The impact of financing the Iraq war on the U.S. economy

Iraq has become not only the second longest war the U.S. has fought (Vietnam being the longest) but the second most expensive (WWII being the most expensive). The costs predicted by the Bush administration were wildly inaccurate. Those costs are semi-hidden from the public by being funded off budget. Regardless of if it is in the budget or not the borrowing by the government to finance the war has had a serious impact on the U.S. economy.

Economist and Nobel Prize winner Joseph Stiglitz addressed his concerns before the Chatham House in London this past week:

THE Iraq war has cost the US 50-60 times more than the Bush administration predicted and was a central cause of the sub-prime banking crisis threatening the world economy, according to Nobel Prize-winning economist Joseph Stiglitz.

The former World Bank vice-president yesterday said the war had, so far, cost the US something like $3trillion compared with the $50-$60-billion predicted in 2003.

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Professor Stiglitz told the Chatham House think tank in London that the Bush White House was currently estimating the cost of the war at about $500 billion, but that figure massively understated things such as the medical and welfare costs of US military servicemen.

The war was now the second-most expensive in US history after World War II and the second-longest after Vietnam, he said.

The spending on Iraq was a hidden cause of the current credit crunch because the US central bank responded to the massive financial drain of the war by flooding the American economy with cheap credit.

"The regulators were looking the other way and money was being lent to anybody this side of a life-support system," he said.

That led to a housing bubble and a consumption boom, and the fallout was plunging the US economy into recession and saddling the next US president with the biggest budget deficit in history, he said.

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The money being spent on the war each week would be enough to wipe out illiteracy around the world, he said.

Just a few days' funding would be enough to provide health insurance for US children who were not covered, he said.

The public had been encouraged by the White House to ignore the costs of the war because of the belief that the war would somehow pay for itself or be paid for by Iraqi oil or US allies.

"When the Bush administration went to war in Iraq it obviously didn't focus very much on the cost. Larry Lindsey, the chief economic adviser, said the cost was going to be between $100 billion and $200 billion - and for that slight moment of quasi-honesty he was fired.

"(Then defence secretary Donald) Rumsfeld responded and said 'baloney', and the number the administration came up with was $50 to $60 billion. We have calculated that the cost was more like $3 trillion.

"Three trillion is a very conservative number, the true costs are likely to be much larger than that."

Five years after the war, the US was still spending about $50 billion every three months on direct military costs, he said.

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