third, exercise more Congressional oversight over war
spending. A lack of this undermines the credibility of a war,
if a lot of the waste is palpable and obvious to the American
people.
Let me cite one historical reference. The so-called Truman
Committee, during World War II--again, Democratic President,
Democratic Congress--the Democratic Congress exercised enormous
oversight. Truman's Committee went around the country and
looked at military bases; it insisted on procurement reforms
that saved the country roughly $15 billion during World War II.
And it made the whole war effort more credible in the eyes
of Americans, because it reassured them that money was being
spent wisely.
Now we need the money more than ever, we need efficiency
more than ever, so this watchdog role of Congress and a
permanent oversight committee, or at least using the existing
committees, makes enormous sense to me.
It's also important that we look at the issue of veterans
and veteran spending, because, that is going to be an important
problem over the long term, for wounded Veterans.
In every other war, there has been a sacrifice by the
American people. When American troops went to war, Americans at
home have had a tradition of sacrificing for those troops on
the battlefield.
Woodrow Wilson's Treasury Secretary, William Gibbs McAdoo,
called it ``capitalizing patriotism.'' He said, the troops are
sacrificing, Americans should give up something at home to
support those troops, whether you agree with the war or you
didn't agree with the war.
And it seems to me, one point that's very important here is
that these wounded veterans are going to have enormous medical
expenses for a long time. I think the American people would
support a surtax or at least a voluntary surtax, if not a
mandatory one, on upper income taxpayers, of a relatively small
amount of money that would go entirely to a fund dedicated to
paying for the costs of wounded veterans. This would constitute
at least some measure of sacrifice on the home front for people
who are making sacrifices abroad, and our troops are doing
this.
Finally, we need to take a long look at national finances
in this country. We have the long-term costs of this war, the
long-term costs of national security; we have growing costs of
Social Security, Medicare and Medicaid, a whole host of things,
and we're leaving burdens that the next generation and
generations beyond are going to have to pay off.
And, you know, this goes back to the Washington quote about
the theft from the future, if we don't exercise fiscal
responsibility in the current environment.
So I think this is a bigger issue than the war; the war is
not the only reason for our budget deficits. A lot of spending
has taken place at home that shouldn't have. Some of the tax
cuts during war have been unusually high and prolonged.
We need to make sure that Federal revenues and spending
begin to converge. Given current policies, they are going to
diverge very dramatically in the next decade and beyond. Thank
you very much.
[The prepared statement of Dr. Robert Hormats appears in
the Submisions for the Record on page 211.]
Vice Chair Maloney [presiding]. Thank you.
Dr. Beers.
STATEMENT OF DR. RAND BEERS; PRESIDENT, NATIONAL SECURITY
NETWORK, WASHINGTON, DC
Dr. Beers. Thank you very much, Congresswoman Maloney and
all of you, for asking me to take a somewhat different tact
from the other testimony today, and take a look at the
strategic costs of the war.
Senator Brownback, you raised the questions of the costs of
security, and I hope that we can engage in a dialog on that
issue, because that's what I want to talk about, as well.
Iraq does not occur in a strategic vacuum; it is part and
parcel of a much broader range of issues and security
challenges that the United States faces.
I think it is important, as we think about Iraq, that we
look at what those other challenges are, and whether or not we
have been able to deal with them and meet them while we have
been bogged down in Iraq.
I sat in the White House working on the National Security
Council staff at the end of 2002 and the beginning of 2003, and
the strategic environment that I saw at that time, included a
number of the issues that are on the table today.
But I want to focus first on Al Qaeda. At that particular
point in time, we had just experienced the Bali bombing, in
which almost 200 people were killed by a bomb in that vacation
resort, and we became very clearly aware that Al Qaeda had
moved from being an organization, to becoming a movement, a
movement that was global in nature, a movement that was capable
of operating around the globe with deadly force.
At the same time in the fall of 2002, it was also clear
that the number of incidents that were caused by the Taliban in
Afghanistan, had begun to rise.
At the same time, it was also clear that the opium poppy,
which had not been grown in Afghanistan for a year, was
suddenly back, and, as we know, would continue to grow.
Last, Osama Bin Laden was still on the loose.
Now, if I was Bin Laden and I was sitting in a cave in
Pakistan or Afghanistan or wherever I was at that particular
point in time, what would I want, from a strategic viewpoint to
have happen, that would allow me to continue to pursue my aims
around the world?
Well clearly, the first thing I would want is for the
United States to go away, to go someplace else and become
involved. And if they went someplace else, what would I want
them to do?
Well, I would want them to stay there. So we did, and so he
looked at the strategic situation again.
Well, they're there, and how do I keep them there? I don't
have a presence in Iraq. There was no Al Qaeda presence in Iraq
before our invasion.
He sent some people there, in order to provoke the conflict
further, in order to get others, who weren't even members of
his organization, to become involved in that same conflict.
And then what would he do? He would want to publicize the
fact that the United States was heavily involved, was seen as
an occupier, and was involved in casualties that he could label
as innocent civilians.
What was the result? The National Intelligence Estimate on
Terrorism said that Al Qaeda has reconstituted along the
Pakistan-Afghan border and is again capable of attacking the
homeland. That's us; that's a strategic cost of our involvement
in Iraq.
Let me do one more like that: You're Iran and you're
sitting there, you have, one, cooperated with the United States
in Afghanistan, publicly to create the Bonn Declaration and set
up the new government in Afghanistan.
You have offered the United States, a terrorist that you
have captured, and you are put on Axis of Evil. You then have a
situation at the beginning of the war in which there is a
chance for dialog, so that conflict can be avoided, and within
the U.S. Government, there was a move to offer that dialog, in
order to discuss whether or not the Al Qaeda members who were
known to be in Iran, and known to be under the watch of the
government, might be available to the United States, in return
for our agreement to do something about their terrorists,
terrorists who we also called terrorists, the Mujahaddin-i-
Khalq, but we were too preoccupied, and, after all, we had
listed them as the Axis of Evil, and that particular option was
not pursued.
So after we invade, the first thing you're going to do in
Teheran, is probably pray that something intervenes in order to
leave you in a situation with a huge U.S. force next door, you
are not the next victim of that military force.
And then what you do is, you think, are there any options
that you have to play in Iraq? Of course, there are. A lot of
the Shia leadership spent time in your country; you know them;
you can work with them.
And what you do, of course, at the same time that we're
invading is send your own operatives into Iraq in order to work
with the Shia there, and in order to do what you can to make
sure that the United States is unable to do anything to you.
And so what do we have today? We have a U.S. military
that's strained. We have a limited capacity to be able to use
force against Iran should we choose to do so, and we have
ignored all of the opportunities for engagement with Iran, that
might have ameliorated the situation in Iraq and the global
challenges that we face from the Iranian nuclear program.
I want to end with those two points and just close and say,
what happens when you rely on military power to demonstrate
your strength, so that others will follow you and you do not
win? What happens when you ask others to act consistently with
the Geneva Convention and the International Convention on
Torture, and then when the tragic situation at Abu Ghraib is
revealed, you quibble about whether or not enhanced
interrogation might be something that we wanted to reserve as
an option in the global environment?
What happens when you seek help for Afghanistan or Darfur
or elsewhere, and no one comes?
The strategic cost of the war in Iraq is not just our
inability to deal with problems like Al Qaeda, Pakistan,
Afghanistan, the Middle East peace process, and our strained
military; it is also, and more importantly, the limitations on
our ability to get others to work with us, to support us, to
look at us as a role model in the world. Thank you.
[The prepared statement of Dr. Beers appears in the
Submissions for the Record on page 216.]
Senator Chafee. Thank you, Mr. Beers. Let me apologize to
both you and Dr. Hormats, that I was unable to hear the
testimony. I did read what had been submitted.
Dr. Wallsten.
STATEMENT OF DR. SCOTT WALLSTEN; VICE PRESIDENT FOR RESEARCH
AND SENIOR FELLOW, iGROWTHGLOBAL, WASHINGTON, DC
Dr. Wallsten. Mr. Chairman and Members of the Committee,
thank you for inviting me to testify today on the costs of the
war.
I estimate that the expected net present value of the total
direct costs or microeconomic costs, as we refer to them, of
the war are approximately $1 trillion to the United States, and
closer to $2 trillion globally.
The real direct economic costs of the war include not only
expenditures from the U.S. budget allocated for the war, but
also injuries, lives lost, and lost productivity from
reservists who cannot do their civilian jobs because they have
been called up for service, and other costs, as well.
My co-author, Katrina Kosec, and I began this project in
2005, and have updated our numbers periodically since then. I
have submitted the original 2005 paper, which explains our
methodology in detail, to the Committee, and I would hope that
it could be introduced into the record.
[The paper referred to, ``The Economic Costs of the War in
Iraq,'' appears in the Submissions for the Record on page 222.]
Dr. Wallsten. We have found that the total direct economic
cost at any given point in time tends to exceed budget
appropriations by about 20 to 25 percent.
As wealthy as our Nation is, our resources are limited and
must be spent carefully. Other areas of policy attempt to
explicitly take into consideration the full economic costs and
benefits of Government actions.
President Ronald Reagan signed an Executive order requiring
certain agencies to conduct a cost-benefit analysis for any
proposed major regulation, and to adopt it, quote ``only upon a
reasoned determination that the benefits of the regulation
justify its costs.''
President Bill Clinton renewed that order, as did the
current President. Now cost-benefit analysis has become an
important and accepted, though certainly not the only, tool for
evaluating many proposed policies.
But this approach has yet to be explicitly incorporated
into decisions regarding defense and security. Admittedly, the
current tools we have for evaluating costs and benefits are not
perfectly suited for evaluating the costs of war, since they
were developed for use in a different setting.
The tools are blunt and imprecise, meaning that the cost
estimates all of us are presenting today are measured with
error. That's why Katrina and I included in our paper ranges of
estimates, and also built an online estimator that allows
people to change underlying assumptions to see how these affect
the costs.
Nevertheless, this type of analysis can provide valuable
information to help inform policymakers as to the best course
of action going forward.
In addition, we supply these tools to other related areas
like homeland security. The Office of Management and Budget
estimated last year that major homeland security regulations
imposed a cost of $2.2 to $4.1 billion a year on the economy.
But those rules were passed with no estimates of their
expected benefits. Those costs may sound small compared to the
cost of the war, but they are not. The net present value of
those costs is close to $100 billion.
Estimating the benefits of homeland security measures or of
any military operation is difficult, because, as OMB
acknowledges, they depend on the probability and severity of
outcomes like terrorist attacks, which are difficult to
quantify.
But just because expected costs and benefits are difficult
to estimate doesn't mean they don't exist, and if you can't
estimate the benefits, you should still follow through on a
policy only if you have good reason to believe that those
benefits exceed the costs, and if you believe that it's the
best way to achieve those benefits.
Professor William Nordhaus of Yale was the first to do this
exercise for the war in Iraq, and he did it before the war when
it could have helped inform policy.
He acknowledged that there would be some benefits of a war;
the world would be better off if Sadam Hussein were not in
power. But Professor Nordhaus meticulously estimated ranges of
the likely costs under different scenarios, and concluded that
a war in Iraq could cost between $100 billion and $2 trillion.
And he further qualified the results by noting factors that
he did not include, such as costs to other countries, or as he
put it, quote, ``fallout that comes from worldwide reaction
against perceived American disregard for the lives and property
of others.''
The point--aside from noting that Professor Nordhaus was
far more insightful than any of us by doing this exercise in
advance--is that even under tremendous uncertainty these tools
can provide us with useful information to help inform
decisions.
If Congress and the public had seriously considered
Professor Nordhaus projected cost estimates, would we still
have gone to war? Perhaps some might have believed it was still
worthwhile, but perhaps not.
We can't do anything about the costs we've already
incurred; those resources are gone, but we do have some control
over what happens next. The lesson, I believe, is that
policymakers can use the tools of cost-benefit analysis to help
evaluate whether proposals regarding what to do next in Iraq
are likely to yield enough benefits to us and the world, and
hopefully that additional information will lead to better
decisions. Thank you.
[The prepared statement of Dr. Scott Wallsten appears in
the Submissions for the Record on page 220.]
Chairman Schumer. Thank you, Dr. Wallsten. I want to thank
all of our witnesses for their just outstanding testimony.
I have a few questions here, and we'll try to stick to the
5-minute limits with questions for everybody, including myself.
First, to Dr. Stiglitz, let me just ask you this: In your
book, you state that if we consider the total macroeconomic
costs of the war, the price tag for a continued presence in
Iraq increases from approximately $3 trillion up to $5
trillion.
I was wondering if you could expand on how we here in
Washington should consider those macroeconomic costs. They
don't appear in our budgets, but they do affect our economy and
constituents.
I mean, how should we change the way we look at things
here, if at all?
Dr. Stiglitz. I think this goes back a little bit to what
Scott was saying, that when you're making a decision, there are
the direct budgetary costs that you're very aware of that go
through your appropriation process, but there are costs to our
society and to our economy that are not as obvious.
You look at these other costs, in effect, when you're
discussing regulations; you're saying, is a safety regulation
worth the costs that it's going to impose? In that case, both
the benefits and the costs of the regulation are outside your
budget, but you're making a public policy decision and making
that judgment.
I think what all of us are saying, in a sense, is that you
need to be aware of what those likely costs are going to be. As
you look at those costs and say, OK, there may be benefits in
the budgetary sense, as well as hard to quantify non-budgetary
benefits that you weigh with the budgetary costs.
But in a war, the non-budgetary costs are so much greater
that to ignore them is really wrong.
Chairman Schumer. Thank you. You spoke at length in your
testimony about how you and your colleague, Linda Bilmes, faced
difficulty in getting information from the Defense Department,
the Department of Veterans Affairs, and you state repeatedly
that you had to rely on Freedom of Information requests to get
information.
Can you provide some more details about the specific types
of information you had difficulty in obtaining and what can we
do, so that the next researcher who comes along and validly
wants this information can get it more easily?
Dr. Stiglitz. Probably the most dramatic and perhaps most
upsetting data was the number of injuries. When the Department
of Defense releases the number of fatalities, they
differentiate between whether the fatalities are hostile or
non-hostile.
When it comes to the injuries, they only release the number
of hostile injuries, and they get to choose whether a
particular injury is hostile. For instance, if you have a
convoy and the first vehicle in the convoy gets blown up,
that's clearly hostile, but if the second vehicle runs into the
first and somebody gets injured, is that just another
automobile accident?
They may classify the injury in the second vehicle as not
hostile. After all, he didn't actually get injured by an IED or
some other weapon.
If a helicopter has to fly at night because it's too
dangerous to fly in the day, and he crashes because he's flying
at night, that's not hostile, but it would not have occurred
had the guy been in his home in New York or Washington.
The Department of Defense has tried to make it difficult to
access these non-hostile injury numbers, for the obvious
reasons that not only do they not want the American people to
feel that there is a greater cost of war than what we've all
talked about, but they didn't even want them to know what those
costs of the war are in the first place.
One of things I emphasized in my testimony was that there
needs to be more systematic procedures to make available not
just the budgetary numbers, but also the kinds of things like
injuries. We are going to have to pay for those injuries in
health care and disability benefits, whether they are hostile
or not hostile.
Chairman Schumer. I understand it, and we're going to have
to look at that, I think, as a Congress.
Final question to both Dr. Hormats and Dr. Beers: You both
talked about--when we talk about the costs of the war, I think
most people look at domestic needs because that's the thing
that affects the most immediately, but we also have lots of
foreign policy needs, which you two focused on.
Could you just--does focusing on the, our weak fiscal
position--how does that weaken us in dealing with potential
future crises, wherever they may occur? Could you each talk a
bit about that?
Dr. Hormats. I'd like to make two points on that, one, to
follow up one point that Rand made earlier. He stressed the
importance of the global leadership or loss thereof, as a
result of this.
One of the things that we can take away from this is that
we would have done a lot better in paying for the war and
prosecuting the war and in getting legitimacy for the war if we
had had a coalition that was anything like the coalition that
first George Bush put together in the first Gulf War.
That seems to me one of the lessons, coalition diplomacy in
a modern war is critically important. There's a very
interesting book about Eisenhower and Marshall called,
``Partners in Command.'' They understood the importance of a
successful coalition in winning World War II.
It's just as important today, as Iraq has demonstrated.
The second, in specific response to your question, Mr.
Chairman, is that a country that is in a weak financial
position has fewer resources to spend on any contingency.
It reduces the resilience of our country to deal with a
national security threat, to deal with a pandemic at home, to
deal with a terrorist act at home. The weaker we are fiscally
and the more in debt we are to ourselves and to the rest of the
world, the fewer resources we have to deal with future
contingencies, with future wars or future emergencies of any
sort.
Forty percent of the debt that has been incurred in this
war, is being financed from abroad. You could say, well, that's
fine, because it reduces the American people's contribution to
the war effort, if one looks at it that way.
But the other part of it is, that makes us more vulnerable,
if in fact, some terrible thing should happen here, that money
may not be available to us. It's the first time since the
Revolution that we have needed to borrow abroad to pay for a
war. Then, we had to do it from France and the Netherlands.
This time, let's suppose, heaven forbid, there's an act of
terrorism at a point in time where we have this current credit
crisis, and we have a big budget deficit that is going to get
bigger over the next 10 or 20 years. Because of the war and
entitlements and various other things, we're more dependent for
Capital on foreigners.
Suppose the economy is disrupted by a terrorist act? Then
what happens? Then their confidence in our economy and their
willingness to lend us money, deteriorates. The budget deficit
skyrockets, because we have to pay for the response to that act
of terrorism, in terms of recovery and retaliation, and the
dollar goes down, interest rates go up.
