Thursday, March 30, 2006

The Economics of the Iraq War

Can economics shed light on whether the Iraq War was a good policy decision? Economists tend to think that economics can shed light on almost all policy decisions. After all, aren't almost all policy decisions about comparing costs and benefits? And isn't that what economics is all about?

Several economists have taken this perspective and written about the Iraq War. In today's NY Times, Princeton economist Alan Krueger provides a summary. Here is an excerpt:

"The Chicago economists [Steven J. Davis, Kevin M. Murphy and Robert H. Topel] argue that anticipated improvements in Iraq's living standard, once the country stabilizes, tip the balance in favor of invasion over containment, which in their view had costs that were "in the same ballpark." They also argue that the number of Iraqi fatalities since the invasion is probably no greater than would have been the case under Mr. Hussein.

"But even if one accepts all of their estimates, their results implicitly raise another question: Why intervene in Iraq and not a country like Sudan, where genocide and oppression are at least as much an affront as they were in Iraq, and where the cost of intervention and prospects for improving lives may offer a better benefit-to-cost ratio than is likely in Iraq?"

If you want to pursue this topic further, note that Chicago economist Gary Becker has recently written about the Iraq war on his blog here, as has his legal scholar co-blogger Richard Posner here.

If you really want to pursue this topic further, you can delve into the longer, more comprehensive studies. One of the first from 2002 was by Yale economist William Nordhaus, which you can find here. The Chicago study by Davis, Murphy, and Topel, updated in February 2006, can be found here.

A study by Linda Bilmes of Harvard and Joseph Stiglitz of Columbia can be found here. The Bilmes-Stiglitz study got a lot of media attention, such as this article, because it estimated the cost of the war could exceed $2 trillion. Krueger and Becker both discuss this study, often critically. Here is what Krueger says about the Bilmes-Stiglitz estimate:

"This is arguably too high for several reasons. First, it counts future interest payments on the debt created by military spending as well as the direct expenditures. (This is analogous to counting both the sale price of a house and the cost of future mortgage payments as the cost of buying the house.) Second, it counts elevated military recruitment costs that incorporate a premium for higher risk of death or injury because of the war as well as the predicted direct cost of the deaths and injuries; this is double counting if the risk premium is adequate. Finally, it ascribes a big increase in the price of oil to the war, and, as a result, a loss to the American economy of almost half a trillion dollars."

In the end, are we any closer to answering the question of whether the Iraq War was a good policy decision? In my view, one cannot help but agree that the subtitle of the Krueger article captures the essence of the problem: Imponderables Meet Uncertainties.