Transcript: Remarks by Harvard Professor Linda Blimes on the cost of the Iraq War on March 21, 2013

Transcript of remarks by Linda J. Blimes, Harvard Kennedy School Professor and co-author of The Trillion Dollar War, on the cost of the Iraq War at the Carnegie Endowment for International Peace in Washington D.C. on March 21, 2013:

I am really pleased to be here today at this wonderful institution, and as I was preparing for this talk I was re-reading some of the papers written by Carnegie Endowment scholars in 2002 and 2003, particularly by Jessica Mathews, and they argue compelling – they were some of the few voices arguing compelling that the U.S. really did have other options, that the U.S. could have pursued an enhanced inspection process, that the U.S. could have allowed the inspectors to complete their jobs.

And as we all know, that advice was ignored. And there were a number of voices at the time that did call for restraint. There were a number of voices that suggested that the war could cost far more than we had anticipated.

But as is typical in the history in the cost of wars, those who are most in favor of going to war typically are most optimistic about how long it’s going to take and how much it is going to cost.

And you may recall back to that time 10 years ago when we were told that the war needed to happen very quickly before the summer became too hot for our troops and that it would be quick and cheap.

So 10 years later that decision to ignore the voices of caution has cost us – has literally cost us – trillions of dollars and counting.

And you may recall that before the war the Bush administration had predicted that the war would cost about $50 to $60 billion. That was the estimate from Donald Rumsfeld and Mitch Daniels and Dick Cheney.

And in fact, Larry Lindsey, the top economic adviser in the Bush administration, was fired for saying that the war might cost up to $200 billion.

And Larry subsequently wrote a book in which he argued that many of the problems that occurred later on in the war were related to the fact that no one early on was willing to confront the true potential costs in those early days.

Today, the U.S. has already spent $2 trillion in direct outlays for Iraq. Over $3 trillion if you include some of the indirect costs that I’ll describe and some of the Afghanistan costs.

And at this point, as we’re thinking about the difference between $50 billion and $3 trillion, I usually remind my students about the difference between $1 billion and $1 trillion because they kind of sound the same. Just sort of thinking about it – know that if you had a million thousand dollar bills stacked up on the table here this would be about 4 inches high. And $1 billion would be about 350 feet, which is – the Washington Monument is 555 feet and the Capitol dome is 268 feet – so somewhere in between that range. And a trillion thousand dollar bills is 65 miles high.

So we’re really talking about an order of magnitude – as the definition of order of magnitude – bigger when we think about the war costs.

But that out-of-pocket cost is just a fraction of the total cost.

Of course, there are many costs. There are costs to Iraq. There are costs to the regions. There are opportunity costs of what we might have done with the money.

But this morning, I’m going to focus on 3 areas of implications of the costs as follows.

First, I want to argue that one of the most significant challenges to future U.S. national security policy is not going to stem from any external threat but simply from coping with the legacy of cost – the legacy of the costs from the Iraq war, from the wars that we have already fought.

Second, I’ll argue that the costs of war are not only high but unpredictable. The Iraq war cost far more than originally estimated but it also set off a chain of events that far-reaching economic consequences.

And third, we discovered that the U.S. lacks any kind of system to track war costs, and that by ignoring the costs, we made it much easier to make poor choices.

So let me turn first to the first point – the legacy of costs. The legacy is the long-term commitment we have made to members of the military, to veterans, and their families.

Historically, the bill for war costs always comes due 30 to 40 years after the war. The peak year for paying disability benefits to World War I veterans was in 1969 – more than 50 years after armistice. The peak year for paying World War II veterans benefits was in the late 1980s. Payments to Vietnam and Gulf War I veterans are still climbing, and even the first Gulf War, which only lasted for a few weeks, is a war that cost us more than $5 billion a year in disability benefits, which is twice the cost – the annual cost for paying for all 400 national parks.

But the magnitude of future expenditures will be much higher for Iraq because this war has been characterized by much higher survival rates, more generous benefits, and new expensive medical treatments.

Between 2001 and today, the Department of Veterans Affairs – the VA – budget has increased in real terms from $61 billion per year to $140 billion per year. So from 2% of the U.S. budget to 3.5% of the U.S. budget. And much of this growth was due specifically to the Iraq and Afghanistan wars.

And here when I speak about veterans, I am including both Iraq and Afghanistan veterans because so many of the veterans fought in both wars, and the VA does not actually keep statistics separately so they’re all aggregated.

But more specifically, when you think about many of the injuries and traumas that have occurred as a result of the past decade of war, it has been the cumulative effect. For example, post-traumatic stress that has been exacerbated by that third tour of duty in Afghanistan after severe firefights in two in Iraq.

I don’t want to overladen you with statistics but I’m about to. So let me go through a few number here.

Since 2002, the number of men and women who have been deployed to Iraq and Afghanistan is 2.5 million. 1.56 million have returned home and left active duty and therefore become eligible for veteran’s medical care and benefits.