The last point is this: One of the things--and Rand also
pointed this out--in the book that I've written, I go back and
look at a lot of what Bin Laden said.
One of his goals is to ``bankrupt'' the United States, as
he's put it. He concluded that he had bankrupted the Soviet
Union in Afghanistan. Their goal is specifically--specifically,
they've said it time and time again--to cripple our economy.
And if they see us economically vulnerable because of big
budget deficits and high dependence on foreign capital, and a
credit crisis at home, that makes them even more emboldened to
go after us, because they think they can not only disrupt the
United States in a specific way, but really weaken the economy.
Chairman Schumer. Dr. Beers.
Dr. Beers. It's hard to follow that, because you took away
several of the points that I was going to make.
[Laughter.]
Dr. Beers. But that's fine. Let just be very specific.
The dollars that are held by China and the dollars that are
held by the oil sheiks in the Gulf mean that when our interest
is that they should do something differently, our leverage to
get them to do something differently is diminished, so, as the
cost of the war increases and it is financed by the deficit,
our ability to operate in specific leveraged situations is
diminished when the holders of those dollars are the people
whose behavior we want to change.
Chairman Schumer. Thank you both.
Congressman Paul.
Representative Paul. Thank you very much. I have two very
brief comments. First, I think the Founders talked about
building coalitions too, and it was called a declaration of war
and then the people would come together.
And I think that's one of our problems is that we don't
develop that coalition.
But also, the holders of our dollars, yes, may have some
leverage, but we also--you argue that we have leverage on them,
but they have leverage on us, just as well, so I think that's a
two-way street.
But I want to get back to the question of inflation, with
Dr. Stiglitz and Dr. Hormats, about war and inflation, because
there is obviously a relationship.
We live in an age where we have a lot of moral hazard,
whether it's the building of the housing bubble or whether it's
the promise that there will always be a bailout and a rescue.
Ultimately, I see the biggest moral hazard as the lender of
last resort.
And in many ways, this is what happens if we can't afford
the war and we don't tax, and then we start borrowing, interest
rates go up. We ask the Fed, you know, to keep interest rates
low, and they can't do that other than by expanding the money
supply, and that's when we start getting into trouble, because
we devalue our currency.
And this is what I think our basic problem is because it's
always out there. I've talked a lot about monetary policy over
the year, and I have my ideas of what should be done.
But is there anything--do you sort of agree with what I'm
saying, that this ultimate lender of last resort to finance war
is a problem, and if it is, is there anything you could suggest
as to how we could rein this in and not permit this endless
creation of credit and deceitful way of financing war?
Because to me, it's so deceitful because it delays the
inevitable and it hides the cost, and the innocent suffer.
I would just like to know if either one of you have a
suggestion along those lines?
Dr. Stiglitz. I agree with you. What's so unusual about
this war is, as you remarked, we haven't seen the inflation so
far. Part of the reason is in the way that the war has imposed
the cost on the economy, which is that it led to high oil
prices.
We were spending lots of money, sending checks abroad to
the oil exporters. Normally, spending that much money abroad
would have weakened the economy, and it was, in fact, weakening
the economy.
So, the Fed and the regulators took on the view, very
myopically, let's keep the economy going, and the way to keep
the economy going is flood it with liquidity and look the other
way when you needed to strengthen regulations on the economy
from the increased spending on oil. They did this to offset the
deflationary pressure.
And the Fed kept it going, but the point is that there were
bills that were going to have to be paid from those huge
deficits. The weakness in the economy that we see today is
directly related, I believe, to the war, but the other problem
is the overhang of the national debt.
It's an overhang in which there's always the risk of trying
to inflate that away.
Dr. Hormats. Since Joe won the Nobel Prize and I didn't, I
basically agree with everything he said, but I'd just add one
point.
And it's really not adding a point, it's just underscoring
the point that Joe made, and that is that--and you touched on
it, Congressman Paul, in what you said at the outset and just
now.
The deferral of the costs here, makes it look at if the war
is cheap, but it isn't cheap.
It makes it look to the current generation of taxpayers,
like it's not very expensive because we don't suffer any
inconvenience. We have not seen much inflation, the interest
rate, in part, has been kept low by the Fed and by the foreign
capital that's come in, also.
But when you look at the spending that's going to occur to
replenish the military costs, to pay for the veterans, to do
all the other things that are going to have to be done over the
next several decades, and to deal with a number of other
programs that also are competing for resources out there, then
the cost to the overall economy becomes higher.
Then, what happens to our children? Our children pay higher
taxes, or, if they don't pay higher taxes, they have to give up
certain Government programs which we take for granted, or there
is more borrowing.
All of those things will tend to weaken the economy down
the road, and then it puts a lot of pressure on the monetary
authorities to try to offset that with more and more monetary
creation.
And the problem is this, in a economy people say, ``well,
we have a very sound economy,'' and in many ways the structure
is very good--very entrepreneurial--we've got a lot of talented
people, but we've built a lot of our growth over the last
several years on debt--Government debt and individual debt.
Just to give you one number. Borrowing against homes, using
your home as an ATM machine, in effect, between mid-2005 and
mid-2006, Americans borrowed $1 trillion against the value of
their homes. We call it mortgage equity withdrawal.
These kinds of debt by the Government and by the American
household are going to be paid back somewhere down the road.
They're not free. That's the problem.
Chairman Schumer. Vice Chair Maloney.
Vice Chair Maloney. Thank you, Mr. Chairman.
Dr. Stiglitz, the Three Trillion Dollar War--your co-author
has written an article in Foreign Policy entitled, ``Iraq's
100-Year Mortgage.'' Is that about how long it will take us to
pay off this war?
Dr. Stiglitz. The reality probably is it won't be paid off
even in a hundred years. The fact is, just going back to what
we've already been saying, the increase in national debt as a
result of the war will be $2 trillion, we estimate, by 2017. We
have lots of other demands on our budget, and so the tendency
will be just to roll it on and hope the Chinese or others are
willing to finance the money that we have borrowed.
Let me put it another way. If we didn't finance it now,
while we're fighting, through increased taxes, why do we expect
that we will raise taxes next year to finance the war that
we've just been through?
Vice Chair Maloney. Dr. Beers, this war was supposed to
make us safer at home. Has it?
Dr. Beers. I think, based on the analysis--not of me, but a
hundred foreign policy experts--the answer to that,
overwhelmingly, is no. The strategic environment that we live
in today has become more problematic than it was before we
entered into Iraq, and as I said in my testimony, our ability
to work with others has been diminished, and our attention to
our security here at home, while it has improved, still has a
very long way to go.
So it is hard to say that we are safer today than we were
before our entry into Iraq.
Vice Chair Maloney. Thank you.
We've been called for a 5-minute vote, and I'm going to be
leaving shortly. But I can read this in the record.
My last and final question to the panelists is, the
Administration has suggested that it wants to maintain a long-
term presence in Iraq, but just as before the war began, they
are still refusing to give any estimates of what future costs
of that presence might be. Our own Committee, the Joint
Economic Committee report, estimated that the U.S. economy
could incur up to $1.9 trillion in additional economic costs
over the next decade if we, quote, ``stay the course'' with our
current troop commitment in Iraq, as compared to a more rapid
withdrawal favored by many House and Senate Democrats.
Dr. Stiglitz, what are the true costs of staying the course
in Iraq over the next decade? And Dr. Hormats, can you put this
in a historical context for us? How would the length, loss of
life, and wounded compare to past conflicts?
And Dr. Beers, can you explain the costs to our military
and national security if we stayed the course in Iraq?
Thank you for really a very enlightened testimony today
from all of you. Thank you so much.
Dr. Stiglitz. The analysis of what it will cost to stay for
another decade really parallels the kind of analysis that we've
done here. There's the upfront budgetary cost, the $12 billion
that we are spending a month. Obviously, that could grow if we
increase our troop commitments.
Then there is the fact that there are lots of military
costs hidden in the Defense Department budget, such as the
depreciation of the equipment that has to be replaced. One of
the reasons that the operational costs have gone from $4
billion a month to $12 billion a month is that we couldn't
defer maintenance forever, and we are now paying for some of
the maintenance that we deferred at the beginning of the war.
Then there are the costs of the people who are being
injured, and these will go on for decades. The longer we are
there, the more troops we send to Iraq, the higher the injury
rate. And this war has had a ratio of injuries to fatalities of
15 to 1. It's a testimony to modern medicine, but it is a cost
to the taxpayer, and our disability benefits do not really
measure the loss to these individuals and to their families.
After the budgetary costs, you start looking at the cost to
our economy and to our society, and the cost of the injuries,
including the opportunity costs that you've been talking about.
Finally, you start looking at the macroeconomic costs, the
disturbance that it brings to our macroeconomy in a whole
variety of ways, including in the fact that we aren't investing
in the infrastructure that we need. That reduces the
productivity of our whole private sector. We aren't investing
in the research that we ought to be, and that reduces future
potential growth of our economy.
So yes, I think those numbers you're talking about are
probably conservative.
Dr. Hormats. Just one more thought to add on, just as a
little parenthetical note to the last question. The long-term
costs of the war--I'll give you a number that's stuck in my
mind.
The last war pension that was paid for the Revolution was
paid in 1907, because it was paid to dependents of people who
fought in the Revolution. So, these things last a very long
time.
The second point--there's a notion in this war that the
best defense is a good offense, and therefore if we fight in
Iraq we won't have to deal with these terrorist issues on the
home front. That is what has been troublesome in looking at
this.
We have a lot of unmet needs at home--needs that are not
being met on the national security front. You talked about our
infrastructure. Our infrastructure has been neglected--our
physical infrastructure, our public health service, training
and equipment for police and firemen and women. These things
are really important to dealing with what is going to be a
long-term terrorist threat.
Whatever happens in Iraq, that terrorist threat is going to
be there for America. If you don't spend the money at home to
improve the public health service, to harden up and improve our
infrastructures so that bridges don't fall down in
Minneapolis--these are the kind of things, these affect our
national security too. And yet we're really not addressing a
lot of them.
Again, it's a question of priorities, a question of how you
allocate resources. The longer we think a good offense is our
best defense, the more we're going to neglect what we need to
do at home, again for very legitimate national security
purposes, so people don't fall through bridges or have dikes
destroyed in New Orleans or elsewhere.
Chairman Schumer. Thank you, Dr. Hormats.
Sam Brownback has been very nice. The House has a voice.
Congressmen Doggett and Hinchey are each going to ask one quick
question. We'd ask the answer to be brief, and then we'll move
on to Senator Brownback and Senator Klobuchar.
I'd ask you both to ask the questions seriatim, and then
they can answer them together.
Representative Doggett. I'll ask mine because time has
expired, and I'll ask my staff and the public to take note of
your answer.
Yesterday, as a Member of the House Budget Committee, I
questioned Secretary Gordon England in what seemed to me to be
very bizarre testimony, that the war might go on for a very
long time, but it's impossible to tell us what it will cost
after a few months, because I was told we have an unpredictable
foe.
As military historians, perhaps you're aware of a time when
we haven't had an unpredictable foe, but I'm wondering if you
could outline, for the record, any reasons why we can't get a
reasonable estimate, for budget purposes, over the next several
years as to the cost of this war, or whether this is just part
of the pattern of duplicity that has characterized the entire
handling of the cost of the war.
Thank you.
Chairman Schumer. I'll ask unanimous consent that each of
the panelists submit that answer in writing, so that
Congressman Doggett and Congressman Hinchey can make their
votes. We'll do the same with Congressman Hinchey after he asks
his question, can submit in writing as well.
Representative Hinchey. Before I leave, I want to express
my appreciation to all four of you. It's been very interesting
and very informative, what you have had to say, and I deeply
appreciate your being here, and I'm going to give close
examination to your testimony and look at other things that
you've written, including the book. So thank you very, very
much.
The economic circumstances that we're confronting is just
one of the reasons why we should be developing a very serious
plan for the withdrawal of our military forces from Iraq over a
specific period of time, which would take place very, very
quickly. And those economic circumstances are becoming
increasingly complex.
One of the things that the Administration says, of course,
is that inflation is not really high. And if you look at the
numbers they produce, then it's true: inflation is not really
high.
But if you look at some other elements--the cost of oil and
the cost of food, the cost of energy generally, but
particularly the cost of oil and the cost of food--you see the
inflation rate goes up much higher. And unless there is a
global recession, then the likelihood is that those increases
are going to continue, and they are going to continue even more
rapidly, depending on the set of circumstances that we're
confronting.
That, combined with the general decline in the economy that
we're confronting, even though the stock market right now
doesn't reflect that decline, nevertheless, there is a very
serious decline for the vast majority of people. The cost of
living for them has gone up; the ability for them to live is
going down.
I think that we may be engaging in that situation of
stagflation once again--declining economy, increasing cost of
living. And I would appreciate it if you would give us your
thoughts on that and what we might do, both to get us out of
the situation there in the military context of Iraq as quickly
and effectively as possible, and what we need to do to deal
with the complexity of these economic circumstances that are
going to prevail upon us for an extended period of time.
Again, Mr. Chairman, thank you very much for doing this
hearing. And gentlemen, thank you very much for your
contribution here. I deeply appreciate it.
Chairman Schumer. Those answers will be submitted in
writing, and I'm sure Congressman Hinchey will review them
carefully, knowing him as I do since 1974, when we were young
assemblymen together.*
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* The Information to be provided by witnesses was unavailabe at
press time.
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We now have two final questioners.
Chairman Bernanke is up in the Banking Committee. I'm
supposed to question him. I'm the last one. I waited till the
end. So I'm going to let Senator Klobuchar chair the hearing.
Senator Brownback goes, then Senator Klobuchar.
I want to thank you gentlemen for your great testimony, and
you've helped us move the debate forward. You really have.
Thank you.
Senator Brownback.
Senator Brownback. Thank you, Mr. Chairman. Thank you,
panelists. I appreciate your presentation.
I want to enter into the record a study done by the State
Senate of New York, the Finance Committee, on the financial
impact of the World Trade Center attack. And I'd ask unanimous
consent, when Senator Klobuchar gets there, to enter this into
the record, just on the cost of 9/11.
And they're saying here, and I don't know if anybody will
dispute this, but they're saying here that the estimated 3-year
cost of 9/11 was $639.3 billion over 2001, 2002 and 2003. Does
anybody dispute that number particularly?
[No response.]
Senator Brownback. Just note the panel, no particular
disputing of that number.
Madam Chair, if I could, I'd ask unanimous consent that
this study be placed in the record.
Senator Klobuchar [presiding]. It will be placed in the
record. Thank you.
Senator Brownback. Thank you very much.
[The study, ``Financial Impact of the World Trade Center
Attack,'' appears in the Submissions for the Record on page
71.]
Senator Brownback. Do any of you have a longer estimate of
the cost of 9/11 to our economy? Have any of you seen a number
on the cost of 9/11 to our economy?
[No response.]
Senator Brownback. I guess the panel would reflect that
there's nobody that has that. I've got a 3-year number here.
I would note Bin Laden put out a cost estimate to us of 9/
11, and I may be missing his number by a few zeroes. But I
think he said it cost him $500,000. It cost us $500 billion.
Dr. Hormats. Right.
Senator Brownback. If so, he's a better economist than he
is a lot of things, because he's not far off what the New York
Senate said in doing that.
Dr. Stiglitz, does your study--which I have not had a
chance to review--include the Afghanistan war as well as the
Iraq war?
Dr. Stiglitz. We try to break it out. We have both
Afghanistan and the Iraq war, and then we divide it.
Senator Brownback. So it does have both of them in it?
Dr. Stiglitz. We identify them separately. The $3 trillion
is for the Iraq war itself.
Senator Brownback. What is your cost for the Afghanistan
war?
Dr. Stiglitz. Roughly, the Afghanistan war is 25 percent of
the operational cost and about 10 percent of the disability and
veterans' costs, the health care costs.
Senator Brownback. Of $3 trillion? Then you're saying
somewhere below a trillion on total costs?
Dr. Stiglitz. Considerably, yes. Because the veterans costs
are only about 10 percent, and the operational costs are 25
percent to Afghanistan, 75 percent to Iraq.
Senator Brownback. Are your policy recommendations the same
for Afghanistan as they are for Iraq? I mean, you're looking at
costs, and you're trying to put a cost analysis on this.
Dr. Stiglitz. Our basic recommendations are more on the
policy, for instance, on how you fund the war, not through
emergency appropriations. We would agree that that principle
would apply to both the Afghanistan and Iraq war. We also
address transparency, so that people know what the total costs
will be, and the recommendations for both wars are exactly the
same on that. Also, we must fully fund the future disability
and health care costs for veterans from both wars, so that they
aren't made subject to the future Congress' whims and so that
we don't create another unfunded entitlement. Those kinds of
recommendations are relevant for both Afghanistan and Iraq.
Senator Brownback. What about any sort of military action?
This has been not a good investment, I guess is what your
analysis is. Would the same analysis apply to Afghanistan on
that, that this is the time to kind of--let's end this thing,
because this hasn't been good for us economically?
Dr. Stiglitz. No. Let me try to emphasize.
Our analysis was focusing on the cost, and saying that in
the end, people are going to have to make their own judgment of
the benefits. Some people think there are benefits, some people
don't.
Senator Brownback. That's the point I'm wanting to get at.
Is your same analysis for Afghanistan the same as it is for
Iraq?
Dr. Stiglitz. No, they're quite different, because of the
sense of consensus on Afghanistan. For instance, NATO is in
Afghanistan. The circumstances of the two wars are different;
how we got into Afghanistan was related to the attack of 9/11.
Iraq was not related to 9/11.
Senator Brownback. I just wanted to get your assumptions on
this. Afghanistan does have higher security value, in your
estimate, than Iraq has a higher security value in your
estimate.
