How the Wars in Iraq and Afghanistan Have Affected the U.S. Economy

 

Even though opinions may differ on whether the wars in Iraq and Afghanistan are justified from moral, political, or environmental viewpoints, the economic impact of the two conflicts is undeniably significant. This is hardly surprising:  a $2.4 trillion dollar war would impact many countries' economies. The American economy has been suffering from the wars, and there is tremendous concern arising from the huge sums of money spent every month financing the war. Conflict in Iraq and Afghanistan has also sparked debate on how wartime spending really affects national economic prospects—does it help the economy, in the way that World War II arguably ended the Great Depression? Or does it hurt the economy through wasteful spending, as has been said of the first Gulf War? Conflict in Iraq and Afghanistan has negatively impacted the U.S. economy, which can be seen by examining its effects on individual elements of the economy.

            One reason the wars in Iraq and Afghanistan have negatively affected the economy is because of their significant impact on the U.S. government budget. When the wars began, the Bush administration severely underestimated the enormous amount that would be spent towards the war effort. White House economic advisor Lawrence B. Lindsey predicted that "invading Iraq could amount to between $100 billion and $200 billion" (Teslik). It is now known that Lindsey grossly underestimated the cost, but in 2002 other government authorities, such as Mitch Daniels (who then headed the White House budget office), scoffed that Lindsey's estimate was "too high" (Teslik). The original Bush administration outlook on the Iraq/Afghan conflicts was that they would prove to be short, relatively inexpensive conflicts. The Bush administration believed the end results would be a model of democracy in the Middle East and controlled oil prices. Administration officials displayed a "cavalier attitude" towards wartime spending, "as if the sums involved were minimal" (Stiglitz and Bilmes). The outcome of this blind, irresponsible spending is a combined expenditure exceeding $2 trillion dollars. Defense and Homeland Security funding composed 23% ($696 billion) of the 2009 fiscal year budget (Guell 168). However, the "emergency appropriations" used to finance the wars are not accounted for in this total.

            The full effect of the wars' running costs on the U.S. government’s budget are unknown because of the nature in which the government has reported its war related expenditure. Only operating costs per month are reported, which are generally funded through "emergency appropriations." Operating costs per month for Iraq and Afghanistan are $12.5 billion and $16 billion, respectfully. This, however, does not include the additional $500 billion spent per year on the Defense Department, or the hidden expenditures on intelligence gathering (Stiglitz and Bilmes). These gigantic expenses have had a negative impact on the government budget, because the money could have been used instead to combat other economic problems, such as the ongoing recession. The opportunity cost of funding the war is surprising: just the Iraq budget for 2007 ($138 billion) would have provided 45 million Americans with Medicaid, hired 30,000 schoolteachers and built 400 schools, or provided weatherization for 1.6 million homes (Pollin and Garret-Peltier). Money that could be used to solve economic problems in the U.S. is being spent on the wars instead, and this is hurting the American economy.

            Conflict in Iraq and Afghanistan is not only hurting the economy via the government budget, but through decreased household spending as well. "The Joint Economic Committee, which estimated a $3.5 trillion cost through 2017, say the war will cost the average U.S. family $46,400 [in increased taxes]" (Teslik). An increase in taxes to pay for war expenditure inevitably means households will have less money to spend on other goods. According to basic economic principle, an increase in future taxes (to pay current war costs) means that aggregate demand will fall. As aggregate demand falls, there will be lower prices, less production, and reduced GDP. Therefore, the Iraq/Afghan conflicts have a negative impact on household spending, which in turn hurts the American economy.

