Economists Agree Waging War in Iraq Is Cheaper than Containment

In 2002, there were two policy options facing the United States with regard to Iraq: go to war or continue containment. The path since the Persian Gulf War in 1991 had been containment. Did more of the same make economic sense, or would invasion be less expensive?

Invasion is the less expensive option, said Steven Davis, William H. Abbott Professor of International Business and Economics, during a panel discussion on economic aspects of the war in Iraq at Management Conference on May 18 at Gleacher Center. He was joined on the panel by Keith Crane, senior economist at the RAND Corporation, and moderator John Huizinga, Walter David “Bud” Fackler Distinguished Service Professor of Economics.

Davis outlined the economic analysis he conducted with Kevin Murphy, George J. Stigler Distinguished Service Professor of Economics,  and Robert Topel, Isidore Brown and Gladys J. Brown Professor in Urban and Labor Economics, which was published last spring by the National Bureau of Economic Research. Research showed “the regime would be hard to dislodge with containment,” Davis said. “Without war, it would remain.” And it would cost the United States between $200 and $300 billion, according the researchers’ calculations.

War, on the other hand, would cost between $106.5 billion, in the best-case scenario, and as much as $872 billion in the worst-case scenario, where everything fails after more than a decade and the United States reverts back to containment.

“There’s no cheap way to deal with Iraq,” Davis said. “We had to choose between two costly policy options.” To date the war has cost $750 billion in direct costs. “It could be worse,” Davis said, “if the lessons in it don’t work.”

These lessons include more consideration for the length and size of the occupation, how much it would cost to mount a carefully controlled occupation and reconstruction apparatus, and how to prepare the American electorate more effectively. “The pre-war debate missed the most important variables,” said Davis.

Now, said Crane, “The consensus is that you have to define goals for Iraq that might be attainable.” As a member of the Baker-Hamilton Iraq Study Group, he said, “We bumped heads with the administration because they didn’t set goals. They just had a vision of victory and prosperity.”

According to Crane, the key issues in Iraq are employment, the role of oil, and setting an economic policy. “There has been a loss of lives because we have supported unproductive policies,” he said.

Crane watched Iraq begin to recover due to oil output in 2004, he said, but by 2006 the GDP was half the level it was in 1975. “Iraq still remains very poor. And mismanagement is the cause of the decline, not the insurgency.”

The key factors determining future economic growth in Iraq include establishing security in regard to sectarian conflict and crime, securing stable oil revenues, lowering inflation, restructuring the oil and electric power industries, improving the technical competence of the Iraqi ministries and continuing price liberalization.

The Study Group’s top recommendations for economic policy in Iraq include:

• Keep oil revenues centralized; disperse revenues in part on a per capita basis
• Let the Iraqi dinar appreciate to curb inflation
• Continue to increase gasoline and diesel prices to reduce corruption and send the proper signal
• Contain increases in the government employment registrar; control the wage bill to be sure people are working

—Carmen Marti

Read article on "Cost of War" research by Murphy, Topel and Davis in the GSB Alumni Magazine