Dr. Stiglitz. We didn't actually do that kind of security
analysis. Clearly, there are differences in the circumstances
in Iraq and Afghanistan that could very well lead to a
different conclusion.
Senator Brownback. I know I'm over my time, but I just want
to be sure I'm clear on that.
You believe there is value in Afghanistan that's not in
Iraq?
Dr. Stiglitz. That's right.
Senator Brownback. But you don't quantify that.
Dr. Stiglitz. That's right. We're only looking at the cost,
and what we're saying is that anybody engaged in this war has
to make a decision whether the benefits are worth those costs.
It's very difficult to see the benefits in Iraq and very
difficult to see what additional benefits we will gain by
staying another 2 years in Iraq. That seems pretty clear.
In Afghanistan, we have a coalition. In Iraq, we've become
a coalition of one. NATO is in Afghanistan, so it's a very
different situation.
Senator Brownback. But you don't estimate, and I take it
nobody on the panel does, the security value of Afghanistan, or
the security value of Iraq, if any. Some of you would question
whether there's a negative security value. You don't estimate
that.
Madam Chair, I'll stay for another round, because I went
way over my time. So I'll just wait till you're done to come
back to that.
Senator Klobuchar [presiding]. Thank you very much.
Thank you to our panelists. This was, I thought, a very
good hearing and helpful to all of us. People often don't want
to go through these actual economic costs, but being a graduate
of the University of Chicago Law School, this isn't surprising
to me. I think it's been very helpful.
As I said, I hear my colleagues, really for the best of
intentions, talk about the war as priceless, and talk about
vague notions of treasure, and I think it very important that
the American people understand exactly what we're talking
about.
Dr. Hormats, you were talking about the cost of this war
and the cost on the American family. And I was thinking back to
in March of 2006, when the Washington Post published a piece on
the typical American family and how they're doing right now.
They said that the typical American family had about $3,800
in the bank. No one had a retirement account. There were no
stocks, no bonds, very little equity in the house, and even
making over $43,000 a year, the average American family in 2006
couldn't manage to pay off a $2,200 credit card balance.
This American family is far different than the families
that we saw during World War II, or even the Vietnam War, when
our economy was different, when the opportunities were there
for these families to get jobs and kind of pull themselves out
if they had some temporary credit trouble or money problems.
And with the economy slowing, unemployment rising, and the
housing market continuing to spiral downward, we can safely say
that today's family is in a much worse and more precarious
circumstance.
And I agree--if we are going to pay for this war, we all
must sacrifice. But at the same time, many middle-class
families are in financial ruins, with no safety net. They can
barely hold on. I see this all the time in our State.
Aren't we too late to try to spread out the costs of this
war? And how can we simultaneously address the need to pay for
the war now, with the demands of a looming recession that sits
really on the back of the typical American family?
Dr. Hormats. Your point is a very good one. We should have
really done this several years ago if we were going to do it.
Now, I think, the American family is sacrificing--is in dire
straits in many cases. Look at the housing crisis, and look at
the fact that people are behind in their credit cards or paying
a lot of interest to borrow. We've borrowed a lot of money, and
people are feeling very vulnerable.
My point on sacrifice was that it needn't have been through
tax increases. It could have been, if people had wanted to hold
taxes the same, through giving up certain domestic programs
which were not needed and characteristically are cut when you
go into war, nonessential domestic spending. That would have
been fine. We didn't do that either.
That's my basic point. We could have done one or the other
or both, but we didn't do any of them.
The point about the veterans is a point that Joe made, and
I very much agree with and discussed in my testimony as well.
And that is, someone's going to have to pay for them at some
point, because they're going to need health care for a very
long time, and it's going to be in the billions and billions of
dollars--hundreds of billions, perhaps.
So the question then is, how do we best pay for it? It is
sort of an unfunded moral liability--I wouldn't even use the
word liability; moral obligation is a better word, unfunded
moral obligation. And at some point, we have to figure out how
we're going to pay for that.
Again, we can cut other programs to make room in the budget
to pay these costs. We can borrow the money, which just raises
the Federal debt beyond what it's already going to be, which is
going to be quite substantial. Or we can find some way for
upper-income people, maybe through a check on their taxe form
or through a mandatory tax, to pay. It's the first time they
haven't ever had to do this.
And you're absolutely right. It may be too late. The reason
I mentioned it, and Joe talked about it in his testimony, is
it's a reality. We have a moral obligation, and the question
is, how do we best fund it? I was providing one idea; it can be
done out of general revenues, too, or it can be done by cutting
spending. But somehow or another, we have a moral obligation to
make sure they get the best health care. For many of them, it's
going to be a lifetime of health care, and paying for it is an
obligation. How do we do it?
Senator Klobuchar [presiding]. I think that's one of the
most miscalculated repercussions from this war. When I was
going around our State for the last 2 years, people would come
up to me and they clearly had some mental health issues.
They said they'd served in the war. I didn't know if they
were telling the truth.
Then I got to Washington and I saw these numbers, where the
Pentagon had underestimated the number of people coming back
from Iraq and Afghanistan that would need health care.
I think in 2005, four times as many people needed health
care as they imagined. So it just wasn't budgeted for.
Dr. Hormats. Frequently these symptoms don't present for
several years after a man or woman returns from the
battlefield. So you really don't know what the long-term cost
is going to be, particularly on psychological considerations.
Senator Klobuchar [presiding]. I think the problem we're
struggling with is a lot of these things you're talking about
that could help the middle class, that's struggling right now--
you know, if we have to look at more unemployment insurance or
those kinds of things. That's why I'm of the belief that we
need to really talk about rolling back some of the tax cuts for
the wealthiest to pay for things.
We won't go into the hedge fund issue, Dr. Hormats. But
there are many ways we could consider paying for things that
people haven't been willing to do. Dr. Stiglitz, do you want to
add anything to this?
Dr. Stiglitz. I agree very much. The point is that already
there have been 100,000 returning veterans diagnosed with
serious psychological problems, and the numbers will be
increasing. Over 263,000 have already gone to a VA hospital.
What was so striking was that in 2005, 2006, the VA were still
basing their appropriations requests for money on prewar
numbers, as if there were going to be no disability payments,
no people injured in this war, and this meant that there were
not going to be the necessary resources available. Either you
crowd out other veterans, or you don't give these veterans the
benefits to which they're entitled, or both. You force the cost
onto their families. But these costs don't go away. They're
going to be there for decades.
One of the issues that we've been discussing is the issue
of national security. When you think about national security,
one of the questions is: As the world has changed a great deal
in the last 15 years, are we spending this money on national
security in the best way?
There's a quip that we're spending a lot of money on
weapons that don't work against enemies that don't exist.
The fact is that we are spending close to one out of two
defense dollars around the world. So the question is, where can
we save money?
Thinking more about about how to spend on defense will
allow us to spend less on it. The other point that was made is,
there's been a lot of waste in the military, including in this
war, because of inadequate accountability. The Department of
Defense has not passed the kind of scrutiny that businesses
must undergo.
Congress passed Sarbanes-Oxley to hold CFOs accountable for
their corporations. But we are not holding officials in the
Department of Defense accountable for their spending, and there
are huge gaps. This is another place where you'll be able to
get some funds to help pay for these entitlements.
Senator Klobuchar [presiding]. I have a few questions of
Dr. Beers.
I'll wait for my final round here and let Senator Brownback
go.
Senator Brownback. Thank you very much, Senator Klobuchar.
If Bin Laden says it costs us $500 billion, and the New
York Senate says it costs us $600-some billion, it seems like
if we haven't been attacked again since 9/11, there is some
value to the economy that we haven't been attacked again since
9/11. Dr. Wallsten, would you agree with that?
Dr. Wallsten. Sure, there's value to the economy in that.
The question is whether our presence in Iraq is part of that,
and I'm not the one to speak on that question, I fear.
Senator Brownback. That's the whole point here, really.
There's clearly value to security. There's clearly value to
the economy that we haven't been hit again since 9/11. I'm not
saying why that has taken place, but clearly there is high,
extraordinary value to that. Is that correct?
Dr. Wallsten. Yes. In fact, I think you and Joe are
actually saying the same or very similar things. One of the
goals from all of this is security, and the question is how
best to achieve it. And are we spending our scarce resources in
the most effective way for a given amount of security? Once we
ask that question clearly, then we can try to figure out the
right answer.
Senator Brownback. It also seems like we ought to ask the
right question there, too. Your analysis, or some of the
analysis here would be, OK, the best security answer is for us
to pull out of Iraq on some sort of basis right now, and that's
the best answer because it cuts our costs and you believe it
provides more security. Fair enough.
But isn't there also a realistic possibility that if we
pull out of Iraq, that Iraq fails and becomes a terrorist
state? And isn't there a reasonable possibility that if we pull
out on a slow basis out of Iraq, maybe like we did in Vietnam,
that Iraq fails and becomes a satellite of Iran?
Those would seem to be reasonable assumptions,
possibilities even, to take place.
Now, I'm not saying that they're going to take place.
But if we're doing an economic analysis, one would take the
extremes on either side of it and say, OK, let's say it's going
to be a perfectly stable state when we pull out, and so here's
what we're going to save by doing this. And there's also a
reasonable assumption to say it's going to be a failed,
terrorist state if we pull out on a slow basis, and there is a
reasonable set of assumptions that we should do based on that.
It looks like to me that we're getting one side of this
economic picture here. And if we're doing an economic analysis
on this, that we ought to look at these assumptions.
I put that to you--and you guys are all smarter than I am.
I readily admit that. I don't have any basis to think
differently. But I met a business guy a few months ago. He was
the president of a corporation. He said, you know, business
people don't know anything--Dr. Hormats, I don't mean to say
this to you at all.
Dr. Hormats. That's all right. I've heard it before.
Senator Brownback. But he says, all we're doing is really
trying to plan for contingencies down the road, and we make our
best guess at this, and that's the way we play the game.
Sometimes we win, sometimes we lose.
And you know, that's what we're trying to do here. I don't
like war. I don't want my nephew in Iraq or in Afghanistan. I
want him home in Kansas.
But you're looking and, OK, I see the world this way.
You see the world that way. And so you've got a set of
assumptions here.
I would hope maybe somebody has done the economic
assumptions of what does it cost us if Iran takes over Iraq, or
if Iraq becomes a terrorist state. There ought to be some
economic assumptions based on that side of it, too, just to
give kind of a, let's look at the full picture.
Or if you're going to have a security environment that's
possibly less secure--now Dr. Beers might say it's going to be
more secure. But there's also a reasonable prospect and there
are military personnel who believe it's going to be less
secure. What's that going to cost us?
So you really get kind of the full range of this, if we're
going to do a true economic analysis. And that's where I have
some problems with the hearing overall, frankly. I think we're
making one set of assumptions that this is all bad, therefore
this is the cost, when we're not looking at really what the
full picture--Republican, Democrat, conservative, liberal.
We've got a tough problem here, and we've got to figure it out.
I appreciate the economic analysis on it. I think that's
good. That puts another picture on it. I just don't think it's
complete, and that's what I would hope we could get in trying
to make these sort of conclusions.
Senator Klobuchar [presiding]. We seem to have widespread
interest in your question. Maybe we can start with Dr. Wallsten
and go down.
Senator Brownback. I hope we can get some good answers and
recommendations. Maybe you've got people for us to read on
that, too.
Dr. Wallsten. I actually think that's a really good point,
and why I framed my testimony in the context of cost- benefit
analysis, because all of those tools were designed to be
forward-looking and to try to incorporate the fact that we're
always dealing with uncertainties.
To do something like this, you should get together people
who are knowledgeable about the various probabilities involved,
and what the likely costs and benefits of those are, and then
you can try to come up with what's a sound decision.
Senator Schumer started off the hearing by saying that he
believed that we would have to be there 5 years for a 50
percent chance of stability. If you believe that stability is
worth something, you could use those numbers to begin some type
of calculation, and then we would also know the costs of
staying there for that time, and we could begin to see whether
that was worthwhile.
I mean, there are lots of other things involved. But that's
exactly why we set up this process, and why most regulatory
agencies now have to go through that. Everything is always
measured with error, but the future is uncertain, and the only
way we can make good decisions is by putting together all of
the information we have for our best guesses to put probability
estimates on things. Then you have the results, and you then
feed it into the decision process.
It can't be the only tool, certainly, but I think it's an
important one.
Senator Brownback. Has anybody done that, that you know of;
any economist done that?
Dr. Wallsten. Like I said, there were estimates, at least
one, before the war, where he tried to. And one of the problems
with doing this--and I don't want to make it sound easier than
it is--is that we're dealing with, as you pointed out, events
that can have very high costs but occur with very low
probability. We're sort of not very well-equipped to handle
that, and that makes it more difficult.
Then, the question again comes back to what Dr. Beers was
saying: How do we best reduce those probabilities?
Dr. Beers. That's what I was going to add to this.
You're certainly correct in saying that there is another
half, which is, what's the cost of scenarios that are
unappealing to the United States as a counter to the cost of
remaining in Iraq. But when you do that, it seems to me you've
got to take two points into consideration.
The first is the probability of those scenarios, because
you've got to assign some value to whether or not you're likely
to experience that. You can then, after you understand the
value of that, then you can do that calculation and you can
decide whether, against that probability, you want to pay that
cost.
But the second thing you have to do, and that's what I was
trying to say, is a decision to spend time and effort in Iraq
means that you've made the decision not to devote time and
effort to dealing with other foreign policy problems as well.
And if you're going to go down that road, then you also have to
look at the probability of things getting worse in other
locations around the world, and the cost of dealing with that.
The one that you have been particularly concerned with is,
what could happen with respect to Iran? And I think that's a
very serious question, and what are the costs downstream if
we're unable to change some of the actions that are happening
in Iran that might affect American security in the future?
We have to weigh those and decide what we're prepared to
do. Not all of it is in economic costs--what we're prepared to
do in order to prevent Iran, for example, from acquiring
weapons of mass destruction. Or what can we do that will reduce
the likelihood that they will acquire weapons of mass
destruction? And the answer to that may be diplomacy, not
necessarily the use of force, or sanctions.
Senator Klobuchar [presiding]. Dr. Hormats.
Dr. Hormats. I think you've asked a very legitimate
question, and it should be looked at along with a whole panoply
of other issues that we've been describing. I would just like
to make two basic points.
The position I'm taking is not that economic issues are or
should be the determinative factor in whether we stay or go in
Iraq, or what the mission level of our troops ought to be. That
needs to be based primarily on national security issues,
foreign policy issues, the questions of the future stability of
Iraq, questions of the future stability of the Middle East, and
the broader opportunity cost issues that Rand has just
discussed.
My basic point is that in making these decisions, we should
be looking at the resource costs, along with other implications
of various outcomes. So I see this as one input, but it's been
a neglected one.
In the outset of the war, when the decision was made,
recognizing it was a war of choice, we didn't look at all the
resource implications, both in terms of direct resource drains
on our system and the broader, longer-term implications that
have been discussed. We may have made the decision to go in
anyway, but at least we should have weighed the cost more
carefully, and in a more considered way.
The second question is, once we decided going to war was
the right thing to do, or as we were considering whether or not
it was a good thing to do, how do we pay for it in a
responsible fashion? From the history of how we've paid for the
wars in the past, other Administrations have concluded that it
was not a wise thing to borrow the entire cost of the war. No
Administration has ever concluded that.
So they've all debated, over a period of time, what portion
of the war should be paid for by borrowing, and what portion
through lower spending in other areas, and what portion through
higher taxes. When you embark on a war of choice and even a war
of necessity you still need to make those calculations. And we
didn't do that in a thoughtful way.
Whether we should stay, what level our troop commitment
ought to be, what its mission ought to be--that involves things
other than economics, but economics should be a component. And
as you say, the pluses and the minuses of failure and success
have economic implications as well.
They should be weighed, I agree with that entirely, to have
a thoughtful debate with an informed public.
But the public hasn't been informed, because the debate
hasn't been a very open one. It's been a very closed one, and
we need to do better in the future. That's my basic conclusion.
Senator Klobuchar [presiding]. Thank you.
Dr. Stiglitz.
Dr. Stiglitz. Briefly, three points. First, you're
absolutely right that there are a lot of risks, and much of
what we have been discussing concerns risk management. But one
has to look at not just the risk here, in Iraq, but risk
globally. We face global security risks, but is spending all of
these resources in Iraq the best way to manage these global
risks?
That brings me to the second question: How do you frame
this particular decision about withdrawal from Iraq? The
question is first, if we leave now versus if we leave, say, in
4 years, what will be the probability of that changing
stability? Those are the kinds of judgments that will have to
be made by security experts. It could be very little, it could
be a great deal, both in the probability and the value.
But in making the judgment, you have to evaluate that
change in the stability in light of the costs. It may be
disastrous if we leave now, it may be disastrous if we leave in
4 years. It may be wonderful if we leave now or in 4 years.
There are differences of view.
But we must ask, how much extra will it cost us to stay in
Iraq for another 4 years? Up front, every month is costing us
$12 billion. That's up front. And then there are all the other
costs that probably double that. And then there are costs to
the global economy.
So you have to say, if you're going to stay another 4
years, is it worth that change in the probability of stability?
That comes to the third point--given the opportunity costs, is
another $2 trillion worth that uncertain change in stability,
given all the other problems we are facing, including in the
security field?
Let me emphasize, it's not just the opportunity costs in
terms of dollars, but the focus on the war. While we were
focusing on weapons of mass destruction that did not exist in
Iraq, another country joined the nuclear club--North Korea--
because, arguably, we weren't focusing on it, arguably. So
there are security costs of focusing on the wrong thing.
Senator Brownback. Maybe that can be your next Nobel Prize.