Now, we knew looking at the histories of past wars – when Joe Stiglitz and I were writing in 2008, we knew there would be long-term costs, consequences, and we predicted that the costs of medical care and disability benefits would grow. We predicted that by today 45% of new veterans would be receiving medical care in the VA and that 40% would have applied for disability benefits. But we were wrong. Our estimates were far too low. The VA is actually treating not 45% but more than 56% already, which is more than 860,000 people, and more than half – more than 50% – of returned veterans have already applied for permanent disability benefits of which currently 98% get approved.

This reflects a great deal of suffering.

253,000 troops have suffered a traumatic brain injury of which 20% have been moderate to severe.

One-third of veterans returning are diagnosed with mental health conditions, in many cases, concurrent with traumatic brain injury.

145,000 veterans are 80%, 90%, or 100% disabled in the ratings system, which means typically that in addition to veteran’s benefits they also qualify for Social Security disability insurance.

And we know that, as in previous wars, veterans medical and disability compensation will rise as veterans get older and suffer complications from injuries they sustain during war time.

We have also found out that in our system for transitioning veterans back into civilian life is fundamentally broken. The VA has spent more than $5 billion every year for the past 4 years just to hire more claims processing employees and to upgrade IT [information technology] systems but as you probably read in newspapers the backlog of claims is still more than 1 million and it keeps growing.

And veterans of the war, particularly my current area of research – women veterans, are suffering from high levels of – higher levels of unemployment, homelessness, suicide, depression, substance abuse, and divorce than the civilian population of their age.

So in total, when you take into account the amount that we have already spent for veteran’s medical care, disability benefits, and all the special programs and computer investments, readjustment counseling, et cetera that the VA has spent on this effort, it comes to about $134 billion.

But we estimate that there is another $836 billion that has already accrued in these disability benefits and medical benefits and Social Security benefits, and that is the present value of what we will owe in the next 40 years not even counting what happens after the veterans retire.

Let me turn – still as part of the first point but to a second part of this cost legacy, and that is being felt in the Pentagon, where one-third of the total budget is now in personnel and health care costs.

The department made a series of decisions during the past decade – some in order to boost recruiting when it ran into difficulty attracting sufficient numbers of troops into the Army and Marines in 2004. These include personnel benefits, pay indexing, health care benefits for National Guards, and retirement pay.

I don’t have time to go through – and I’d be happy to talk about it later – all of these.

But, for example, the Tricare system, which serves active duty troops who are injured while serving in the war theater. This is troops before they’re discharged into the VA system or troops who don’t leave active duty and their families. The Tricare system is the fastest-growing part of the Pentagon budget. Tricare spending has risen from $18 billion in 2001 to $56 billion today, and this is largely the result of wartime decisions, including expanding Tricare to include National Guards and reservists, which it didn’t before, because they’ve made up 40% of the fighting force; keeping co-pays and enrollment fees extremely low so that the price for troops and retirees is a tiny fraction of the private sector costs.

And during this period, the cost of private sector health insurance has skyrocketed so the differential between getting health insurance in the Tricare system versus in the private sector has gone from 3 to 1 to 9 to 1.

So unsurprisingly, the number of people who are eligible for Tricare who are participating in the system has risen 22% to 59% as a result of basic economics.

In addition, the sheer raw numbers of claims in the Tricare system has risen extensively. For example, behavioral counseling – health counseling for troops and families – rose by 65% and counseling for the children of troops has risen by 85%. Medical visits from active duty troops due to muscular skeletal problems grew from 2.8 million to 4 million as of 2009.

And another interesting factor is that the companies that make up Tricare were some of the biggest beneficiaries of the war in terms of profits.

When I did some work a couple of years ago and wrote a paper on who were the main beneficiaries of the war in terms of profits, I had expected to see Blackwater and Halliburton and the kind of usual suspects. But in fact, at the top of the list were the 3 companies that make up Tricare who, taken together, would be the 6th largest contractor in the Defense Department. This is because they’ve enjoyed enormous amount of growth with all of these additional beneficiaries coming into the system. But since they haven’t passed on any of the costs to those beneficiaries, who still pay less than $250 a year for health care, but the government has reimbursed all the increases in the actual price of diagnostics and the actual utilization of treatments and diagnostics within the Tricare system is much higher than in private sector systems.

And this Tricare problem will increase even further when the Affordable Care Act pushes everyone into buying a medical plan because for all of those who are not insured now, particularly Guards and Reservists whom at least 30% – according to a recent RAND study – don’t have insurance. It would be cheaper to buy into the Tricare system than even to pay the penalty for not having insurance.

Another key decision taken in 2004 in response to the recruiting shortfall was to adopt higher pay scale indexing in the Pentagon. Previous pay increases were linked to employment cost index. But in 2004 the Department changed that to use the employment cost index plus 0.5%. This has added a whole other layer of costs to the DOD base.

