[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

=======================================================================


                                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

                              ----------                              

                                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

                              ----------                              


                      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.
---------------------------------------------------------------------------
    * 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.
---------------------------------------------------------------------------
    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
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       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.
---------------------------------------------------------------------------
    \1\ University Professor at Columbia University and Chair of the 
Committee on Global Thought.
---------------------------------------------------------------------------
                          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.''
---------------------------------------------------------------------------
    \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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