But I would hope you could do a complete analysis on this,
because otherwise it just kind of looks partisan. Because there
is value to security. You all agree with that. Certainly people
from New York City know that there's value to this. I would
just hope maybe you'd look at that.
You've been very patient. Thank you very much, Senator.
Senator Klobuchar [presiding]. Senator Brownback's my
neighbor in the Hart Building, so.
I just want to explore this a little bit more with you, Dr.
Beers. Senator Brownback's point seems to be, well, we need a
fuller analysis. And I think what you've done today is
incredibly helpful with showing the economic repercussions
domestically, and he's talked about the fact that there's
security issues that should be taken into account.
I wonder, Dr. Beers, if you could just elaborate a bit on--
just talk about some of these issues with some of these other
countries, with this global view from Kosovo to Pakistan,
Kenya. I always use the example of Lebanon.
Maybe if we'd put just a fraction of the money from Iraq
into Lebanon, we wouldn't have what we saw with Hezbollah and
what happened with Israel, if we'd helped some of these
fledgling democracies with just a fraction of the money that we
spent in Iraq.
So could you talk about what you see as the opportunity
costs and, because we were putting so much attention and focus
on Iraq, what we could have done with these other countries?
Dr. Beers. Yes, and thank you for the opportunity to talk
about that.
Let me do a couple of things with respect to Iraq, and then
come back and do some work on a variety, but not exhaustive
list, of what those other opportunities were.
With respect to Iraq, if the level of troops in Iraq
remains 140,000, which is what the joint staff is saying is
likely to be the case through the end of the surge and for an
indefinite period after that--if the number remains at 140,000,
it basically means that we cannot sustain an increase of U.S.
forces in Afghanistan, despite the fact that the commander of
U.S. Central Command believes that we need to do that, and the
Secretary of Defense does as well.
If the level of troops in Iraq goes down, but not below
90,000, we cannot begin to reconstitute our military. We will
not deal with any of the readiness problems, and we will still
have to find ways to rob Peter to pay Paul to keep those troop
levels in the field. It will mean that the dwell time--that is,
the time that U.S. forces come home before they have to go out
again--will continue to exceed the length of their tours. And
so we will have the continued effect on America's military at
roughly that level. If you go below that, you can begin to
think about some of those savings.
But I think it's important to just think in rough terms
that that's what the consequences are about the level of U.S.
presence for any extended period of time.
I've talked about Bin Laden. Let me talk about Afghanistan.
The fact that the United States has only been prepared to work
in Afghanistan as a secondary theater has meant, one, that the
government in Kabul has been unable to actually become the true
government of Afghanistan. The Afghan security forces who could
have been mentored by the United States and an increased NATO
presence--because NATO would be more willing to be at higher
levels in Afghanistan if their publics didn't conflate being in
Afghanistan with being in Iraq, and I think that Secretary
Gates has made that clear when he has sought to increase troop
levels in Afghanistan from our NATO allies.
So it's both a question of what they could do on their own
for security, but also what they could do in mentoring Afghan
security forces so that they would be in a better position to
take over those missions and our mission in Afghanistan. Our
NATO mission in Afghanistan could then even begin to think
about reducing, which we're not in a position to be able to do
today, and are unlikely to be in a position to do at this point
in time and for the foreseeable future.
With respect to Pakistan, our reliance on General
Musharraf, who was seen as a reformer when he entered power,
and throughout Prime Minister Sharif, who was regarded as an
exceedingly corrupt leader, our dependence on General
Musharraf, as he descended further, further and further into
becoming an autocrat and reflective of some of the corruption
that the army had been untainted with before Sharif was thrown
out, has meant that we failed effectively to anticipate and
deal with the burgeoning political crisis in Pakistan, and have
remedies if you will to work with the people of Pakistan rather
than just the Musharraf government.
So that, one, the instability that has resulted from
terrorist attacks; but two, the instability that has resulted
from civil society believing that they didn't have a role in
the government, has left us with a situation in which we don't
know where the political situation is going to go. The election
was good. The talk of a coalition government between the two
leading political parties is good. But the situation is still
very problematic.
Lebanon--a wonderful event there when the Syrians were
forced to leave Lebanon. No follow-up other than to cheer them
on, leaving us in effect with a situation that then blew up
later on when the Israelis went into Lebanon after Hezbollah
and created an even more turbulent situation there. We, who
have normally sought to end hostilities almost immediately when
they have occurred in that region of the world--because the
longer the hostilities have gone on, the more instability has
resulted--were unwilling or unable to intervene with the
Israelis and the government of Lebanon to try to stop those
hostilities immediately.
The government of Turkey is now in a state of incursion,
intervention or occupation in northern Iraq because we were
inattentive to their needs and concerns about the PKK that
existed in northern Iraq, because we were focused on Baghdad
and Anbar and the security concerns and problems that we were
facing down there, when we should have been working with our
Turkish allies to keep their situation from getting out of
control.
And then on to places like Kenya and Darfur and West Africa
to Indonesia and the Philippines, and other places where Al
Qaeda and the forces of instability are active and we are
unable to devote the time, effort and cooperation with those
governments--who, by and large, would be prepared to work with
us if we had the time and effort and resources to be able to
intervene in those; and, if we were not in Iraq, have a
reasonable expectation that others would help us in doing that.
Thank you.
Senator Klobuchar [presiding]. Thank you, Dr. Beers, for
that thorough answer. I appreciate it.
One last question. We had a hearing a few weeks ago with
this Committee on sovereign wealth fund investments.
And with our housing market crumbling and more and more of
our U.S. companies turning to oil-rich countries, which
continue to flourish as these oil prices rise, do you see any
danger in the surge of foreign investment in terms of our
national security?
Dr. Beers. The Committee on Foreign Investment in the
United States was established particularly and specifically to
look at those very issues. It seems to me that the activities
of that committee--and Bob, you can talk to this one probably
better than I can--are part and parcel of, I think, our
security considerations about what is an appropriate investment
in the United States from a security perspective, as well as
from an economic perspective. And those kinds of discussions
ought to be available in some kind of public fashion and, I
would hope, in consultation with the Congress of the United
States. Because they obviously have both an economic and a
security effect.
But I want to give Bob the floor on that.
Senator Klobuchar [presiding.] Dr. Hormats.
Dr. Hormats. I think Rand's put it very well. Just let me
add one point.
There's been concern expressed in some quarters, and your
question reflects it, about sovereign wealth funds, and broader
dependence on foreign capital. It's important to have a dialog
with the American people, and certainly within the halls of
this Congress, on this topic.
I think Americans don't fully understand how dependent this
country has come to be on foreign capital. Now one can regard
it as a good or a bad thing.
I'm not going to get into that at this point, because there
are different people who perceive it differently.
I would make a more fundamental point--that it is a
mathematical necessity for a country that has a very low
savings rate--the household savings rate is very low; in some
quarters it's been negative. The Government is borrowing, and
it's going to borrow a lot more over the course of the next
several decades.
A country with low savings rates that consumes a great
deal, in part based on borrowing against homes or credit cards
or whatever, and a country that has a huge appetite for
imported oil--60 percent of our oil comes from abroad--is going
to depend more and more on foreign capital to fuel our
capitalist economy. If we don't generate the savings to invest
in this country, then we will have to get the money from
countries that have a higher savings rate. And those countries
are mostly emerging market economies, and some oil countries,
that have very high savings rates.
We have it fully within our capability of reducing this
dependence on foreign capital for those who are concerned about
it by raising our savings rate, not borrowing as much to
consume, reducing our dependence on imported oil, and running
tighter fiscal policy. And I don't think that broad debate has
really been engaged very much.
It's easy to look outside and say, there's this problem.
It's much more difficult to look internally and say, what
can we do if we're concerned about this problem.
I would hope that this Committee, which is in a perfect
position to address this issue, might do so at some point in
the future, because it's a broad issue, and we're only going to
get more dependent because our savings rate is low. We may
borrow a little less now because of this housing crisis, but
still we have a very chronically low savings rate.
Senator Klobuchar [presiding]. One last answer, Dr.
Stiglitz.
Dr. Stiglitz. I agree with everything that's been said so
far. I just want to add two points.
The Iraq war has contributed to the dependency, or to the
nature of the problem, in two ways. One, because we financed
the war entirely by deficits, it has meant that we've had to
borrow more. And second, by driving up the price of oil, it's
created a liquid source of funds outside the United States. We
weren't saving and they had the money when we needed it.
It's an inevitable consequence of what had gone on before.
But the second point I want to make is, a lot of the way the
discussion has gone on about dealing with the sovereign wealth
funds I find inadequate, in the following sense. The major
discussion has focused on increasing transparency, asking the
sovereign wealth funds: Will you act in a commercially sound
way? And they say: Trust us, we'll be good.
It seems to me a little bit naive, on the one hand. And
second, asking transparency of the sovereign wealth funds while
we maintain non-transparency of hedge funds only encourages
sovereign wealth funds to invest through hedge funds and
offshore centers, because we don't know who owns a lot of the
hedge funds.
If you're concerned about transparency, the issue has to be
dealt with in a systemic way. You can't just pick out a little
piece and say: We're going to make that transparent. If there
are non-transparent parts of the financial system, they'll go
through the non-transparent parts.
What is good about this recent debate is that it highlights
our belief that we have an inadequate regulatory structure that
is not up to the task of dealing with some of the risks that
might be posed. But so far, the discussion has not addressed
how we might really adequately regulate in an effective way.
Senator Klobuchar [presiding]. Thank you, Dr. Stiglitz.
I want to thank all our witnesses for your professional and
thoughtful testimony. I also want to thank the people here for
the hearing. I know this is a very emotional and heartfelt
issue for so many, and I want to thank you for the respect that
you showed all of our witnesses here. Because as you know, we
talk about this a lot in terms of, as I do, the people we know
and we see, and the families that have been touched by this
war.
But I think it's very important, and this is why we have
this hearing today, that we also step back and look at the
actual costs. And I think we've heard a lot about, not just the
obvious costs of going into war and the money that has been
lost because of a lack of accountability, but also on the debt
and what's happening there, and the price of oil--as Mr. Beers
has pointed out, our standing in the world and what that's done
in terms of opportunity costs of helping with other countries.
So I appreciate this far-ranging discussion, and the
willingness of our panelists to try to step in and put some
price tags on something that people never really want to put a
price tag on.
Thank you very much. The hearing is adjourned.
[Whereupon, at 12:25 p.m., the hearing in the above-
entitled matter was adjourned.]
SUBMISSIONS FOR THE RECORD
[GRAPHIC] [TIFF OMITTED] 42773.001
Prepared Statement of Senator Charles E. Schumer, Chairman
Good morning. I'd like to thank you for coming to our Joint
Economic Committee hearing today on the costs of the war in Iraq. This
is a contentious topic, so I will ask our audience at the outset to be
respectful of the witnesses, their opinions, and the committee as we
proceed today.
We have a very distinguished panel including:
Professor Joseph Stiglitz, a Nobel Laureate economist;
Robert Hormats, a former National Security Council adviser under both
Democratic and Republican Presidents and a co-Chairman at Goldman
Sachs International;
Rand Beers, the president of the National Security Network and also a
former NSC adviser; and
Scott Wallsten, an economist and formerly of the American Enterprise
Institute.
I would like to take a few moments to talk about the war, its
costs, and what I believe is a turning point in our argument against
this war. Then I will recognize our members for opening statements and
formally introduce our panel.
The case against this war has been building for a long time. Too
many young American men and women have given their lives, or have
suffered terrible, life-altering injuries, with little to show for
their sacrifice. The American people are baffled by the lack of
political progress, despite the good work of our troops,. And now,
Americans are trying to comprehend the eye-popping dollar figures that
this war is costing our budget and our economy.
It is becoming clear to all Americans--Republicans, Democrats and
Independents that by continuing to spend huge amounts in Iraq we are
prevented from spending on important goals and vital needs here at
home.
So the turning point is this: the lack of progress, particularly on
the political front, continues. The tragic loss of life continues. But
the cost of the war and the inability to use those funds to help us
here at home and to properly go after the nexus of terror, which is to
the east--in Pakistan and Iran--has become the clinching argument that
we must, quickly and soon, change the course of this war in Iraq.
I went to Iraq over New Year's. I spent time with our soldiers.
They're wonderful. They're awe-inspiring--from the private I met just
out of a Queens high school who had enlisted 8 months previously and
who had been in Iraq only 3 weeks, to the majors and colonels who had
served 10 years in the Army or the Marines and had made the military
their life's work. All of them see a greater good than just themselves.
I spent time with General Petraeus and General Odierno. There's no
doubt they are fine, intelligent, good people.
When I went to Iraq, I assured our soldiers, from the privates to
the generals, that one good thing that would come out of this war is
that the esteem in which we hold both the military and our soldiers
would be greater than when the war started. This is far different from
the Vietnam War, one of the more disgraceful times in America, when our
soldiers were often vilified for serving their country.
But after leaving Iraq, I came to this conclusion. Even if we were
to follow general Petraeus' game plan, which involves not just military
success and security but winning the hearts and minds of the people, it
would take us a minimum of 5 years and even then, have only about a 50
percent chance of success of bringing stability to Iraq--not democracy
but just stability to large portions of the country.
That's not the military's fault and that's not America's fault.
That's because of the age-old enmities within Iraq--Sunnis, Shiites,
and Kurds--and then within the groups themselves--that make it very
hard to create long-term stability without a permanent at-large
structure of troops.
We have too many pressing national security and economic priorities
that require the attention, energy and resources that we are spending
on a policy in Iraq that has too high a risk of failure.
Our education system is declining. Our health care system doesn't
cover too many people. We are paying $3.30 for gas because we don't
have an energy policy. And if your goals are primarily foreign policy,
wouldn't our time and effort be better spent focusing on the dangerous
triangle composed of Pakistan, Iran, and Afghanistan, not Iraq?
We must ask ourselves, is it worth spending trillions of dollars on
such an uncertain and unpredictable outcome?
The cost of the war has become the 800 billion dollar gorilla in
the room. The backbreaking costs of this war to American families, the
Federal budget, and the entire economy are beyond measure in many ways,
and it is becoming one of the first things after the loss of life that
people think and talk about.
A report issued by the majority staff of this committee estimated
that the total costs of the war will double what the Administration has
spent directly on the war alone--$1.3 trillion through 2008, and that
is a conservative estimate.
According to budget and Iraq spending figures, for the amount the
Bush Administration wants to spend PER DAY in Iraq, over $430 million,
we could:
Enroll an additional 58,000 children in Head Start per
year;
Put an additional 8,900 police officers on the streets
per year;
Provide health insurance for 329,200 low-income children
through CHIP per year;
Hire another 10,700 Border patrol agents per year;
Make college more affordable for 163,700 students through
Pell Grants per year; and
Help nearly 260,000 American families to keep their homes
with foreclosure prevention counseling this year.
In the fiscal year 2008 budget, we put $159 Billion into Iraq:
That doubles our entire domestic transportation spending
to fix roads and bridges of $80 billion.
It dwarfs all the funds we provide to the National
Institutes of Health to discover cures for diseases like cancer and
diabetes--$29 billion.
Iraq spending is seven times our spending to help young
Americans get a college education--$22 billion.
And spending in Iraq is 30 times greater than what we set
aside to ensure the health of every single American child--$5 billion.
The costs are mountainous, and in this changing world where we have
to fight to keep America No. 1, we cannot afford such costs--despite
the great efforts that our soldiers are putting into Iraq.
I've read the testimony from Professor Stiglitz. And we are
grateful to have him here before his new book comes out. His book's
title speaks for itself--``The $3 Trillion War.''
I was dismayed to learn that Professor Stiglitz had trouble getting
information from the government about what this war is costing us,
particularly from the Pentagon and the Veterans Administration.
I plan to ask the Senator Levin, who chairs the Senate Armed
Services Committee, to work with me to make sure this administration is
transparent and forthcoming about the billions in taxpayers' money that
we are spending going forward.
Professor Stiglitz estimates that conservatively, this war could
cost $3 Trillion for budget costs alone--and that is TRILLION with a
``T.'' These estimates make our JEC estimates seem small. His higher
estimates of the total economic costs dwarf all other estimates at up
to 5 trillion.
So we desperately need a change of course in Iraq. We can't
continue to police a civil war built on age-old enmities of the various
factions in Iraq. We can't afford the costs, which are increasing
exponentially according to expert economists. And we can't allow this
skyrocketing spending in Iraq to displace other very real domestic and
foreign policy priorities.
History will look upon this Iraq War in two ways. It will admire
the bravery of our soldiers, from the privates to the generals; and it
will be amazed at the mistakes made by this Administration in starting
and continuing this war, for far too long.
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Prepared Statement of Representative Jim Saxton, Ranking Minority
I would like to join in welcoming the witnesses appearing before
the Joint Economic Committee this morning.
The Iraq War obviously has many dimensions including foreign
policy, defense policy, and terrorism policy. While debate about past
policies in Iraq will continue, the most important question facing
policymakers is: What should U.S. policy in Iraq be now and in the
future? Since the implementation of the surge strategy in Iraq, the
military situation has improved dramatically, as noted by a variety of
independent experts from the Brookings Institution to the American
Enterprise Institute, and publications such as the Washington Post. A
recent Washington Post editorial urged critics of the war to take the
success of the surge into account in setting future policy.
However, another attempt to force a hasty retreat from Iraq is now
underway, following the many failures earlier in this Congress. Now
that the surge is proving successful, a quick exit from Iraq would be
especially costly. The virtually immediate withdrawal advocated by some
politicians is not militarily feasible, but even a premature withdrawal
could produce immense costs.
