And this was the war to save the US economy

The costs of war: a looming crisis

by Regan E. Doherty

WASHINGTON--As casualties in Iraq continue to mount, one of the nation's leading economists has suggested that not only have we have entered a moral and strategic crisis, we are likely to confront a financial crisis as well because the administration has not raised the money to pay for the war.

The Iraq war and the “war on terror” will have tremendous financial consequences not just for us, but also for our children and grandchildren, says Robert D. Hormats, vice chairman of Goldman Sachs International, who has held high posts in three administrations, most recently serving as assistant secretary of state for economic and business affairs in the Ronald Reagan administration.

Hormats, who cites estimates of $2 trillion for the eventual cost of the war, believes the Bush administration’s long-term financial strategy, including its financing of the Iraq conflict and the war on terror, does not adequately incorporate future national security needs.

“We are living in a post-9/11 world with a pre-9/11 fiscal policy,” Hormats, the author of The Price of Liberty: Paying for America’s Wars, said in a presentation at the Council of Foreign Relations last week.

Throughout American history, wartime administrations and Congresses have reduced funding for domestic projects in order to make room in the budget for high-priority military spending, Hormats says. They also raised taxes and initiated bond drives to generate money for their war effort.

This has not happened with the Iraq war, however, or with the overall security needs stemming from the attacks of Sept. 11, 2001.

In fact, in 2003, just prior to the invasion of Iraq, Congress enacted a large tax cut proposed by Bush to stimulate the economy. It did so with “little consideration of its significant long-term revenue costs and whether it was appropriate during a period of elevated national security spending,” Hormats says.

Hormats says that after September 11, there were no calls for patriotic sacrifice, as there had been in previous wars. Instead, Americans were encouraged to increase spending to boost the economy, reversing a precedent set by nearly every other wartime president.

“By supporting and signing expensive spending and tax legislation, President George W. Bush broke with a tradition that had extended from Madison through Lincoln, Wilson, Franklin Roosevelt, Truman, and eventually, Johnson and Reagan,” Hormats writes.

Soon after September 11, President Bush stated that “Americans should not expect one battle, but a lengthy campaign, unlike any we have ever seen.” If this is truly the case, Hormats suggested, shouldn’t our fiscal strategy be altered to accommodate this new reality?

Instead, tax cuts and spending on “politically popular but security-irrelevant domestic programs” have been enacted without regard for increased national security needs, Hormats says.

Some were initially skeptical of such tax cuts. Hormats points specifically to Sen. John McCain, R., Ariz., who studied military history at the Naval Academy and was familiar with war costs being underestimated. McCain, now a Republican presidential contender, suggested that he was willing to consider a new tax cut, but would not support it “until Congress and the administration have a better understanding of the costs of war and peace.”

In the run up to the invasion of Iraq in March 2003, there was “a general view that the war would be short and cheap,” Hormats says.” It was widely projected that oil would pay for the war and reconstruction, despite ample evidence to the contrary.” But Paul Bremer, who ran the U.S. occupation authority in Iraq, acknowledged right away that the oil infrastructure was “in terrible shape” due largely to economic sanctions.

“There was an effort to soft-pedal the costs,” Hormats said.

Historically, wars have prompted significant changes in fiscal policy, specifically dramatic increases in taxation and foreign loans. Hormats’ book takes its title from Alexander Hamilton’s statement that the Revolutionary war debt incurred from foreign loans was “the price of liberty.” Woodrow Wilson, too, reconciled himself to massive borrowing during World War I. Seeing the conflict as ‘the war to end all wars,” he felt the debt was justified.

According to Hormats, the war on terrorism poses a unique financial challenge. While the Cold War featured mutually-assured destruction, costly to both sides, the war on terror is “entirely asymmetrical,” he said, citing claims by Osama bin Laden that Al-Qaeda spent only $500,000 for the September 11 attacks, which cost the United States more than $500 billion.

“It cost very little for Al-Qaeda to perpetrate the attacks, but it costs us a lot to respond,” he said.

This kind of asymmetry, accompanied by the financial demands of our presence in Iraq, would seem to call for a dramatic shift in financial strategy.

Part of the reason such a shift has not occurred, Hormats believes, is the relatively small impact the Iraq war has had on the economy overall. In contrast to both world wars, the cost of fighting in Iraq represents only 1 percent of our GDP, compared to 45 percent for World War II, 15 percent for the Korean War and 10 percent for the Vietnam conflict.

The total cost of the Iraq war has been estimated at $2 trillion. Part of the ultimate cost, Hormats believes, must include a significant rebuilding of the military, specifically replacement of equipment that has been destroyed or worn out. However, the “almost certain souring” on military spending that will likely accompany our withdrawal from Iraq due to human costs and wartime fatigue may prevent such replenishment, ultimately impairing our ability to defend against a future attack.

“The true cost of this war has not been well spelled-out,” Hormats said.

A reassessment of short- and long-term budgetary priorities and a review of how taxation, borrowing and spending should be managed over coming decades must be undertaken, and soon, Hormats says. Sound national finances are necessary for the country’s military strength, and precarious spending could have horrendous consequences for the nation’s future preparedness.

“The current long-term direction of U.S. fiscal policy is inconsistent with, and could ultimately undermine, America’s national security.”

Another attack, Hormats says, could also precipitate a dramatic reduction of foreign investment in the U.S. and trigger a spike in interest rates and a collapse of the dollar.

In addition, Hormats noted, we will soon be faced with a crucial domestic need: the rapidly rising retirement and health-care costs of an aging population. Security concerns and costs will collide with unprecedented health care expenses, the brunt of which will fall on future generations.

Posterity, Hormats writes, was a “compelling preoccupation of the founding fathers,” one that the current administration seems to disregard.

Infographic:
According to Congressional Research Service, Congress has appropriated approximately $510 billion in funds for Iraq, Afghanistan and enhanced security:
 $378 billion for Iraq (75%)
 $99 billion for Afghanistan (20%)
 $27 billion for enhanced security (5%)
 $5 billion that Congressional Research Services cannot allocate

Original article posted here.