April 12, 2004
by Irwin Stelzer
President Bush has made clear that nothing that happened in recent weeks has affected his resolve to continue efforts to bring peace, democracy, and prosperity to Iraq. Tony Blair will undoubtedly use the occasion of his visit to Washington later this week to brave the political fall-out at home by announcing that he intends to stand firmly with his American ally in their joint goal of turning sovereignty over to Iraqis come June.
Unfortunately for these politicians, the costs of the effort to convert the nations of the Middle East from the world’s tinderboxes to modern, democratic and prosperous states are here and now, and very visible, while the potential benefits are due to come later, and won’t be as easily identified.
Most obvious is the terrible cost in blood—the blood of coalition soldiers, and of innocent Iraqis caught in the crossfire between those forces and the assorted Saddamites, Islamic fanatics, and terrorists that oppose the democratization of Iraq. It is no disservice to the dead to point out that one of the economic consequences to America will be the increased difficulty of recruiting men and women to serve in the military. This comes at a time when the civilian labor market is recovering, a circumstance that always makes military service relatively less attractive to job-seekers.
So it is not unreasonable to guess that the military will soon have to offer better compensation to potential recruits, with negative consequences for the defense budget.
More significant, however, is an emerging shift in the nature of the forces deployed in Iraq. Private security firms are more and more prominent in the Iraq operation. The four Americans whose charred bodies were exhibited by Iraqi mobs were employees of one such firm, Blackwater Security. Quite by good chance, I ran into their replacements as they were headed to Iraq. All at one time served in the military; all have special training, either in the Green Berets or similar units; all have long-standing relations not only with Britain’s SAS, but with former military colleagues now working for other security firms.
As a result of the recent intensification of the fighting, outrage at the deaths of former colleagues, and long-standing relationships among the personnel they employ, the private security firms are forming formal and informal alliances. In the words of The Washington Post, we are witnessing the creation of the “largest private army in the world”, providing what Blackwater describes as “a new generation of capability, skills, and people to solve the spectrum of needs in the world of security.” This relatively new industry, which reportedly has more than 25,000 contract soldiers operating in Iraq, probably has annual revenues of something like $100 billion. We may be witnessing the privatization of war, with all of the increased labor costs associated with other privatizations.
Still, even with rising recruitment and labor costs, and the greater expenditure on armaments that the renewed fighting entails, the direct cost of the war is hardly a strain on the U.S. economy.
The administration has been adamant in its refusal to provide a cost estimate, even going so far as to omit the cost of the war from the budget the president submitted to congress. Informed observers, all of whom refuse to be quoted directly, are putting the number at $200 billion, which includes the cost of reconstructing the infrastructure that Saddam neglected and Iraqi looters virtually destroyed. That may be a lot of money, but it is the equivalent of only about one week’s GDP for America’s massively productive economy.
Matched against the potential benefits of a successful engagement, these direct monetary costs can only be described as trivial. If the American president and the British prime minister are right in believing that a stable and prosperous Iraq will be the payoff for their nations’ expenditure of blood and treasure, the benefits will include an increased supply of oil available to world markets; the replacement of an Iraq dependent on foreign aid with a self-sufficient Iraq; reduced support for terrorist operations by Saudi Arabia, Syria and Iran; and, eventually, a reduction in the cost of homeland security.
But if Iraq remains a world hot spot, the economic consequences of this war might increase sharply. The markets hate uncertainty, causing the risk premium built into the cost of capital and the price of oil to rise when the Iraq war takes a turn for the worse. Consumers, too, dislike uncertainty, which is why Gerd Hausler, director of international capital markets at the International Monetary Fund, says that more incidents like Madrid “would have an impact on the real economy; consumer confidence would probably be hit.”
Then, too, an Iraq in turmoil might prompt voters to replace president Bush with Massachusetts Senator John Kerry, who has promised voters a series of rather expensive goodies, to be financed by taxes on “the rich” (families earning more than $200,000) and on traitorous firms that outsource jobs and operate overseas. He has also promised to review all existing trade agreements, to refuse to sign any new agreements that do not meet the standards of his trade-union allies, and generally to tilt policy in a protectionist direction. Such a change from America’s traditional policy of free-trade-with-occasional-lapses will surely cost American consumers dear.
The fear of a roll-back of the Bush tax cuts prompted Patricia Chadwick, president of Ravengate Partners, investment advisors, to say, “The market is most concerned that Bush not be unseated.” Perhaps, but not certainly. Others think that a Democratic victory would cause share prices to rise.
What is certain is that this war has short-term costs, and that those costs will seem paltry compared with the long-term benefits of victory, which Bush and Blair are certain is within our grasp if we stay the course.
This article appeared in London’s Sunday Times on April 11, 2004.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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