For example, if the U.S. withdrew quickly, the biggest winners
would include terrorists and the Iranian regime that is a designated
state sponsor of terrorism. Iranian influence would further spread in
Iraq, potentially expanding Iranian military influence in the Persian
Gulf including the Straight of Hormuz, and leading to Iranian control
of significant Iraqi oil resources. Iran has already threatened to
cutoff Westem oil supplies, and in such a situation would be well
positioned to act on such a threat.
Consider also the scenario that a rapid U.S. pullout could lead to
civil war in Iraq, drawing in surrounding nations and leading to a
regional conflagration. This unfortunately is not a remote possibility
but something that must be considered. The economic and potential
military costs of this outcome to the U.S. and its allies would be
enormous.
All wars impose costs in terms of life and treasure, and the Iraq
War is no exception. These costs must be considered as the U.S. weighs
its options in Iraq. We also must consider the fact that there have
been no terrorist attacks such as 9/11 following the U.S. intervention
in Afghanistan and Iraq that disrupted the Taliban and Al Qaida
terrorist networks. The benefits of preventing a second or third attack
on the scale of 9/11 are very high in both human and economic terms,
and failure to do so would be very costly indeed.
In determining future policy, we have to consider whether the
situation in Iraq is improving significantly as well as the costs and
benefits of our various policy options. As economic costs and benefits
are considered, it is important to keep in mind that estimates will
range widely because they are necessarily based on questionable data, a
variety of assumptions, and speculation about related events. As Dr.
Wallsten has warneded, ``the data are not of high quality . . . and . .
. each calculation requires several assumptions.'' He also has pointed
out that even meticulous cost estimates ``contain a great deal of
error,'' and thus such analysis ``cannot determine whether the benefits
of the war exceed the costs.'' I would note that important elements of
Dr. Wallsten's work are also incorporated into Dr. Stiglitz's research,
which shares the same limitations.
In their 2005 paper, Dr. Wallsten and a coauthor acknowledge the
``inherent imprecision'' of war cost estimates but provide a
significant ``analytical framework for the policy debate.'' It is
important to repeat their warning that this ``inherent imprecision''
makes it impossible to determine the relative costs and benefits of the
Iraq War.
In closing, I would note an article in the Washington Post last
week covers the new attack advertising on the Iraq War sponsored by the
Democratic Senatorial Campaign Committee. I would like to think that
the timing of this ad campaign, this hearing, and the Iraq pullout vote
is a remarkable coincidence, but others may draw different conclusions.
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Prepared Statement of Representative Carolyn Maloney, Vice Chair
Good morning. I would like to thank Chairman Schumer for holding
this hearing to examine the economic costs of the Iraq war. I want to
welcome our distinguished panel and thank them for testifying here
today.
Over the past 5 years, the President has requested some $665
billion from Congress to fund the war in Iraq. The more than $180
billion that the President wants the government to spend on Iraq just
this year, including interest on the war debt, totals almost half a
billion dollars a day.
But the untold story--one every American needs to hear--is that the
costs of this war go well beyond these budget numbers. At my request,
last year the Joint Economic Committee prepared a report showing that
if the President's 2008 funding request is approved, the full economic
cost of the war will total $1.3 trillion just by the end of the year.
This figure includes the ``hidden costs'' of deficit financing, the
future care of our wounded veterans, and disruption in oil markets. And
if the war continues, the costs will only mount higher. In his new
book, Dr. Stiglitz estimates that the total economic price tag for the
war could reach $3 trillion to $5 trillion over the next decade if we
remain in Iraq.
The numbers may feel abstract, but the costs are real. The burden
of war debt handed down to our children is real--it's been called the
Iraq 100-year mortgage. The lost opportunities to invest here at home
in jobs, green technologies, roads and bridges, health care and
education are real. And, the nearly 4,000 lives lost are real. We are
all paying for the colossal costs of this war one way or another.
Last year alone, the President asked Congress to spend more on the
Iraq war than the $130 billion our nation spends annually on the entire
American road and highway system. At a time when our levees and bridges
are crumbling, we cannot afford to stop investing in our
infrastructure. And the President has been squabbling with Congress
about money for children's health care, when about 3 months' worth of
Iraq war spending would have covered the entire 5-year Children's
Health Insurance Program funding increase he vetoed last year.
The administration is reportedly negotiating for an indefinite U.S.
troop presence in Iraq. We know we cannot afford the continued loss of
life. The economic costs have also become unbearable. The JEC has
estimated that the difference between ``staying the course'' with our
current troop commitment in Iraq versus a more rapid draw down favored
by many Congressional Democrats is about $1.8 trillion in additional
economic costs over the next decade.
That's above and beyond what we've already spent on the war, and
it's money that will continue to be diverted from important national
priorities.
A productive debate over the long-term economic impact of the war
and its cost to future generations is long overdue. It's no surprise,
however, that this is a debate the Bush administration would rather
hide from.
OMB Director Nussle took issue with our JEC report last year.
Chairman Schumer and I wrote to invite him to appear before this
Committee to present the Administration's estimates of what the full
economic costs of the Iraq war have been so far, and will be going
forward. Not surprisingly, Director Nussle has not responded to our
open invitation. I want to call on the Administration to produce their
own estimates, as we and many of our witnesses have done, and appear
before this committee to have a productive dialog about this critical
issue facing our nation.
Mr. Chairman, thank you for holding this important hearing.
Prepared Statement of Representative Ron Paul
Mr. Chairman,
I thank you for calling a hearing on this very important topic. In
recent months the undeclared war in Iraq seems not to have been on the
minds of most Americans. News of the violence and deprivation which
ordinary Iraqis are forced to deal with on a daily basis rarely makes
it to the front pages. Instead, we read in the newspapers numerous
slanted stories about the how the surge is succeeding and reducing
violence. Never does anyone dare to discuss the costs of the war or its
implications.
There are the direct costs of the war, the costs of maintaining
bases, providing food, water, and supplies, which the administration
vastly underestimated before embarking on their quest in Iraq. These
costs run into the tens of billions of dollars per month, and I shudder
to think what the total direct costs will add up to when we finally
pull out.
Then there are the opportunity costs, those which decisionmakers in
Washington almost never discuss. Imagine that the war in Iraq had never
happened, and the hundreds of billions of dollars we have spent so far
were still in the hands of taxpayers and businesses. How many jobs
could have been created, how much money could have been saved,
invested, and put to productive use?
Unfortunately, it appears too many policymakers in Washington still
cling to the broken window fallacy, long since discredited by the 19th
century French economist Frederic Bastiat, that destruction is a good
thing because jobs are created to rebuild what is destroyed. This
pernicious fallacy is unfortunately widespread in our society today
because those in positions of power and influence only recognize what
is seen, and ignore what is unseen.
Running a deficit of hundreds of billions of dollars per year in
order to fund our misadventure is unsustainable. Eventually those debts
must be repaid, but this country is in such poor financial shape that
when our creditors come knocking, we will have little with which to pay
them. Our imperial system of military bases set up in protectorate
states around the world is completely dependent on the conntinuing
willingness of foreigners to finance our deficits. When the credit
dries up we will find ourselves in a dire situation. Americans will
suffer under a combination of confiscatory taxation, double-digit
inflation, and the sale of massive amounts of land and capital goods to
our foreign creditors.
The continuation of the war in Iraq will end in disaster for this
country. Parallels between the Roman empire and our own are numerous,
although our decline and fall will happen far quicker than that of
Rome. The current financial crisis has awakened some to the perils that
await us, but solutions that address the root of the problem and seek
to fix it are nowhere to be found. There must be a sea change in the
attitudes and thinking of Americans and their leaders. The welfare-
warfare state must be abolished, respect for private property and
individual liberties restored, and we must return to the limited-
government ideals of our Founding Fathers. Any other course will doom
our nation to the dustbin of history.
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Prepared Statement of Senator Sam Brownback
Thank you, Mr. Chairman. When the Committee released the majority
staff report ``War at Any Price? The Total Economic Costs of the War
Beyond the Federal Budget'', Ranking Republican Member Saxton and I
questioned much of the methodology and many of the assumptions made in
the report.
Before I address those issues, I want express my appreciation for
the fact that the Democratic staff of the Committee took the time to
sit down with my staff yesterday afternoon to walk through the
methodology and assumptions used in the report. One of our initial
criticisms was that reports of this nature should include sufficient
detail as to data and methods so that other researchers could replicate
the results as well as raise questions about the analysis.
We appreciate knowing how the conclusions were reached. We continue
to believe that the report's methodology and assumptions are, at best,
very controversial and debatable. Moreover, by making standard economic
assumptions, over $1 trillion of war costs estimated in the report
vanish. With results this sensitive to reasonable changes in economic
assumptions, it seems that use of the findings in this report to guide
policy would be unwarranted.
As an example of questionable assumptions used in the report, let
me note that the report asserts that war costs have been debt financed,
and the portion borrowed domestically (60 percent) displaces private
investments that would have generated a 7 percent real rate of return
which, according to the analysis, seems to be riskless. It would have
been more proper to do this evaluation using the risk adjusted rate of
return--which, in real terms, would be on the order of maybe 3 percent.
In any case, taking the report's assumptions to heart, we are informed
that there seem to be riskless private investment opportunities
available that pay 7 percent real returns.
From the report, we also learn that effectively every dollar of
government borrowing or tax revenue displaces around two dollars worth
of social value. Perhaps we should take this to heart also and begin
immediately to cut spending, taxes, and borrowing. Let us allow our
private citizens to enjoy the 7 percent real returns that are evidently
available to them all.
If the methods and assumptions used in the report are valid to
analyze the ``true costs'' of military operations, those methods and
assumptions should also be valid to analyze the ``true costs'' of many
other government spending and taxation programs. The answers arrived at
by employing the majority staff report's methodology and assumptions
could give rise to unease among several members of the committee,
particularly on the other side of the aisle. Let me use the majority
staff report's approach to address some key questions:
1. Should the present Social Security system be scrapped in favor
of a system of personal accounts? According to the report's
methodology, the answer is ``yes.''
2. Should the U.S. resist domestic borrowing in favor of borrowing
from foreigners? According the report's methodology, the answer is
``yes.''
3. Do deficit financed tax cuts create a net benefit for the
economy? Using the report's methodology, the answer would be ``yes.''
Let me also note that the report totally ignores economic savings
and benefits that may have resulted from attacks or disruptions that
may have been prevented by our efforts in Iraq and Afghanistan. Note
that, according to some estimates, the economic costs to the U.S.
associated with the tragic attacks on 9-11 amounted to loss of life,
well over half a trillion dollars of economic activity, and millions of
lost jobs. The loss of economic activity alone is more than the costs
of direct spending in Iraq and Afghanistan to date. If our war efforts
prevent another tragedy like 9-11, tremendous benefits are obtained.
We can debate extensively whether and how those unprovoked attacks
might have been prevented. Some might argue that by allowing our
Defense expenditures as a percent of GDP to fall by nearly 45 percent
in the 1990's from 5.4 percent of GDP to 3.0 percent left us exposed.
That may or may not have been a contributing factor. It is clear,
however, that the losses were real--real in human costs and real in
economic costs. It necessarily follows that preventing future attacks
provides benefits both in economic and human terms. To dismiss out of
hand or to ignore potential benefits is an improper approach when
undertaking this type of analysis.
Mr. Chairman, I must remark for the record what a coincidence it is
that this hearing's scheduling coincides so closely with the Democratic
Senatorial Campaign Committee's new anti-Iraq advertising campaign
against Senator McCain and incumbent Republican Senators up for re-
election.
I look forward to the exchange of views between members of the
committee and our witnesses. My staffs more detailed analysis of the
problematic nature of the majority reports follows.
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Prepared Statement of Hon. Joseph E. Stiglitzi,\1\ Nobel Laureate,
Professor, Columbia University, New York, NY
Thank you for this opportunity to discuss with you the economic
costs of the Iraq War. March 19 marks the fifth anniversary of what was
supposed to be a short venture to save the world from the threat of
weapons of mass destruction--which simply weren't there. It is now the
second longest war in America's history, and, after the all-
encompassing World War II, the second most costly, even after adjusting
for inflation. In terms of costs per troop, it is by far the
costliest--some eight times as expensive as World War II.
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\1\ University Professor at Columbia University and Chair of the
Committee on Global Thought.
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a war for democracy
Before turning to the costs beyond the Federal Budget, I want to
make three prefatory remarks. We went to war to fight for democracy;
but democracy is more than just periodic elections. It involves broader
notions of democratic accountability. Citizens have the right to know
what they are spending their hard earned dollars on. They have a right
to know what their government is doing and the consequences of its
actions. Over the past 2 years, I have worked with a colleague at
Harvard, Linda Bilmes, to estimate the full costs of the Iraq war. We
published our initial study in January 2006, and I would like that
paper to be entered into the record. We published a second study,
concerning the costs of providing medical care and disability benefits
to our returning veterans, in January 2007. I would ask for that to
also be entered into the record. We have now published a book, The
Three Trillion Dollar War, which estimates the true costs of the war,
the veterans' costs, and the impact on the U.S. economy. I want to
point out that it required an enormous amount of work to write our book
We should not have needed to write it, and when we came to write it, it
should have been a far easier task. The Administration and Congress
should have provided these numbers to the American people. Five years
after the beginning of this war, you should not be funding this war
with emergency appropriations, which escape the normal budget scrutiny.
We should not have had to resort to the Freedom of Information Act to
find out how many Americans have been injured in this war. This
Administration has said that it will provide everything that our troops
need. We should not have had to use the Freedom of Information Act to
discover that more than 3 years ago, senior officers in the Marines
were already sending urgent requests for MRAPs--which would have saved
the lives of a large fraction of those killed if we had provided them
at that time.
the soaring budgetary costs
The second remark is that the budgetary costs themselves have been
enormous--far, far larger than the some $50 billion that the
Administration estimated at the beginning of the war. We are now
spending that amount in operations every 3 months. But the costs to the
Federal Budget are far larger than the day-to-day operational costs.
The war has raised overall military costs: we have to pay more to
recruit and retain our troops, and even with these increased
expenditures, standards for recruits have had to be lowered. It will be
costly to restore our military to its pre-war standing, both in terms
of personnel and materiel. There are costs hidden in other parts of the
budget--not only are the direct costs of the contractors high,
especially as a result of single source contracting and low levels of
oversight (the defense contractors and oil companies have been the only
true winners in this war, evidenced by what has happened to their stock
prices), but we are also paying for the contractors' insurance for
death benefits and disability. Even with these high insurance premiums,
remarkably the government often winds up paying the benefits as well.
In our calculations, we have not included the full costs of these,
simply because it is impossible for ordinary citizens to find out what
they are.
The most important costs that go well beyond the operational costs
are the expenditures required to provide health care and disability for
returning veterans. These are likely to be very, very high, and we will
be paying these bills for decades to come. Almost 40 percent of the
nearly 700,000 troops who fought in the 1 month long Gulf War have
become eligible for disability benefits, and we are paying more than $4
billion a year for disability benefits from that short war. Imagine,
then, what a war that will almost surely involve more than 2 million
troops and will almost surely last more than 6 or 7 years will cost.
Already, we are seeing large numbers of returning veterans showing up
at VA hospitals for treatment, large numbers applying for disability,
and large numbers with severe psychological problems. These problems
increase disproportionately with every tour of duty and with longer
tours of duty; and with more than one-third of our men and women being
asked to do two or three tours of duty, the numbers will almost surely
mount. While in previous wars, the ratio of injured to fatalities was
2.5 to 1, in this war it is 7 to 1, and if we include those that have
to be medically evacuated because of what are classified as non-hostile
accidents or illnesses, the ratio soars to 15 to 1. Many of the
injuries are horrific and will require a lifetime of care. It is a
testimony to modern medicine--though clearly we could have done a lot
more to spare our troops than we did. Most of the costs will be borne
by the VA, but there will be a burden on our social security system as
well. We have estimated the total costs (in present discounted value
terms) in what we call our ``realistic'' (but still highly
conservative) scenario as $630 billion.
bills we will be paying for decades
My third prefatory remark is this: we will be facing these
budgetary costs for decades to come. Even the CBO methodology, which
looks 10 years into the future, is too short-sighted for these
liabilities which we have incurred. In the case of World War II
veterans, VA expenditures peaked more than four decades after the
cessation of hostilities. Furthermore, because the Administration
actually cut taxes as we went to war, when we were already running huge
deficits, this war has, effectively, been entirely financed by
deficits. The national debt has increased by some $2.5 trillion since
the beginning of the war, and of this, almost $1 trillion is due
directly to the war itself. But the meter is still ticking. By 2017, we
estimate that the national debt will have increased, just because of
the war, by some $2 trillion.
There has been much discussion of unfunded entitlements in recent
years. This war has created a new unfunded entitlement--future benefits
of Iraqi veterans that may total a half a trillion dollars or more. But
this is an entitlement which they have earned, and from which we should
not, we cannot walk away. What we should do, now, is to recognize the
financial obligations that we have incurred, that we are incurring
today, and that we will incur before this War is over, and fully fund
them. These obligations are much like deferred compensation: we require
private firms to fully fund such obligations, and for good reason.
There should not be a double standard.
When, of course, we add together all of these costs of the war, we
are talking about budgetary impacts that are not just $12 billion a
month (or $16 billion if we include Afghanistan), but greater than that
by at least 40 percent. Our full cost of the war--our $3 trillion
dollar tally--is twice the direct operational budget. We should
remember that every month we stay in Iraq and Afghanistan is really
costing us some $22 billion; every year, more than $250 billion. In
another 2 years, the tally will exceed another half trillion.
micro-economic costs
The focus of my remarks today, however, is on the large costs that
go beyond these budgetary costs. We classify these into two categories,
micro-economic costs (to individuals, especially to the troops that
have served us so well and their families, and to firms) and
macroeconomic costs (to our overall economy, today and into the
future).
