NCPA - National Center for Policy Analysis

The Costs of War With Iraq

March 6, 2003

With an American-led attack on Iraq likely, the unknown economic consequences are being blamed for the sick state of the world economy.

Governments tend to underestimate the cost of war. Economically, costs can be broken into three types: the direct military costs; the potentially far larger indirect costs of peacekeeping, humanitarian assistance and reconstruction; and the macroeconomic costs of lost output.

  • The cost of the six-week Gulf war in 1991 was $80 billion in today's prices (most of it paid for by America's allies).
  • Assuming a similarly short war, the Congressional Budget Office and the U.S. House Budget Committee have both estimated a total military cost of around $50 billion, or 0.5 percent of America's gross domestic product (GDP), while other observers expect that a more protracted war could cost America as much as $150 billion.
  • One economist thinks that peacekeeping and humanitarian assistance and reconstruction could cost America between $100 billion and $600 billion over the next decade.
  • The macroeconomic costs of lost output could range between $100 billion and $1.9 trillion, spread over a 10-year period -- or in other words, as much as 2 percent of American GDP every year.

According to economist John Llewellyn, the risks to the global economy are greater now than at any time since the 1973-74 oil crisis. Even if the war goes well, he argues, it will probably not be the panacea that investors are hoping for.

Source: Special Report, "War and Iraq: The economic risks," Economist, February 22, 2003.


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