[Peace-discuss] Price of Iraq occupation could dwarf war's cost

[patton paul]

Price of Iraq occupation could dwarf war's cost
Wed March 26, 2003 05:46 PM ET
By Jonathan Nicholson

WASHINGTON, March 26 (Reuters) - The price of a post-war U.S. occupation
of Iraq could be so big that some experts fear it would make the cost of
combat alone pale in significance.

This is especially true because consideration of the war's ultimate price
tag, and how to pay it, comes at a time the U.S. government is already
awash in red ink.

This week, the White House asked Congress for almost $75 billion in extra
money to pay for a relatively short war in Iraq.

While Congress has yet to set aside funding for rebuilding in the current
budget debate, worries over the war's eventual costs were cited in the
Senate's Tuesday vote to whack U.S. President George W. Bush's proposed
10-year tax cut of $726 billion in half.

For a government that spends more than $2 trillion a year, a one-time
expense of $75 billion is relatively small. It will, however, add to what
the Bush administration has already estimated will be a record budget
shortfall of $304 billion in 2003 and it will mean additional debt will be
added to the government's current outstanding debt of $6.400 trillion.

The Council on Foreign Relations, in a recent report, estimated that the
United States may need to station 75,000 troops in Iraq, which, with aid
efforts, could cost $20 billion a year "for several years."

Bob Bixby, executive director of the Concord Coalition, a balanced budget
advocacy group, said the annual costs could run between $10 billion and
$30 billion.

"No one really has any idea about how much this might cost," said Lyle
Gramley, a former Federal Reserve governor and a senior economic
consultant with Schwab Washington Research Group. "It could be very, very
big bucks."

DIFFERENT WARS, DIFFERENT COSTS

In World War II, the United States ran up huge amounts of debt to finance
a global war fought on two fronts. While it left the war with a big debt
burden, it quickly worked it off. Publicly held debt as a percentage of
U.S. gross domestic product fell to 57.3 percent by 1955, after peaking at
108.6 percent in 1946.

In Vietnam, the increasing U.S. involvement throughout the decade of the
'60s was also financed by government borrowing, though to a much smaller
extent. The decision to finance the war at the same time as then-President
Lyndon Johnson's Great Society social programs led critics to say the
administration was buying both "guns and butter."

The last major U.S. war, the original Persian Gulf War in 1991, was a
different matter. As part of a much larger international coalition, the
United States successfully raised almost all of the approximately $61
billion cost through international contributions.

A Treasury spokesman on Tuesday declined to comment on whether Iraq
occupation costs could affect Treasury's long-term borrowing patterns.

There is, however, a vert small cash cushion left over from the 1991 Gulf
War. The Defense Cooperation Account, where money from U.S. allies was
deposited to help pay for the first Gulf War, still had about $657 in cash
and another $13.1 million in holdings of U.S. government securities on
hand at February's end, according to the Treasury Department.

CREEPING GROWTH?

The cost of keeping troops in Iraq after the war depends on several
variables, experts say. The size and duration of a post-war U.S. operation
is a major question and likely would depend on how well a post-Saddam
Hussein regime is accepted. Another variable is whether the costs could be
shared with other nations or defrayed through oil sales.

But if the United States is faced with a long, solitary commitment, it
could have consequences for the economy.

One problem could be a creeping growth in expenses reminiscent of the
Vietnam era. The costs of the continued escalation of U.S. efforts in
Vietnam were not foreseen and, some argue, played a part in the rise of
inflation in the late 1960s and early 1970s.

"Vietnam snuck up on budgeters," said Lou Crandall, chief economist with
Wrightson ICAP.

Another possibility is a return of the early '80s economy, according to
Schwab's Gramley. Seeing an expensive military buildup leading to massive
deficits under the Reagan administration, the Federal Reserve was
compelled to keep inflation-adjusted interest rates high in order to hold
inflation in check, he said.

Those rates, he said, kept productivity growth low and economic growth
muted.

"That, I think, is the risk we run," he said.

Others think those worries are overblown. Stephen Stanley, senior market
economist with RBS Greenwich Capital, said it's unlikely other nations
would refuse to underwrite or take some part in post-war Iraq operations.

Stanley also said capital markets would not necessarily hear alarm bells
from a somewhat higher budget deficit.

"Ultimately," he said, "it's a question of what is its relation to the
size of the economy and where do we think it is headed."
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