We have consistently understaffed, underinvested in, and
underfunded the medical and disability programs that serve our
veterans. As a result, our servicemen and women returning from the
battlefield in Iraq often face a new battle--with the bureaucracy to
get the benefits to which they are entitled and which they deserve.
When they cannot get the health care to which they are entitled, or
they have to wait months just to schedule an appointment to see a VA
doctor, those who are fortunate enough to have families who can afford
to do so, pay for it on their own. This doesn't diminish the cost to
society; it just shifts the burden from the Federal budget to these
people who have already sacrificed so much.
There are other ways in which the costs to society exceed the costs
to the budget, often by considerable amounts. When the government
evaluates whether a safety regulation is worth instituting, it balances
the costs with the benefits, that is, the savings in lives; as
unpleasant as it may seem, it places a dollar value on people's lives,
which includes the loss in output. The typical numbers, called the
value of statistical lives, are $7 to $8 million. But to the budget,
the cost of the life of a troop is only the $500,000 death benefit. I
have already noted that in this war, we have been penny wise and pound
foolish--a little extra spending earlier on would have made the war, in
the short run, seem more costly, but it would have saved us billions in
the long run. But the billions that it would have saved the budget pale
in comparison to what it would have meant to those who have died
unnecessarily or who face a lifetime with disabilities far worse than
needed to have been the case. I am not a lawyer, but I do know this:
any private employer who had acted in this way, with consequences as
serious, would be liable for a suit for gross negligence.
There are other costs: for instance, the Dole-Shalala Commission
estimated that in one of five families with a seriously disabled
veteran, someone in the family has to give up their job to provide the
necessary care.
Some of the costs are hard to quantify, but nonetheless real:
Reservists and members of the National Guard who are forced to serve in
Iraq find their lives and careers interrupted. Their employers lose the
services of these often highly valued employees.
Economists emphasize the concept of opportunity costs. Resources
devoted to the war could have been used for other purposes. One of the
main responsibilities of the National Guard is to serve as a first
responder in times of an emergency; their services are invaluable, and
when they are not available--because they are in Iraq--everyone suffers
when an emergency occurs. We saw that so clearly in Hurricane Katrina.
More broadly, we are today less equipped to handle a variety of
challenges that might arise. If we are lucky, we may muddle through. We
may not be so lucky. Already, one of the opportunity costs is apparent:
while we were focusing on the weapons of mass destruction that did not
exist in Iraq--and that we should have known did not exist--a new
country joined the Nuclear Club.
Our country and our businesses are suffering due to America's
changed standing in the eyes of the world because of the war and the
way it has been conducted, as shown in survey after survey. These
surveys show a clear relation between attitudes toward America more
generally and attitudes toward American businesses. In many quarters,
the supposed war for democracy has even given democracy a bad name.
I have, so far, emphasized the direct economic costs as well as the
opportunity costs--the diversion of funds that could have been used in
so many other and better ways. I would be remiss, however, if I did not
note that there are other costs: in the long run, the squandering of
America's leadership role in the international community, the diversion
of attention from critical global issues, including issues like global
warming and nuclear proliferation in North Korea--that simply won't go
away on their own, and that cannot simply wait to be addressed--may
represent the largest and most longstanding legacy of this unfortunate
war. \2\
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\2\ This is a point that even conservative commentators have
emphasized. Anne Applebaum, for instance, noted that ``Countries that
would once have supported American foreign policy on principle, simply
out of solidarity or friendship, will now have to be cajoled, or paid,
to join us. Count that along with the lives of soldiers and civilians,
the dollars and equipment--as another cost of the war.'' Anne
Applebaum, ``Why They Don't Like Us,'' Washington Post, October 2,
2007, p. A19.
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macro-economic costs
Finally, I want to turn to the macroeconomic costs. First, I want
to dispel a widespread misconception that wars are good for the
economy--a misconception that arose from the role that World War II
played in helping the US emerge from the Great Depression. But at least
since Keynes, we know how to maintain the economy at or near full
employment in far better ways; there are ways of spending money that
stimulate the economy in the short run while at the same time leaving
it stronger for the long run. This war has been especially bad for the
economy. Some of the costs are becoming apparent only now; others we
will face for years to come.
There are four major categories of macroeconomic impacts. The first
is through the war's effect on oil prices. Before the war, 5 years ago,
the price of oil was under $25 a barrel. As you know, now it has hit
$100 a barrel. Before the war, future markets expected the $25 price to
persist for at least a decade. Yes, there would be increased demands
from China and India; but in well-functioning markets, supply responds
to meet new demands. With large supplies and low extraction costs in
the Middle East, markets expected production would increase in tandem
with demand. The war changed this equation. How much of the increased
price should be blamed on the War? In our book, we have taken a very
conservative position that only $5 to $10 of the increase is due to the
war, and that the price increase will last for only 7 to 8 years. We
think those assumptions are unrealistically conservative. For instance,
futures markets today expect that the price will remain in excess of
$80 for at least the next decade. We chose to be excessively
conservative, simply because we did not want to have an unnecessary
squabble: as it was, even with these very conservative estimates, the
costs of the war are vastly higher than its advocates were willing to
admit. (Even the CBO, at the time we did our earlier study in 2006, was
projecting that the total cost of the war would amount to only a half
trillion dollars, still ten times greater than the Administration had
estimated at the beginning of the war. Our objective was the more
modest one of trying to get people to realize that this war was going
to be far more expensive than that.)
Money spent to buy oil is money not available to be spent here in
the U.S. It's as simple as that. Lower aggregate demand leads, through
a multiplier, to lower national income.
The second impact arises from the fact that Iraq expenditures do
not stimulate the economy in the short run as much as expenditures on,
say, infrastructure or education that are so badly needed here at home.
A dollar spent to hire a Nepalese contractor--or even an Iraqi--in Iraq
does not have the first round, second round, or nth round impacts that
a dollar spent here does.
The third impact is that both directly, and indirectly, through the
mounting deficits, Iraq expenditures are crowding out investments that
would have increased America's productivity in the future.
The mounting Iraqi war debt has meant that we have had to borrow
more and more money from abroad--America as a country is far more
indebted to others than it was five years ago. We and our children will
be paying interest on this debt. The fact that we borrowed rather than
paid the bills as they came due does not mean that the war was for
free; it only postponed the payments. The payments we will have to make
to service this debt will lower the standard of living of Americans
from what it otherwise would have been--an outcome which is
particularly harsh, given that median American income today is lower
than it was 5 years ago (which is simply to say that, adjusting for
inflation, most Americans are worse off now than they were 5 years
ago). This was true even before America went into its current downturn.
It should have come as no surprise that, when America's great
financial institutions, Citibank and Merrill Lynch, needed money
quickly, there were no pools of liquid cash available here. High oil
prices and high national savings in China and elsewhere have created
huge pools of wealth outside the United States, and it was to these
that our financial institutions had to turn. It is, and should be, a
cause of concern.
Until recently, it was a surprise to some that, in spite of these
obvious ways in which the Iraq war was weakening the American economy,
the economy seemed as strong as it did. Was there something, after all,
to the old adage about wars being good for the economy? To me, and to
other serious students of the American economy, there was, however, an
obvious answer. These weaknesses were being hidden, just as much of the
other costs of the war were being hidden from easy view. The exposure
of these weaknesses was, it seemed to me, just around the corner--
perhaps even more than the long vaunted victory that remained elusively
just around the corner. The macroeconomic effects were being hidden by
lose monetary policy, a flood of liquidity, and lax regulation. These
allowed household savings rates to plummet to zero, the lowest levels
since the great Depression, and fed a housing bubble, allowing hundreds
of billions of dollars to be taken out in mortgage equity withdrawals
that increased the irresponsible consumption boom. As I once put it
somewhat graphically, the subprime mortgages and lending programs with
slogans like ``qualified at birth'' meant that easy credit was
available for anyone this side of being on a life support system. Our
financial institutions and credit rating agencies came to believe in
financial alchemy, that these toxic mortgages could somehow be
converted into AAA assets. We were living on borrowed money and
borrowed time. There had to come a day of reckoning, and it has now
arrived. The games we played--which for a time allowed us to hide the
true costs of the Iraq war--are now over. And, just as our troops paid
a high price for our penny wise pound foolish policies, so too will our
economy.
The cost to the economy of this downturn will be enormous. We do
not know, of course, how long or how deep the downturn will be, but it
is likely to be worse than any we have experienced in the last quarter
of a century. Even if growth this year is 0.8 percent (as the IMF
forecasts), and next year growth starts to resuscitate, to 2 percent,
and in 2010 returns to its potential growth of, say, 3.5 percent (a
quicker recovery than most would expect), the total lost output over
those 3 years--the discrepancy between the economy's actual output and
its potential--will amount to some one and a half trillion dollars.
reforms
This war has been very costly. We have made many mistakes. Some
have been honest errors of judgment. But when there are repeated
mistakes of this size, as social scientists, we have to ask, are there
some systematic patterns? Also, as policy analysts, we have to ask, are
there things that we can do to avoid their repetition? In our book, we
set out a list of eighteen recommendations for reform. Here, I want to
highlight five.
First, we should not be funding any war years after the beginning
through emergency appropriations. If we do, it should be a sign that
things are not going as expected, and there should be a detailed,
written explanation to Congress. Second, there should be a full,
comprehensive, accrual-based consolidated accounting of all the
budgetary and non-budgetary national defense costs; with so many of the
costs years, even decades, down the line, cash accounting not only
fails to provide an accurate picture of the cost but encourages what we
have seen: short-sighted decisions to keep today's costs down which
simply raise the overall costs. And unless the accounting is
comprehensive, it encourages cost shifting. Furthermore, the
accounting, particularly of military expenditures, must be auditable,
with those in charge held responsible. Congress passed Sarbanes-Oxley
to hold private firms accountable; but the Defense Department has not
lived up to these same standards. The President has not presented, on a
regular basis, an accounting of how much the war in Iraq has cost us.
These costs span the Departments of Defense, State, Labor, Veterans
Affairs, Energy, Social Security, and other agencies. It is only
through hard work that we, and others, have been able to piece together
the accounts.
Third, if we think a war is worth fighting, we must force Americans
to pay up front and not shift the costs to our children; we cannot
pretend that one can have a war for free. We must set aside the money
required to pay health care and disability benefits for the returning
veterans. We require companies to do this, and we should ask nothing
less of ourselves. We cannot let what they receive be hostage to the
whims of a future political process, and we should not be creating
enormous new unfunded entitlements.
Fourth, we must not place the burden on so few who are asked to do
repeated tours of duty. It is unfair, and in the long run, as we have
seen, it is costly, not just because of the toll it puts on those put
through such repeated stress, but also because it will inevitably make
it more difficult and more expensive for the armed forces to recruit in
the future.
Fifth, we should be wary of privatizing the military to the extent
that we have; it has been expensive, in so many ways. There are some
things that should be privatized, but there are some things which
should not: this is one area where economic theory and historical
experience suggests that we should not. To the extent that private
contractors are used, there is a need both for greater reliance on
competitive bidding and more oversight; and we need a full accounting
of the costs, including those costs taxpayers will pay outside the
defense department budget.
concluding remarks
America is a rich country. The question is not whether we can
afford to squander $3 trillion or $5 trillion. We can. But our strength
will be sapped. We will be less prepared to meet challenges in the
future, and there are huge opportunity costs. Some of our children will
not have the medical care that should be a right to every citizen born
in a country as rich as ours; some will bear the scars for life. We are
not investing as we should in technology and science, to make our
economy as competitive as it should and needs to be. We worry about the
inroads China is making in Africa--but our foreign aid budget in Africa
amounts to but a few days fighting in Iraq. With a fraction of the
amount spent on this war we could have had a new Marshall plan, which
would have done so much to win the hearts and minds of those around the
world. We have talked about the huge problem facing our social security
system, putting into jeopardy the economic security of our elderly. But
for a fraction of the cost of this war, we could have put Social
Security on a sound footing for the next half century or more.
Economists are fond of saying that there is no such thing as a free
lunch. It is also the case that there is no such thing as a free war.
This is not the first time that an Administration tried to enlist
support for an unpopular war by trying to hide the true and full costs
from the American people. And this is not the first time that America
and the American economy have suffered as a result. The inflationary
episode that America went through beginning in the late 1960's was at
least partly a consequence of President Johnson's failure to own up
fully to the costs and adjust other tax and expenditures appropriately.
This time, the underlying economic situation is different, and,
accordingly, the consequences have been different but in many ways even
more severe.
The budgetary costs of this war have been huge. But the costs that
go beyond the budget are at least as large, and the meter is still
ticking. Every year of this war has seen the costs rise. But even if
the troops stay where they are, two more years will add,
conservatively, another $500 billion to the total tally. No one can
know for sure whether, when we depart, things will get better (as more
Iraqis seem to believe) or worse. No one can know for sure whether
staying an extra 2 years will make the chaos that might follow less--or
greater. But it is your solemn responsibility to make the judgment: is
this the best way of spending $500 billion? Is it the best way to
strengthen America's capacity to meet future challenges, to promote
democracy around the world, to help create the kind of world, here and
abroad, that we would like our children to inherit? For too long, this
Congress and this Administration has approached the problem by dribs
and drabs: a little more today might just do the trick; a little more
later will help us turn the proverbial corner. But as the late Senator
Dirksen said, ``a billion here, a billion there, and pretty soon you're
talking about real money.'' Today, we would have to say, a trillion
here, a trillion there, and pretty soon you're talking about real
money.
Even a rich country ignores costs of this magnitude at its peril.
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Prepared Statement of Robert D. Hormats, Vice Chairman, Goldman Sachs
(International)
Mr. Chairman and Members of the Joint Economic Committee,
It is a great pleasure for me to appear before this Committee once
again, and especially so because the topic you have chosen to consider
today--the cost of the Iraq War--is of great importance to our country.
This hearing also is particularly timely, because next month will mark
the beginning of the fifth year of that war. What was originally
expected to be a short and cheap military exercise has become the
second longest war in American history (Vietnam being the longest) and
the second most expensive (World War II having been considerably more
costly).
Now is a good time for a deeply divided nation to develop a better
understanding of the costs of this war and to use that information--
factoring in a variety of other national security considerations as
well, of course--to determine whether these costs are still worth
paying. And if they are considered worth paying, we need to consider
how to cover the costs in a way that is fiscally responsible and that
will put America's longer-term finances on a stronger footing.
To be sure, the decision on whether, and at what level, to continue
the American military presence in Iraq is not primarily an economic
one--nor should it be. It must depend heavily on a range of
considerations that relate to the positive or negative consequences of
changes in troop levels (or of the in-country mission of our troops)
for US national security and for the future stability of Iraq and the
Middle East. It must also factor in other important considerations such
as whether political reconciliation and stabilization in Iraq are
moving forward rapidly enough, and whether or not the continued loss of
life and the injuries suffered by Americans are worth the outcomes we
seek. Whatever the case, the Congress should use this period to
consider--in as non-partisan a way as possible--how in the future this
country can avoid the mistakes that have been made in the funding of
this conflict.
lack of a candid national debate on war costs
Democracies function best when policies are based on the informed
consent of the governed. And here I emphasis the word informed. In most
wars there is a tendency to underestimate the cost at the outset--in
part because of wishful thinking that they will be short and cheap and
in part because leaders often cannot immediately judge at the outset.
That was certainly true in Civil War, World War I and the Vietnam War.
But there was generally a very candid, open and robust debate in the
Congress and among the American people about how to pay for a war once
its costs became apparent--and in some cases even in anticipation of
rising costs.
During this war there has been a surprising absence of vigorous
public or Congressional debate over war costs and how to pay them. In
large measure that is because this war represents only a small portion
of American GDP--roughly 1 percent annually in direct budgetary terms--
compared to World War II (around 40 percent at its peak) the Korean War
(around 15 percent) and Vietnam (around 10 percent). So paying for the
current war has not appeared to impose large visible costs on the
American economy--although, as I shall later point out, that is a
deceptive illusion.
Also, in other wars higher taxes, and elevated borrowing that
pushed up interest rates, forced Americans to come to grips with the
price of the war and political leaders to feel a greater sense of
accountability about war costs. This war so far has seen taxes lowered
and has had no impact on interest rates; for the better part of the war
the Federal Reserve was cutting rates and long term bond rates were
quite stable.
Moreover, the fact that this war has been financed almost entirely
by using ``emergency budget supplementals'' that circumvent the normal
budget process has meant that the executive branch and the Congress
have skirted the issue of tradeoffs in the budget. Thus a great deal of
unnecessary and non-essential spending, including climbing numbers of
``earmarks,'' has occurred even as the cost of the war has increased--a
development that never before occurred in American wartime history.
Normally when America goes to war, non-essential spending programs
are reduced to make room in the budget for the higher costs of the war.
Individual programs that benefit specific constituencies are sacrificed
for the common good. FDR himself slashed or removed from the budget
entirely many of his pet New Deal programs to pay for World War II. And
taxes have never been cut during a major American war; for example,
President Eisenhower adamantly resisted pressure from Senate
Republicans for a tax cut during the Korean War.
paying for past wars--compared to this one
One month after the attack on Pearl Harbor plunged America into
World War II, President Roosevelt appeared before Congress to deliver
his 1942 State of the Union Address. He was straightforward about the
massive expenses the war would require. ``War,'' he said, ``costs
money. That means taxes and bonds and bonds and taxes. It means cutting
luxuries and other non essentials.''
Higher taxes as well as cuts in luxuries and non-essential spending
have been hallmarks of fiscal policy during every major war in which
the U.S. has engaged--until now. The Iraq War has been paid for in a
very different way. As noted above, it is the first war during which
taxes have been cut and non-essential government spending has
increased, and quite substantially at that. This has meant that the
bond part of FDR's equation (i.e. Federal borrowing) has been the sole
source of funding for the costs of this War. This has made it easier
for Americans to avoid coming to grips with the cost of the war,
because no popular programs were cut and no taxes were levied--no
economic inconvenience to them.