            Warfare in Iraq and Afghanistan is taking a toll on prices of market commodities, mainly crude oil, which has a negative impact on the economy. Crude oil prices have spiked since the beginning of the conflicts. The Bush administration mistakenly assumed that war in Iraq would bring stable, lowered oil prices. "Iraqi oil production currently accounts for 3 percent of global oil production, and thus turmoil in Iraq can have a substantial effect on oil prices. This bears heavily on the U.S. economy" (Teslik). This means that the conflicts in Iraq and Afghanistan (along with increased world demand) have actually caused prices to rise and become more unstable. "Since governments then have to spend more [because of the war] on importing oil and on interest payments on outstanding debts, it becomes harder to balance budgets. Higher interest rates also lead to lower investment and consumer spending, declines in share prices, and a slowing of the economy" (Salameh 42). The spiking oil prices cause inflation, which is not a problem now but could become a major issue later, if oil prices continue to rise (and if interest rates are cut). "Before the 2003 invasion, oil cost less than $25 a barrel...the war changed that equation, and oil prices recently topped $100 a barrel" (Stiglitz and Bilmes). Evidently, the war is indeed forcing oil prices upward, decreasing the ability and willingness of consumers to spend money on other items, and negatively affecting the American economy as a whole.

            Another negative impact of the wars on the economy is evident in the increased national debt. Conflicts in Afghanistan and Iraq have taken a sizable toll on the national debt. Both wars are financed almost entirely through borrowing, which has increased the national debt since the inception of the wars. The Congressional Budget Office has estimated the direct cost of the wars through 2017 to be more than $1 trillion. Combined with an extra $705 billion in interest payments on this spending, the total cost of the Iraq and Afghanistan wars together could reach $2.4 trillion (Teslik). Since the wars are being financed primarily though borrowing, the added $2.4 trillion would worsen an already staggeringly $13 trillion national debt. This massive national debt increases interest rates for U.S. government to borrow money and enhances the "crowding out effect", where more government borrowing leaves little money for individuals and companies to borrow from. Iraq/Afghan conflict "is harming U.S. taxpayers by saddling them with an enormous debt burden, since the wars are being financed with deficit spending" (Sterngold). Americans may not necessarily feel this tax burden now, but eventually the government will need to raise taxes to pay off the increasing interest on the debt. U.S. fiscal priorities are being thrown out of balance due to the irresponsible spending on the wars. "The federal fiscal deficit in 2007 was $244 billion. Shutting down the Iraq War and using the fiscal savings to cut the deficit would mean a 57 percent deficit reduction" (Pollin and Garret-Peltier). Obviously, from a purely economic standpoint, it would be in the country's best interest to cut funding for the conflicts in order to begin repairing the economy.  

            The American economy continues to suffer from financing the "war on terror." Many aspects of the economy have been negatively affected, including the government budget, household spending, oil prices, and the national debt. Left unchecked, the enormous spending on the war effort will create a monstrous national debt that will have to be paid off by future generations. The Iraq and Afghanistan conflicts are quickly becoming economic disasters that need to be addressed immediately, before serious damage is done.

 

 Works Cited:

Bilmes, Linda J., and Joseph E. Stiglitz. "The Iraq War Will Cost Us $3 Trillion, and         Much More." The Washington Post. The Washington Post Company, 9 March 2008. Web. 3 July 2010.

Guell, Robert C. Issues In Economics Today. 5th ed. New York: McGraw-Hill/Irwin,          2010. Print.

Pollin, Robert, and Heidi Garret-Peltier. "The Iraq War Is Killing Our Economy."                AlterNet. Alternet, 18 March 2008. Web. 6 July 2010.

Salameh, Mamdouh G. "The Oil "Price Rise" Factor in the Iraq War: A Macroeconomic   Assessment." Energy Politics. Energy Politics, 2008. Web. 6 July 2010.

Sterngold, James. "Casualty of War: The U.S. Economy." SFGate.com. Hearst     Communications Inc., 17 July 2005. Web. 2 July 2010.

Stiglitz, Joseph, and Linda Bilmes. "The Three Trillion Dollar War." The Times & The      Sunday Times. Times Newspapers Ltd, 23 February 2008. Web. 2 July 2010.

Teslik, Lee Hudson. "Iraq, Afghanistan, and the U.S. Economy." Council on Foreign       Relations. Council on Foreign Relations, 11 March 2008. Web. 2 July 2010.

Thiele, Everett. "Military Spending: Cost of Iraq War is but the Tip of the Iceberg."             GlobalResearch.ca. Global Research, 20 July 2005. Web. 2 July 2010.