The Trillion Dollar War Of Choice And Its Constraints On Macro Policy

Or at least $805.6 billion as of the end of September, not including debt service and additional reset costs; around $940 billion including interest payments.

As the US economy faces the prospects of stagnant growth or recession, it is of interest to see why the scope for fiscal policy is so circumscribed — that is why is the debt level so high given that in the last year of the Clinton Administration, we were paying down debt? Figure 1 depicts part of the answer (other parts, here).


To understand the magnitude of the cumulative nominal costs as of September 2011, it is useful to normalize by nominal GDP. As of 2011Q2, GDP was $15 trillion SAAR. Hence, cumulative expenditures (not including the resulting incremental interest rate payments) was equivalent to 5.4% of one year’s economic output. Including the interest burden, the (publicly held) debt to GDP ratio would be 6.3 percentage points lower than what it currently is (65.0%).

Former Vice President Dick Cheney’s remarks about the benefits of the United States’ expedition in Iraq are interesting in this context. From CNN:

When asked if the current fatality count of more than 4,000 troops in Iraq, coupled with the hundreds of billions of dollars spent on the war, made it a worthy endeavour, Cheney said “yes.”

“No doubt about it,” Cheney said. “When we went in and took down Saddam Hussein, first of all, we got rid of one of the worst dictators in the world.”


Still talking about the war in Iraq, he later said: “I think we made exactly the right decisions.” “There were a lot of things that came out of what we did in Iraq that were very positive,” Cheney said. “We’re much better off today with Saddam Hussein gone. We’ve got Moammar Gadhafi gone. We got a lot done. We didn’t get it all done, but we got a lot done.”

Vice President Cheney makes no mention of the costs.

Note that figure 1 does not incorporate the debt servicing costs associated with these expenditures which were unmatched by any tax revenue increases. Nor does it necessarily include all the reset costs to refurbish and restore the equipment that experienced economic depreciation during operations (i.e., was worn out). [CSBA, 2011, pp.8-9] [CSBA, 2009, p. 29]

It is also of interest to tabulate the costs in real (i.e., inflation adjusted) dollars, so we know the resource costs associated with the invasion and occupation of Iraq. Those are depicted in FY2010 dollars in figure 2.


Real direct costs as of end-September will be 857 billion FY2010$; it will be approximately 874 billion as of end of FY2012.

Clearly, these direct fiscal costs are not the only costs associated with this venture. Since some Econbrowser readers have requested it, I also include a tally of US casualties in the Iraq theatre of operations.


By the way, the macro challenge posed by the unfunded war (combined with tax cuts and a new, unfunded, Medicare Part D mandate) was not unforeseen. Nearly five years ago, I predicted that running big budget deficits when the US economy was near full employment would constrain fiscal policy in a dangerous way when we encountered a downturn. [1].

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