the war in Iraq continues in the Middle East, the economy is hitting
a rough patch here at home. In fact, the cost of the war and the
economic impact of the credit squeeze are the two most commonly
addressed topics in this column space. But are these two events
related to each other? A Nobel Prize-winning economist from Columbia
business school linked them last week, in a presentation to the
Chatham House think tank in London.
Professor Joseph E. Stiglitz said that the Iraq war "caused
the slowdown in the United States," estimating the actual total
cost of the war to date at $3.3 trillion. This estimate far exceeds
the budgeted cost of $500 billion, because Stiglitz is including the
indirect medical and welfare costs of returning soldiers.
"Three trillion is a very conservative number," Stiglitz
said. "The true costs are likely to be much larger than
that." Donald Rumsfeld, defense secretary in 2003, originally
estimated the total cost of the war would total between $50 billion
and $60 billion, just 10 percent of the current direct budgeted cost
to date, and probably less than 2 percent of the actual cost based
on Stiglitz’s analysis.
Stiglitz, the author of multiple books on globalization, also
concluded that the unexpectedly large ongoing war expense forced the
central bank to flood the economy with easy credit to temporarily
absorb the economic impact. This policy led to the overextension of
credit and subsequent pullback currently under way in the banking
and housing industries. "The regulators were looking the other
way and money was being lent to anybody this side of a life-support
system," Stiglitz said.
With the five-year anniversary of the initial invasion coming in
mid-March, the war in Iraq is now the second longest military action
(behind only Vietnam), and the second most expensive. Only World War
II cost more money to wage. With this perspective, it is not
difficult to imagine that the cost of war, both directly recognized
and unrecognized, could have a complex impact on the American
We already understood that the slowing economy was caused by
tightening lending standards, combined with poor visibility into the
hidden risk embedded in mortgage-backed securities. Now, economists
may be concluding that our current situation is far more
Here in Waukesha, home values are dropping, and new home
construction is collapsing - housing starts in southeastern
Wisconsin fell 19 percent in 2007. These conditions are occurring as
a direct result of the tightening credit in the banking industry.
The tightening credit causes the loss of jobs and homes, resulting
in a downturn for many local businesses. Just last week, Signature
Lighting in Waukesha announced that the store will be closing after
30 years in business, due to the home construction market collapse.
Did the cost of the Iraq war put Signature Lighting out of business?
In retrospect, it seems plausible.
The direct cost of the Iraq war for Waukesha County, based on
Waukesha’s portion of the $500 billion in total approved budget,
is $804 million to date. By itself, that’s enough money to provide
health care for every child in the entire county, and send each of
them to college for four years. The $804 million also represents a
$720 million excess over Rumsfeld’s original 2003 estimate. The
total direct taxpayer cost for the state of Wisconsin to date is a
staggering $8.3 billion.
But if Stiglitz is correct in his analysis, the real economic
impact on Waukesha may extend far beyond the direct expenses to
taxpayers. Start with $804 million in direct tax dollars, and add
the underestimated costs of necessary health care and social
programs for veterans, in addition to a massive nationwide credit
problem made worse by the over-extension of easy credit during the
early years of the war.
Actions really do have consequences, even when those actions
occur halfway around the world. As a result of the extreme
complexity buried within our economic system, the reasoned opinion
of a Nobel Prize-winning economist is sometimes required to remind
us about the obvious impact of those consequences.
With this information in hand, the continuation of the War in
Iraq transitions from a geopolitical debate to an economic debate -
a critical portion of the discussion which is long overdue. It’s
time to ignore the political rhetoric and listen to the economic
experts, before we find ourselves repeating the 1930s in the name of
(Tim Schilke is the author of "Growing up Red" and
lives in Grafton. His column runs Wednesdays in The Freeman.)