The Economics of War

by Alan Reynolds

November 21, 2002

Alan Reynolds is a senior fellow with the Cato Institute.

I am often asked about the cost of starting a war with Iraq -- not just the cost to taxpayers, but also the potential impact on the economy, oil prices, the stock market, etc. Before we can even begin to answer such questions, we must first evaluate the odds that U.N. inspections will or will not prevent a full-scale war. Then we must try to arrive at an informed opinion about whether any war is likely to be brief or protracted.

Those most eager for a U.S. invasion use arguments that do not fit together very well. They claim to have indisputable information about Iraq's "weapons of mass destruction." Yet they are equally confident that inspections will fail because those same weapons will supposedly be impossible to find. If the weapons and factories are so impossible to find, how can we be so sure they exist?

Enthusiasts for war say we must be in a big hurry to invade before Iraq acquires weapons of mass destruction, thus changing the complaint from weapons Saddam has to weapons he wishes he had. But that is equivalent to admitting Iraq does not yet have the many dangerous weapons that were supposed to justify invasion in the first place -- gas, germs, nukes and (more importantly) the means of delivering them to U.S. shores. Inspections do not "buy time" for Saddam. He could not start or expand a weapons program with ground inspectors and aerial photographers looking over his shoulder.

Those who claim to be certain that Iraq has a formidable arsenal of fearsome weapons also express inexplicable confidence that those weapons pose no danger to U.S. troops. They declare that an invasion will be fast and easy. "I guarantee it will be over within 10 days," says Mort Zuckerman of U.S. News. Such assurances that Iraq is a feeble military power contradict the rationale for war -- namely, the assertion that Iraq is in possession of terrifying weapons. Iraq may be a dangerous predator or an easy prey, but it cannot be both.

To maximize the alleged danger of Saddam's weapons while minimizing the risk to U.S. troops seems reckless. After reading "Iraq's Weapons of Mass Destruction" from The International Institute for Strategic Studies and "When Every Moment Counts" by Sen. Bill Frist, R-Tenn., my understanding is that homeland risks from chemical or biological terrorism are smaller than from, say, two snipers. Although it is unlikely that Iraq has any method of delivering significant quantities of gas or germs as far as the United States, it is more plausible that he might use whatever he has against invading U.S. troops.

My best guess is that war and its aftermath would be more costly and difficult than the optimists admit. The fact that presidential adviser Larry Lindsey publicly estimates it would cost $100 billion to $200 billion implies the administration expects a second Iraq war to be two or three times more difficult than the first one.

Despite recent musings about deflation, wars are always inflationary. Money chases fewer goods, as labor and materials are diverted to military uses, boosting business costs and squeezing profits. Wholesale prices rose 122 percent from 1915 to 1920 and 52 percent from 1945 to 1948, but we are not talking about anything on such a horrific scale. News of an Iraq invasion would provoke a speculative and probably ephemeral rise in prices of metals and other military materials, as in 1990, but it would be a big mistake for the Fed to mistake that for sustained inflation.

Oil prices doubled in a couple of months after Iraq invaded Kuwait, approaching $40 a barrel, but the current situation is quite different. In 1990, there was a threat to Kuwait's oil, not just Iraq's, and there was some anxiety that a major power might end up taking Iraq's side in a conflict with the United States. Unlike 1990, oil is already fairly pricey today because (1) substantial risk of war has already been priced into the oil markets, and (2) the post-1991 "sanctions" have reduced world oil supplies while making the Iraqis more dependent on Saddam. In 1991, oil prices fell and stocks rallied when the United States attacked Iraq. But that was because pushing Iraq out of Kuwait reduced risks to world oil supplies. An attack on Iraq today would have the opposite effect.

The S&P stock index fell nearly 12 percent from 1941 to 1952, which spanned World War II and the Korean War. But risks of a relatively short war today probably explain only a fraction of the stock market's troubles, since even defense stocks have fared poorly. Risks of terrorism, on the other hand, have a paralyzing effect on business investments.

Perhaps the biggest risk of a war with Iraq is that it would divert the nation's security resources from fighting al Qaeda to fighting Saddam, and from homeland security to foreign affairs. Ambassador L. Paul Bremer III, chairman of the National Commission on Terrorism, recently told Fox News, "I don't buy the idea that there is a trade-off." But the trade-off is a mathematical certainty, not a matter of opinion.

It impossible to devote 100 percent of resources to two or three tasks at the same time. Assigning a higher priority to one thing (Iraq) means a lower priority for something else (Al Qaeda). The president cannot work more than about 60 hours a week, for example, so devoting 30 hours to a foreign war and 10 hours to the domestic economy would leave only 20 for homeland security and everything else. More troops "over there" means fewer over here. More intelligence agents monitoring Iraq means fewer watching out for a Taliban resurgence in Afghanistan or for al Qaeda cells plotting trouble in U.S. cities.

In short, war is still hell, even if we call it liberation. And the unavoidable diversion of effort, attention and resources to any foreign war also implies greater risk of domestic troubles, including domestic terrorism. The prospect of war with Iraq is not as hellish as some other wars, but it is not necessarily unavoidable, either. Time has a way of solving many problems, and only time will tell.

This article originally appeared on Creators.com on November 21, 2002.

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