By the end of fiscal year 2008, the Iraq War will have cost $608
billion in direct budgetary appropriations, plus another and far larger
set of costs that are not directly in the budget. These have been
described in a Joint Economic Committee Report entitled ``War at Any
Price?'' released in November 2007, and in my friend and co-panelist
Joe Stiglitz's recent book entitled The Three Trillion Dollar War. This
$608 billion figure also does not include the interest that has been
paid on funds previously borrowed to cover the costs of the war since
2003 (which itself must be borrowed). That brings total borrowing for
the war close to $650 billion dollars. [The direct costs of the War in
Afghanistan for the U.S. come to around $200 billion so far, although I
do not include them in this analysis, even though many of the same
considerations apply; but that war is dissimilar in one major respect,
because it was and is a ``war of necessity,'' and there is far greater
foreign engagement.]
The Iraq War differs from other major American wars of the past in
yet one more respect as well: a substantial portion of the money
borrowed to pay for it (roughly 40 percent) comes from abroad. That has
been the case on only one other American War--the Revolution, when
borrowing from France and the Netherlands proved critical to the
success of the Continental Army.
I make these points of differentiation between this war and past
wars because it is important to understand the unique character of the
funding of this war and to put it in historical perspective. The
methods by which American wars have been paid for since 1776 are
described in greater detail in a book I have written recently called
The Price of Liberty: Paying for Americas Wars from the Revolution to
the War on Terror. There is merit in studying how presidents and
Congresses have paid for wars in the past as we attempt to put the
policies used to pay for this war in historical context--and seek to do
a better job in the future.
absence of shared sacrifice
There is another point of history worth emphasizing: war financing
is not simply about money. Clearly wars, as FDR emphasized, cost a lot
of money. But throughout history national leaders also have recognized
the importance of conducting war financing in ways that connect
Americans at home to the armed forces abroad, demonstrating that as
American forces are making sacrifices on the battlefield--and many
thousands of them are making major sacrifices every single day during
this war--the American people are making sacrifices in their behalf at
home. Woodrow Wilson's Treasury Secretary, William Gibbs McAdoo, stated
during the early months of World War I that ``a man who could not serve
in the trenches of France might never the less serve in the financial
trenches at home'' by buying war bonds (called Liberty Bonds). He
coined the term ``capitalizing patriotism'' to emphasize that
patriotism required all Americans to make financial sacrifices to
support the nation's troops when they were at war, putting their lives
at risk. He did not see this as a partisan measure--but as one of
support for American troops.
FDR was even more blunt, emphasizing the need for shared sacrifice.
```Battles are not won,'' he stated, ``by soldiers or sailors who think
first of their own safety. And wars are not won by people who are
concerned primarily with their own comfort, their own convenience and
their own pocketbooks.'' Yet the American people as a whole have been
asked to give up nothing for this war--they have been treated to tax
cuts and increases in government programs of various sorts. The only
sacrifices are those being made by the troops and their families.
I believe that in the current environment Americans would willingly
support enactment of a ``tax surcharge for veterans'' levied on
citizens in the top income bracket. The tax would not be to pay for the
war itself--because so many Americans either oppose this war or find it
futile and therefore would not, at this point, support a tax that
appeared in any way to perpetuate an American presence in Iraq. The tax
revenues would go into a fund dedicated specifically to ensure that
wounded and disabled veterans receive the highest quality care for as
long as they need it, which for many will be their entire lifetimes.
The cost of treating the many thousands of returning men and women
who receive various kinds of serious wounds, among which are the much
discussed traumatic brain injury (TBI), or are victims of post-
traumatic stress disorder (PTSD), will be enormous. These wounds and
conditions also take a heavy toll on the families of victims. I believe
that even Americans who are bitterly opposed to this war would support
such a tax to ensure the provision of lifelong disability and medical
care for these veterans; estimates for such costs range into the
hundreds of billions of dollars over many decades, especially since
disabilities often manifest themselves years after veterans have come
home from the battle field.
borrowing for the war
I have been asked by the Committee to focus a portion of my remarks
on the issue of borrowing for this war--which, sadly, receives little
public attention. In all major wars in our past (with the exception of
the first Iraq War when President George H.W. Bush, Secretary James
Baker and Secretary Nicholas Brady organized massive and direct
financial support from America's friends and allies to pay the lion's
share of the war), a significant amount of additional Federal borrowing
has occurred. This is because administrations and Congresses did not
want to place the entire burden of the war cost on the current
generation of tax payers and sought to spread out the cost over time.
Such a policy was prudent, because the Nation could not absorb tax
increases large enough to pay the full cost of the war during the
course of the conflict without crippling the economy. But they also
believed that taxes should pay some portion of the cost, i.e. that the
entire cost burden should not be shifted to future generations of
taxpayers through borrowing.
So before, or in the early stages of, every major war in the past
there was an active debate in the Congress and the Executive branch--
and in parallel among the American public--over what proportion of the
war should be paid for by taxes and what proportion by borrowing. This
was true in the Civil War, in which Secretary Salmon P. Chase informed
President Lincoln and the Congress that he proposed to divide up the
incremental costs of the war on the basis of 25 percent taxes and 75
percent borrowing; Secretary McAdoo set and nearly achieved the goal of
paying for one third of World War I through taxes; and Secretary Henry
Morgenthau set a goal of paying half the cost of World War II through
taxes, although in the final analysis he only got to 45 percent (a
nonetheless impressive feat); President Harry S. Truman aimed to pay
almost all of the Korean War through taxes, although he fell short.
The underlying point is that during all of these conflicts there
was a vigorous national debate on how best to pay the bill--how much
current taxpayers should pay and how much should be borrowed and
therefore shouldered by future taxpayers through debt service. Usually
there were frequent and well attended Congressional hearings on the
matter. Sadly, we haven't had that kind of debate regarding this war.
The notion that national security can be paid for ``on the
cheap''--using borrowed funds alone--is a dangerous one, especially for
a nation that is likely to be engaged for several decades in what the
Pentagon refers to as the Long War on Terrorism. If that is the case,
and there is good reason to believe it is, Americans should be candidly
told the costs and exactly how the money will be used. The American
public should understand the long term resource requirements not only
for the military but also for national intelligence, improved
diplomacy, increased foreign assistance, augmented homeland defense,
and better support for police, firefighters and public health
authorities. The last of these will also be important if the Nation is
hit by a pandemic--for which all authorities acknowledge we are grossly
ill-prepared.
Funding this war on terror or any other war without presenting
Americans with a comprehensive package that relates the various
components to the overall goal does not enable the electorate to
understand the full costs or consider the most appropriate way of
paying them. Once they understand these, they will be better able to
decide whether they wish to give up other programs to make room in the
budget to cover some of the costs, or pay higher taxes, or borrow more
or simply not fund some of these national security items at all.
A robust debate on the topic of war spending (for this or for any
other war) and how to allocate the burden between current and future
taxpayers is an unambiguously good idea for our democracy, in part
because in debating taxes and borrowing for a war, Americans can also
debate the wisdom of the war itself when it is--as the Iraq War is--a
war of choice. It also brings into play the issue of budgetary
priorities and tradeoffs. In debating whether to engage in a ``war of
choice,'' Americans should be cognizant of the important government
programs that could be paid for with the resources that would otherwise
be devoted to paying for that war. Dwight Eisenhower--certainly no
pacifist but a former Supreme Allied Commander--recognized that war
diverts resources from other purposes and therefore a decision to enter
one should be thoughtfully and carefully taken. He put the tradeoffs as
follows: ``Every gun that is made, every warship launched, every rocket
fired, signifies in the final sense a theft from those who hunger and
are not fed, those who are cold and are not clothed.''
The November JEC Report points out that the money spent on the Iraq
War during one single day could enroll an additional 58,000 kids in
Head Start, make college more affordable for 160,000 low-income
students through Pell Grants, hire nearly 11,000 border patrol agents,
or put an additional 14,000 police officers on our streets. The large
sums so far spent also could have helped to put Social Security and
Medicare on a more sustainable basis. And a small fraction of them
could have helped to eradicate or contain diseases that devastate the
lives of millions in Africa and Asia. But we have had no such debate
over what economists call the ``opportunity costs'' of war spending and
thus no such tradeoffs were considered.
The broader implications of paying for the war entirely by
increasing the Federal debt are inter-generational. Borrowing to pay
the full cost of the war passes the cost wholly to future taxpayers.
The JEC Report calculates that by the end of fiscal year 2008 the
additional Federal debt resulting from the war will total $660
billion--and that this figure will grow to $1.7 trillion by the end of
2017. It further points out that within the coming year the debt
service cost for Iraq War spending alone will exceed Federal spending
for education and health research.
Again, the point is that there are major tradeoffs here. Is the
continued cost of the Iraq War worth the commitment of resources that
potentially could be used otherwise for national social programs or to
shore up homeland security or for other purposes? Or, if we do wish to
pursue the war at current troop levels--or bring troop levels down to a
Korean War-like presence as suggested by Secretary Gates, or engage in
a sharp drawdown as recommended by the House Plan--are we willing to
give up other programs that are now being funded to pay the costs?
These questions cannot be decided here, but what can be agreed on is
that a vigorous debate should be held about national priorities and
tradeoffs for the use of Federal budgetary resources before any new
decisions are taken about whether to undertake a war of choice. It may
well be that we will undertake such a war after all the considerations
are aired, but at least then Americans will understand the resource
implications of the decision, and recognize that certain things must be
given up to pay the price of that war. And even in a war of necessity,
resource decisions need to be taken in the context of a transparent
dialog about the optimum way to pay the bill.
There is also the issue of the degree to which borrowing for the
war draws money away from productive investment. (Of course, it is
worth noting that higher taxes would do that too, but I will focus in
the borrowing side of the equation here.) It is difficult to know
precisely the degree to which money not borrowed by the Federal
Government to pay for the war would have gone into productive private
sector investment as opposed to one-shot consumption. Presumably less
Federal borrowing for the war would have lowered the cost of capital
and thus encouraged some additional private sector investment--although
there is little evidence in recent years that the cost of capital was
an inhibiting factor in capital investment in the United States. So it
is difficult to measure with any precision how much private investment
was actually displaced by Federal borrowing for the war. Conceivably,
the major impact of less Federal borrowing and thus a lower cost of
capital could simply have been to encourage even more consumer
borrowing (which was already enormous)--and that would have contributed
little to national productivity.
More troubling is that borrowing for war, or for any other current
purpose for that matter, will impose a large debt burden on future
generations at a time when Federal borrowing in the future will climb
dramatically to pay for the skyrocketing costs of social security and
health care for the aged and the poor. These vital but costly programs
will put enormous stress on the Federal budget in coming decades,
causing an additional increase in borrowing and/or taxes--or cuts in
other programs. Placing added burdens on Federal finances by
accumulating additional war debt now simply makes the management of
this problem more difficult. In his celebrated Farewell Address,
President Washington enjoined Congress and his fellow citizens to
``discharge the debts which unavoidable wars may have occasioned, not
ungenerously throwing upon posterity the burdens we ourselves ought to
bear.''
But it is not simply war debt that is the problem. Our analysts at
Goldman Sachs anticipate that overall Federal borrowing over the next
10 years will amount to over three trillion dollars--so there are other
fiscal issues at play here besides the war. There has been a general
absence of fiscal discipline in Washington for nearly a decade. War
costs would not have added to Federal debt to the degree that they have
if non-essential programs had been cut and earmarking been better
contained--or if taxes had been raised to pay for even a portion of the
added costs of America's military efforts in Iraq.
A century and a half after President Washington's Farewell Address,
President Eisenhower gave his own Farewell Address in which he
counseled Americans ``to avoid the impulse to live only for today,
plundering for our own ease and convenience the precious resources of
tomorrow'' and to avoid ``mortgaging the material assets of our
grandchildren. . . '' And yet we seem to have heeded neither of these
calls in recent years. That is not the fault of the war but of a less
than rigorous process of budgeting and resource allocation in
Washington--and a seeming indifference to that by Americans in general.
Finally, as noted above, because roughly 40 percent of all Treasury
securities are sold abroad, that portion of war borrowing is financed
by China, Japan, the Middle East and Westem Europe. Thus, Americans are
accumulating large interest and debt repayment obligations to a number
of other nations because of our budget deficits. After the US had
accumulated debts to France and the Netherlands during the Revolution,
Treasury Secretary Hamilton and the Federalists, followed by the
Jeffersonian Republicans, insisted that they be paid down promptly to
preserve American creditworthiness.
That will not happen this time; America's debt to other nations and
its continued dependence of their capital will climb dramatically in
coming years. To be sure, this country can sustain large foreign
obligations today far better than the America of the late 18th century,
but growing amounts could still present problems. It is worth noting
here that while there appears to be consternation among many Americans
about this nation's growing dependence on foreign capital, there is
little apparent recognition that we Americans have it in our power to
reduce this dependence. We can do so by saving more, running government
surpluses, curbing the rate of growth of consumption financed by
borrowing, and using less imported oil. So far we are moving in the
wrong direction on all four counts (although consumer borrowing now
appears to be slowing) and thus will depend increasingly on foreign
capital inflows.
It is also worth noting that this dependence constitutes a security
vulnerability. Were there to be another catastrophic terrorist attack
in the near term, at a time when foreign confidence in American
finances is already low due to the crisis in our credit markets and to
the expectation of rising Federal deficits in coming years, the massive
sums of foreign funds that we count on--roughly $2-3 billion net every
working day--could decline precipitously. That would sharply slow an
already weak U.S. economy that would have been weakened further by the
attack. It is worth recalling that in September 2001 the Federal
Government had been running a budget surplus for 4 years and the Nation
was only half as dependent on foreign capital as it is today--and we
had no credit crisis. At that time foreign capital inflows slowed for a
while but resumed quickly, and the dollar proved remarkably resilient.
In current circumstances a drop on foreign flows could last longer,
push up interest rates due to a fall in available capital, and cause
the dollar to plunge.
conclusions
Several lessons can be drawn from the way this war has been paid
for:
(1) Avoid paying for wars by supplementals. The process circumvents
the need to make budgetary tradeoffs, set resource priorities or
sufficiently scrutinize how the funds are being used. Even during the
very poorly and non-transparently financed Vietnam War, emergency
supplementals were used to finance only about a quarter of the costs.
Democratic leaders in the Senate insisted that President Johnson and
Defense Secretary McNamara stop using this technique as it was
undermining support for their policies in the Congress.
(2) Cut way back on earmarks, especially during war. During wars,
such programs divert budgetary funds from higher national priorities.
Moreover, they create the notion that America can pay for its national
security with no sacrifices--and indeed new programs not on the
national priority list can be funded with no heed being paid to the
need for even slight national sacrifices.
(3) Exercise more rigorous Congressional oversight over war
spending. It is possible that even if the party in control of the White
House and the party in control of Congress are the same, there can be
rigorous oversight of spending to curb waste. The Truman Commission
(formally known as the Special Senate Committee to Investigate the
National Defense Program) reportedly saved the American taxpayer an
estimated $15 billion during World War II. As historian David
McCullough wrote, ``Unquestionably [Truman's] relentless watchdog role
. . . greatly increased public confidence in how the war was being
run.'' In the future the demands of the country for greater attention
to social programs at home will grow, so the military will need to
demonstrate that it is using its funds with maximum efficiency and on
essential requirements.
(4) Recognize the advantage of coalition diplomacy in paying for a
war. The first Iraq War demonstrated the military and the financial
benefits of forging a strong international coalition. That coalition
provided additional fighting forces, greater legitimacy for the effort
and foreign funds that helped to relieve the burden on the American
taxpayer.
(5) Take a long-term look at national finances. If the US allows
its finances to deteriorate in coming years there will be serious
consequences for the nation's security and its ability to address
growing social needs such as education and health care--as well as to
provide for the requirements of what will soon become a rapidly
retiring group of 76 million baby boomers. A new administration and a
new Congress will need to examine closely the future resource
requirements of this nation--including the obligations we are accruing
to retirees through Social Security and Medicare--and the likely
budgetary resources that will be available to meet them. Congress and
the president will need to find ways to ensure that projected outlays
and resource availability converge as opposed to diverge--which will be
the case absent changes in anticipated spending and revenue
trajectories. It is difficult to see how America's growing needs can be
met without tax increases, and if they are required, they should be
structured in ways that boost growth and savings and are consistent
with the longstanding principle on which the income tax was based
starting during the Civil War--fairness and progressivity.
I thank the Committee for giving me the opportunity to testify at
this hearing and welcome your questions.
__________
Prepared Statement of Dr. Rand Beers, President, National Security
Network, Washington, DC
Thank you, Chairman Schumer, Vice Chair Maloney, Ranking Member
Brownback, Ranking Member Saxton and other Distinguished Members of the
Committee, for giving me the honor of testifying today on the
additional costs to our national security as a result of the War in
Iraq.
The cost of the war in Iraq in terms of lives and treasure has been
tremendous: nearly 4,000 American troops have been killed; 30,000
American serviceman and women have been wounded; and according to a
report released by this committee, the American economy has already
incurred $1.3 trillion dollars in costs--a sobering $16,500 per family
of four.
