The Price of War
December 14, 2002

Two major policy initiatives dominate in the Bush Administration. The first is the march toward war with Iraq, although there remains an outside chance that battle will be avoided at the last minute. The other is to rejuvenate the economy with a series of dramatic tax cuts.

Yet the Administration is avoiding any link between the cost of waging war and its economic strategy. That's a big mistake, because how we pay for war will dramatically impact the economy.

The price of war has varied greatly throughout U.S. history. But the Vietnam War experience is instructive. Like now, the United States was the world's pre-eminent economic and military power. Back then, policymakers also had an incentive to play down the outlays required to fight the North Vietnamese. Yet the Pentagon's initial cost estimates were way too low—the military misjudged by 90 percent. The U.S. government tried to maintain support for an unpopular war by spending more on both "guns and butter." The effect was to unleash chronic inflation that took another quarter century to bring under control. The budget deficit started its long climb to steep levels of the '80s and early '90s. The long productivity boom of the '50s and '60s came to an end.

Of course, there are so many imponderables when it comes to war that it's impossible to come up with an accurate estimate. Yet that doesn’t mean it isn't worth trying so that citizens can understand what they are up against. A group of distinguished scholars for the American Academy of Arts and Sciences has prepared a report. Their cost range is $99 billion with the most optimistic assumptions to $1.9 trillion for a worst-case scenario.

An economic reckoning doesn't take into account the benefits of disarming Saddam Hussein. There's no question the United States can afford to wage war. No, the issue is that the Administration needs to come clean on what financial sacrifices will be asked of taxpaying civilians while the military and reservists go to war. The Administration's new economic team has been assembled to sell a package of tax cuts. But if the price of battle with Iraq starts adding up into large numbers—$200 billion, $400 billion, $1 trillion—how does the government propose to meet the tab? By borrowing, and sending the budget deficit into the stratosphere? Cutting government spending? Rescinding tax cuts and maybe a surcharge on the wealthy to pay on time? Depreciating the currency with inflation?

The answer matters for the long-term health of the economy. Despite the economic downturn, much has gone right with the economy over the past decade. Productivity, the key to higher standards of living, has been strong for the past seven years. High-tech innovation has transformed the workplace. Prices are stable in the United States. How durable these gains may be largely depends on whether the Administration publicly moves to link its two major policy programs. So far, the outlook isn't heartening.

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