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Joseph Stiglitz presented a sobering economic assessment of the cost of war during an April 18 lecture at the Kellogg School.

Nobel laureate Joseph Stiglitz reveals true cost of war during Kellogg visit

Government accounting flaws, deception hide grim numbers associated with Iraq conflict, claims former World Bank economist

By Matt Golosinski

4/21/2008 - The United States is bleeding money. That’s the alarm sounded by Joseph Stiglitz in his new book The Three Trillion Dollar War, a narrative that details what he and co-author Linda Bilmes, a Harvard professor of public finance, say are the staggering hidden costs of America’s current Iraq War. He brought his discussion to the Kellogg School on April 18, speaking to a capacity audience from Kellogg and the larger Northwestern University and Evanston communities.

To hear the former World Bank chief economist and senior vice president detail the economic circumstances associated with the conflict, now in its fifth year and costing U.S. taxpayers $12 billion each month, is to enter a realm that rivals the bleak, madcap world conjured by Joseph Heller’s classic satire Catch-22. For Stiglitz, a 2001 Nobel Prize winner, the tragedy of war is compounded by significant — and deliberate, he contends — flaws in how the Bush Administration has accounted for the war’s expenses.

Citing the broader economic implications that extend beyond official budgetary figures that he said obscure the war’s reality, Stiglitz believes the U.S. government is “vastly undervaluing” the war’s impact on the economy, including its negative influence through lost opportunities that might otherwise shore up domestic infrastructure and education or enhance technological innovation. Stiglitz calculated that one-sixth of the Iraq War’s cost would fund Social Security for the next 75 years, while “just a few days of fighting” would provide healthcare to all U.S. citizens currently lacking it.

By using a cash accounting system that minimizes up-front costs while obscuring or ignoring massive long-term expenditures, such as those associated with equipment repair and replacement or healthcare outlays for soldiers injured or killed in the war, the U.S. government has convinced some Americans that the Iraq conflict carries a far more modest price tag than Stiglitz and Bilmes say is accurate. In fact, Stiglitz, a professor at Columbia Business School, believes his own $3 trillion figure is “conservative.” The real figure may be closer to $4 or even $5 trillion, he said, noting that the Bush Administration’s current tally is only $600 billion — dramatically larger than its initial estimate of $50 to $60 billion, but well off the mark that Stiglitz has calculated using what he considers a more accurate system called accrual accounting. He said that this approach assesses many of the inevitable future costs associated with the war, including demobilization and restoring the military to its pre-war strength. But chief among these costs is long-term care for those killed or disabled by the conflict, expenses that Stiglitz said will continue for the next 50 years.

“Disability costs are a big chunk of change,” he told the audience in the Kellogg School’s James L. Allen Center, noting that the country is paying about $4.3 billion a year in healthcare for those soldiers injured in the first Iraq War, which lasted only 100 days in 1991. “Today, the costs of a years-long war will surely be much greater and will go on for decades,” Stiglitz said, adding that improved battleground medical treatment has resulted in more soldiers surviving — his figures were 15 for every 1 fatality — a favorable development, but one that carries significant lifelong costs to care for those people. “We have created an unfunded entitlement as big as the hole in our healthcare system.”

While the Bush Administration’s cash accounting practice gives the appearance of fewer expenses, Stiglitz said it also drives short-term decisions that can have deadly consequences. He cited the examples of soldiers who were issued no body armor early in the war, or those whose vehicles were inadequately armored against improvised explosive devices. Equally troubling, he said, were instances of soldiers who, after being maimed and hospitalized, discovered that they were docked by the military for the remainder of their contracted service pay. (Congress is likely to change this policy soon, Stiglitz said.)

Deliberate accounting choices also play a part in the United States’ official tally of its soldiers killed or injured in Iraq, Stiglitz said. Official injury numbers represent only half of the actual total, he said, citing data he and Bilmes obtained from veterans’ organizations who themselves had to use the Freedom of Information Act to get the full statistics released. The government, Stiglitz indicated, only counts injuries it considers the result of direct hostile conflict, not those it reckons as accidents. As an example, he noted that any U.S. casualties from a helicopter shot down during daylight fighting would be numbered among the official tally. If that same helicopter, flying at night because day travel is too dangerous, crashes without coming under enemy fire, the injuries are not officially tabulated as battle casualties, Stiglitz said. Importantly, however, the U.S. taxpayer will be responsible for funding all such war injuries, whether or not these appear as “official” in government records.

In addition, the economics surrounding how the war is being fought — with significant privatization through contractors like Blackwater and Halliburton — creates “perverse incentives,” according to Stiglitz. With salaries up to five times higher for private security forces, the U.S. military is faced with serious financial challenges when trying to recruit talent or retain those eligible for discharge at the end of their tours. “The administration wanted to convince citizens that we can do war on the cheap,” Stiglitz said, but its policies actually have increased the military’s costs since the armed services must now offer more money in salary and bonuses to compete with private contractors.

Stiglitz also pointed to what he considered broader economic mistakes made during the last eight years of the Bush Administration, which have contributed to the U.S. deficit ballooning from $6 trillion to $9 trillion, with about a third of that increase “directly due to the Iraq War,” according to Stiglitz. What’s more, that economic circumstance has resulted in some 40 percent of war costs actually being funded by foreign countries, through investments in instruments such as Treasury bonds, a situation Stiglitz said leaves the United States “more vulnerable to global volatility.” He faulted “lax regulation” and a “reckless increase in liquidity” by the Federal Reserve under former Chairman Alan Greenspan and current Chairman Ben Bernanke as contributing to the recent real estate bubble and credit crunch, and considered this fiscal policy an attempt to prop up a fundamentally flawed economy whose collapse during the early years of the war could have eroded public support for the military intervention.

Stiglitz, chairman of the Council of Economic Advisers from 1995-1997, also criticized the Bush Administration for cutting taxes during wartime, thereby passing the costs on to future generations.

For the first time in U.S. history, “We have put this war entirely on our credit card,” he said.