What has that spending bought us? Diminishing respect for America
around the globe; the reconstitution of our terrorist and extremist
enemies; and the over-extension of our military and diplomatic
capacity. In Pakistan and Afghanistan Al Qaeda and the Taliban have
regained their strength and now operate with impunity. In the broader
Middle East, Iran has been let out of its strategic box and now wields
greater power. The war has severely overstretched and depleted our
military, leaving us vulnerable and unable to respond effectively
elsewhere. Freedom and democracy around the world have slid backwards,
as American moral authority has been tarnished and our ability to
mobilize others to meet global challenges and the needs of our citizens
has been undermined.
afghanistan, pakistan and terrorism
The most direct costs to America's security have come in the fight
against Al Qaeda. The war has empowered Al Qaeda and undermined
American interests. It has acted as a distraction, causing the United
States to divert assets that were necessary to fight Al Qaeda in
Afghanistan and Pakistan and put that time and energy into Iraq--a
country that had no operational relationship with Al Qaeda. Thanks to
this Administration's strategic misallocation of resources, today Al
Qaeda's central leadership has established a new safe haven in
northwest Pakistan even as Afghanistan continues to deteriorate.
The National Intelligence Estimate, released this past summer on
The Terrorist Threat to the U.S. Homeland, concluded that the greatest
threat to the American homeland emanates from Al Qaeda's ``central
leadership,'' which is based in the tribal areas of northwest Pakistan.
The NIE also concluded that, thanks to its new safe haven the
organization has increased its capacity to directly attack the United
States.
Al Qaeda is and will remain the most serious terrorist threat
to the Homeland, as its central leadership continues to plan
high-impact plots, while pushing others in extremist Sunni
communities to mimic its efforts and to supplement its
capabilities. We assess the group has protected or regenerated
key elements of its Homeland attack capability, including: a
safe haven in the Pakistan federally Administered Tribal Areas
(FATA), operational lieutenants, and its top leadership.''
The security situation in Afghanistan also continues to deteriorate
as the Administration focuses its energy on Iraq. The Chairman of the
Joint Chiefs, Admiral Mullen, admitted that the main focus of U.S.
efforts is on Iraq: ``In Afghanistan, we do what we can; in Iraq, we do
what we must.'' As a result, the Taliban has returned to lead a growing
insurgency against the Afghan government and U.S. and NATO forces. The
security situation has grown worse every year since late 2002 when we
were preparing to invade Iraq--a concern which I raised while still in
government in the months before the invasion to no avail. 2007 was the
deadliest on record for U.S. forces in Afghanistan, with fatalities
four times higher than in 2004. The number of suicide bombings has also
increased dramatically and civilian casualties have also increased. The
Taliban has regained strength and confidence and operates with impunity
in large parts of the country. Though unable to hold territory, the
Taliban remain a force for intimidation and instability, increasingly
operating in battalion-sized units of 400 or more. And despite the
near-total eradication of poppy during the Taliban's time, opium
production has again become a routine part of life in rural
Afghanistan--providing more than 90 percent of the world's supply while
helping corrupt the government and fund terrorism and the insurgency.
In the last year, we have also seen our Iraq preoccupation
contribute to Pakistan's political instability. While we focused on the
``surge'' in early 2007, we ignored a brewing crisis in Pakistan--a
country that is not only at the heart of our struggle against terrorism
but also happens to be a nuclear power. We were slow to realize that
our strategy of using Musharraf to keep Al Qaeda at bay was failing,
and that instead his autocratic rule was creating instability in
Pakistan proper. By conducting a Musharraf policy, instead of a
Pakistan policy we alienated the people of Pakistan. The hope that
Benazir Buhtto would bridge the divide collapsed with her
assassination. While the election last week was a welcome step forward,
the attendant instability and the questions about how to deal with Al
Qaeda and Taliban elements remain serious strategic issues--issues that
that this Administration could have addressed more carefully and
thoughtfully if its efforts weren't so heavily focused on Iraq.
Meanwhile, the conflict in Iraq has also given terrorists a new
tool for recruitment, fundraising, training and indoctrination of
terrorists. Prior to 2003, Al Qaeda had no formal presence on the
ground in Iraq. But, as a result of the U.S. invasion, Iraq has become
a magnet for foreign fighters--many of whom pledge allegiance to Al
Qaeda. In 2006, the nation's 16 intelligence agencies agreed that the
war has created a ``cause celebre'' for terrorists around the world.
And the July 2007 National Intelligence Estimate concluded that ``its
association with Al Qaeda in Iraq helps al Qaeda to energize the
broader Sunni extremist community, raise resources, and to recruit and
indoctrinate operatives, including for Homeland attacks.''
Thus, it is no surprise that 84 percent of foreign policy experts
recently told an independent bipartisan survey by the Center for
American Progress and Foreign Policy Magazine that they do not think
the United States is winning the war on terror.
iran and the middle east
The War in Iraq has also had grave consequences for our position in
the Middle East. Iran has been one of the greatest beneficiaries of the
Iraq War. For years, American policy in the Persian Gulf was based on
playing Iran and Iraq off each other, thus containing both. The Bush
Administration's catastrophic Iraq policy tipped the balance, allowing
Iran to step into the power vacuum inside Iraq and increase its
influence in the region. Iran is now an ascendant power, which uses its
influence to oppose American interests.
In Iraq, Iran's influence has increased tremendously. Many of the
Shi'a political leaders, whom the United States has empowered, spent
years in exile in Iran during Saddam Hussein's rule. They maintain
close political ties with Tehran. To take just one example, the Islamic
Supreme Council of Iraq (ISCI), which represents one of the two largest
Shi'a political movements in Iraq, was originally formed in Iran. In
addition, there is little doubt that Iran has contributed weapons and
tactical guidance to some of the insurgent groups that have attacked
American forces.
Meanwhile, Iran also increased its influence throughout the Middle
East. While Iran spent the 1990s and early parts of this decade
concerned primarily with the security of its own borders against the
threat of Saddam Hussein and the Taliban, today it finds itself
unfettered. This has left it free to pursue a more aggressive and anti-
U.S. strategy throughout the region through the support for extremist
groups, most notably Hezbollah and Hamas. As a result, it is more
difficult to achieve any progress in ending the Arab-Israeli conflict
or stabilizing Lebanon.
The Iraq War has also improved Iran's position vis-a-vis its
uranium enrichment program. The fact that the United States went to war
based on the threat of weapons of mass destruction, only to find none,
undermined our global authority on this issue, making it more difficult
to bring allies together to oppose Iran's uranium enrichment program.
Moreover, our large military presence in Iraq today makes any military
threats against Iran's nuclear facilities less credible. Limited attack
capabilities reduce the likelihood of success against difficult known
targets and the uncertainty of having identified all the targets only
complicates the situation. With no assurance of success, an attack will
invite an asymmetric insurgent/terrorist response against our forces in
Iraq as well as attacks in Lebanon and Israel.
Thus, on just about every measure Iran finds itself more powerful
today then it did 5 years ago--before the start of the war.
the strains on our military
The Iraq war has severely overstretched our ground forces and has
taken a tremendous toll on the Army, the Marines and National Guard.
Not since Vietnam have our ground forces been in such a state.
Of the Army's more than 40 combat brigades, all but the First
Brigade of the Second Infantry Division, which is permanently based in
South Korea, have served at least one tour, often longer than the 12
month ``limit.'' More than three fourths have served more than one tour
in Iraq and Afghanistan. The Army has been continually forced to
violate its own dwell-time policy, which calls for troops to receive 24
months for recuperation and retraining for every 12 months deployed. In
many cases soldiers have been sent back to Iraq after being home only 9
months.
The pace of deployments is severely affecting combat readiness.
Two-thirds of the Army--virtually all of the active Army's combat
brigades not currently deployed to Iraq or Afghanistan--are rated ``not
combat ready.'' In fact General Casey, Chief of Staff of the Army, told
the Senate Armed Services Committee on Tuesday that, ``The cumulative
effects of the last six-plus years at war have left our army out of
balance, consumed by the current fight and unable to do the things we
know we need to do to properly sustain our all-volunteer force and
restore our flexibility for an uncertain future.''
The war is also placing great strain on the Marine Corps. The
Marines were charged with pacifying Anbar province and signs of severe
strain are appearing in America's 911 force. As the Marine Corps
Commandant James Conway has noted, as reported in the Los Angeles
Times, ``back-to-back deployments were stretching the Marine Corps
thin, giving it little or no time to train young enlisted personnel and
officers for amphibious assaults, cold-weather warfare and other `core
competencies. '
Just as worrisome is the state of our Army National Guard. The
National Guard and Reserve are already suffering from severe shortages
of equipment and available combat personnel. The National Guard has
become a shell of its former self and in many states around the country
the Guard would struggle to respond to a natural or man-made disaster--
just as the Kansas National Guard struggled to respond to the severe
tornados last year.
working with our allies,
The Iraq War has also caused the world's respect for America--one
of the fundamental sources of our strength--to evaporate, even among
our closest allies. The latest Pew Global Attitudes survey from June
2007 found some disturbing trends regarding how America is viewed in
the world.
In Germany, one of our most strategically important European
allies, only 30 percent of the people have a positive view of the
United States, down from 78 percent in 2000. In Turkey, a Muslim
democracy and NATO ally, approval ratings of the United States have
dropped from 52 percent to a dismal 9 percent. In Britain--our partner
in Iraq and most reliable ally--favorability ratings have dropped from
83 percent in 2000 to only 51 percent last year.
This is not just a question of wanting other countries to like us.
It is a question of being able to mobilize others around our ideas and
interests. It is a question of having the moral authority to press
others not to torture political prisoners. It goes to the very
questions of America's ability to lead. These are among the most
significant strategic costs associated with the unpopularity that has
come from the Iraq War.
Take for example the question of more NATO troops for Afghanistan.
We need a greater military commitment from the Alliance, to help
stabilize Afghanistan and prevent the reemergence of a terrorist
haven--one of our core national interests. Yet, public opinion in
Europe has conflated the necessary war in Afghanistan with the
unnecessary war in Iraq. The whole venture is now so unpopular, and the
domestic political cost of providing more troops for Afghanistan has
become so high, that it has created a major impediment in getting the
support we need for the mission. Meanwhile, in Turkey, the United
States' unpopularity has made it much more difficult for the current
government to show restraint in pursuing the PKK into Iraq.
For months the Turkish government beseeched the United States to do
more, but its calls went unanswered as we were preoccupied in Baghdad
and Anbar. As a result, America's popularity dropped and domestic
pressure to respond grew ever stronger. Now, we are faced with an even
more dangerous situation in Northern Iraq. Finally, in countries across
the Muslim world from Pakistan to Morocco our image is so tainted that
local politicians who work closely with the United States are viewed
with suspicion or simply discredited, making it far more difficult for
us to win the ideological struggle with Al Qaeda.
These are only some concrete examples of the very real strategic
costs that we face because of our damaged image around the world.
the question of strategic focus
Finally, there is the question of strategic focus. Iraq has
occupied the majority of our political leadership's attention and a
huge proportion of the national security budget. As long as our troops
remain there in large numbers this will not change, nor should it. But
the question is: should our troops be there or should our focus be
elsewhere?
As a government servant, who spent thirty-five years working on
national security issues, I understand that we can never address all of
the serious national security concerns that we face at once. Tradeoffs
need to be made on time and resources, and the day is never long
enough. But the reality is that as long as this government's efforts
are so strongly focused on Iraq, other priorities will not get the
attention they deserve, other national security issues will find funds
limited; and, when situations around the world explode, we will find
ourselves surprised and trying to make up time.
To understand this dynamic one need only take a look at some of the
most recent serious international incidents: Kosovo's declaration of
independence and the burning of the American embassy; the ongoing
crises in Pakistan and Kenya; the increasing tensions between Turkey
and the PKK in Northern Iraq and the looming friction with a muscle-
flexing Russia. In all of these cases, the United States was caught off
guard and had to scramble for the right policy, instead of seeing the
crisis coming in advance and acting to mitigate the danger. This is not
to say that our people on the ground did not see the development
building, but that those in Washington are so absorbed with Iraq that
they did not have the capacity to respond effectively. As long as we
are in Iraq with such large numbers of troops, we will continue to be
in a reactive posture to events in the rest of the world. Other threats
and opportunities such as an increasingly powerful China, Russia's turn
away from democracy, instability in Africa or growing anti-Americanism
in Latin America will be neglected to the detriment of our security.
conclusion
In conclusion, the Iraq war has not only made the world a more
dangerous place, but has distracted the United States from pivotal
foreign policy priorities, harmed America's prestige and international
credibility, and hurt our ability to respond to emerging challenges.
The world is a complex place full of threats and dangers, and the
United States has many interests and values to protect. By its
strategic misstep into an ill-conceived war in Iraq, this
Administration has found itself unable handle more significant threats
elsewhere--and that is costing us abroad and at home.
For years now the debate in this country has been about whether the
situation in Iraq is getting better or worse, whether this benchmark or
that benchmark has been met, or whether or not violence in Iraq is down
by this percent or that percent. I fear that these arguments miss a
central point. It is not a question of whether or not the surge is
working--the surge is a short-term security band-aid to a longer-term
political problem.
The question we need to be asking is one of opportunity costs and
strategic costs to the United States. We're seeing a new debate
emerge--one where we look at the financial costs of Iraq and their
impact on U.S. priorities. I want to make sure Americans fully
understand the global consequences of where we are now. The strategic
sinkhole in Iraq means that our priorities at home and around the world
are not being met. It is difficult to see how remaining in Iraq will
offer this country the opportunity to move forward on any of these
concerns. And it is equally difficult for me to understand how
remaining in Iraq without a disengagement strategy will break the
culture of dependency and ensure an Iraqi government and security force
more committed to Iraq's future than we are.
Thank you for the opportunity to present these ideas, and thank you
to the Committee for highlighting such an important topic.
__________
Prepared Statement of Scott Wallsten, Ph.D., Vice President for
Research and Senior Fellow, iGrowthGLobal, Senior Fellow, Georgetown
Center for business & Public Policy
Mr. Chairman and members of the Committee, thank you for inviting
me to testify today on the costs of the war.
I estimate that the expected net present value of the total direct
costs of the war are approximately $1 trillion to the U.S., and closer
to $2 trillion globally.
The real direct economic costs of the war include not only
expenditures from the U.S. budget allocated for the war, but also
injuries, lives lost, and lost productivity from reservists who cannot
do their civilian jobs because they have been called up for service.
My coauthor, Katrina Kosec, and I began this project in 2005 and
have updated our numbers periodically since then. (I submitted the
original 2005 paper, which explains our methodology in detail, to the
Committee). We have found that the total direct economic costs of the
war at any given point in time tend to exceed budget appropriations by
about 20-25 percent.
As wealthy as our nation is, our resources are limited and must be
spent carefully. Other areas of policy attempt to explicitly take into
consideration the full economic costs and benefits of government
actions. President Ronald Reagan signed an executive order requiring
certain agencies to conduct a cost-benefit analysis for any proposed
major regulation and to adopt it ``only upon a reasoned determination
that the benefits of the regulation justify its costs.''
President Bill Clinton renewed this order, as did the current
president.
And now cost-benefit analysis has become an important and accepted,
though certainly not the only, tool for evaluating many proposed
policies.
But this approach has yet to be explicitly incorporated into
decisions regarding defense and security.
Admittedly, the current tools we have for evaluating costs and
benefits are not perfectly suited for evaluating the costs of war since
they were developed for use in a different setting. The tools are blunt
and imprecise, meaning that the cost estimates all of us are presenting
today are measured with a great deal of error. That's why Katrina and I
included in our paper ranges of estimates and also built an online
estimator that allows people to change underlying assumptions to see
how those affect the costs.
Nevertheless, this type of analysis can provide valuable
information to help inform policymakers as to the best course of action
going forward.
In addition, we should apply these tools to other, related, areas,
like homeland security. The Office of Management and Budget estimated
last year that major homeland security regulations imposed a cost of
$2.2 to $4.1 billion dollars a year on the economy.\1\ But those rules
were passed with no estimates of their expected benefits. Those costs
may sound small compared to the costs of the war, but they are not. The
net present value of those costs is close to $100 billion.
Estimating the benefits of homeland security measures or of
military operations is difficult because, as OMB acknowledges, they
depend on the probability and severity of outcomes like terrorist
attacks, which are difficult to quantify.
Just because expected costs and benefits are difficult to estimate
doesn't mean they don't exist. And if you can't estimate the benefits,
you should still follow through on a policy only if you have good
reason to believe those benefits exceed the costs.
Professor William Nordhaus of Yale was the first to do this
exercise for a war in Iraq, and he did it before the war when it could
have helped inform policy.\2\ He acknowledged that there would be some
benefits of a war. The world would be better off if Saddam Hussein were
not in power. But Professor Nordhaus meticulously estimated ranges of
the likely costs under different scenarios and concluded that a war in
Iraq could cost between $100 billion and $2 trillion. And he further
qualified the results by noting factors that he did not include, such
as costs to other countries or, as he put it, ``fallout that comes from
worldwide reaction. . . against perceived American disregard for the
lives and property of others.''
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\1\ White House Office of Management and Budget. 2007. ``Draft 2007
Report to Congress on the Costs and Benefits of Federal Regulations.''
Washington, DC.
\2\ Nordhaus, William D. 2002. ``The Economic Consequences of a War
With Iraq.'' NBER Working Paper. Cambridge, MA.
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The point, aside from noting that Professor Nordhaus was far more
insightful than any of us by doing this exercise in advance, is that
even under tremendous uncertainty, these tools can provide us with
useful information to help inform decisions. If Congress and the public
had seriously considered Professor Nordhaus's projected cost estimates,
would we still have gone to war? Perhaps. Some might have still
believed it was worthwhile. But perhaps not.
We can't do anything about the costs we have already incurred.
Those resources are gone. But we do have some control over what happens
next. The lesson, I believe, is that policymakers can use the tools of
cost benefit analysis to help evaluate whether proposals regarding what
to do next in Iraq are likely to yield net benefits to us and to the
world.
And hopefully that additional information will lead to better
decisions.
Thank you.
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