For the past 2 or 3 years, the Pentagon has been asking Congress to repeal some of these benefits. For example, the additional incremental indexing and to increase the co-pays for Tricare. But politically, it’s very difficult – you all understand better than me – to change these benefits, and so far there is no likelihood of major reforms.

And finally on this point, the Pentagon has a retirement system in place in which we only pay servicemembers who have served for 20 years. If you serve for 19.5 years, you don’t get anything, which means that in the all volunteer force, the vast majority – 87% – of Iraq and Afghanistan troops will not qualify for pensions through the Defense Department.

And my theory is that one of the reasons for the huge pressure on the disability system is that troops get out – I work with a large number of active duty and veteran troops. I have about 20 who work for me at the Kennedy School, and the feeling is they serve for several years, they serve 3 tours, they don’t get anything, but they’re not quite the same. And the disability comp system essentially becomes a small benefit that takes the place of any kind of a pension system, and I believe that there will be increasing pressure for that to be reformed, which will add another layer of long-term costs.

All of these legacy costs that I’m describing are in addition to the legacy of needing to replace a generation of military equipments and vehicles, which has been depreciating at 6 times the peacetime rate. Not to mention long-term commitments, such as the agreement we have signed to support Afghanistan for the next decade.

All of this together adds another $700 billion or so to the cost of the war and it means that the U.S. will not be enjoying a peace dividend.

You know, quite the contrary, the Pentagon, which is already facing pressure on its budget, will have its hands tied very much over the next decade, dealing with, coping with the legacy of these costs.

Let me turn now to my second point…

The war has affected the economy as well and left us with the legacy of high oil prices and much higher national debt. And the Iraq war costs set off a chain of events that has far-reaching consequences.

I’ve been speaking up until now about budgetary costs, but of course there are vast costs to civil society, both here and in Iraq, and economic costs and financial costs.

And some of the costs that I’m now going to talk about are costs that are borne by individuals and society or society at large rather than directly by the government.

There are many of these costs that I could talk about but let me just highlight a couple.

First, if we think back to when we invaded Iraq in 2003, oil prices were $25 a barrel, and we had been at that level for more than 2 decades. And the futures markets, which take into account already increasing demand from China and India, predicted that oil prices would remain in that range for the next decade. Oil prices are complicated but most experts agree that Iraq was one of the triggers that led to oil prices shooting up shortly after the invasion. Oil prices peaked at $140 per barrel 3 years later, and since then we have barely seen oil prices at a level below $100.

If Joe Stiglitz were here, he would argue very strongly that we need to connect the dots, that oil prices contributed to the Federal Reserve’s decision to increase liquidity, that that decision played a role in the housing bubble – the bursting of which, of course, led to the financial crisis. And he would argue that it’s reasonable to attribute some of the costs of the financial crisis back to the oil price rise, which was precipitated, in part, due to the U.S. invasion of Afghanistan, particularly in light of the fact that we all know that oil was one of the reasons we went to war in the first place.

Perhaps easier to see in the context of today’s budget quagmire is the fact that in an unprecedented move, the U.S. has borrowed all of the money that we’ve spent in Iraq. This is the first time in history since the Revolutionary War, when we borrowed from France, that we cut taxes and paid for an entire war out of debt. So we added some $2 trillion to the national credit card, which is a major component of the $9 trillion in U.S. debt that has been accrued since 2001.

Of course, when we think about debt and deficits, there are 2 kinds of deficits. There are those that invest in human capital or infrastructure or invest in education, and then there are those which do not, which endanger our future by adding to the national debt. And this war deficit was of the second kind.

My third point that I am passionate about – although it is difficult for many people to be passionate about accounting but I am very passionate about the lack of war accounting.

One of the purposes of our book and the several book chapters that we’ve written since then is to argue that bad accounting matters.

The U.S. owes nearly $1 trillion in what businesses would call deferred compensations to the men and women who fought the war but this liability doesn’t appear any where on the national balance sheet. We do not account for the value of the 6,658 lives lost in Iraq and Afghanistan – and that’s just the troops, not civilians, not contractors – except for a small amount of life insurance money even though civilian government agencies estimate the value of a life at $7.2 million. And so OSHA or EPA would value each one of those lives and account for it at a cost of $7.2 million.

We’ve accrued trillion of dollars in war debt but we don’t keep track of it, and in recent years the Congressional Research Service, the Congressional Budget Office, the GAO [Government Accountability Office], the Pentagon, Inspector Generals, and others have repeatedly and loudly bemoaned the fact that we lack the basic accounting systems necessary to understand where the money is spent.

Over the past decade, the military budget has increased by $1.5 trillion in addition to the monies appropriated for war spending. Some of that I already identified as attributed to increases in personnel, Tricare, and recruiting costs. But we know that at the same time the Air Force and the Navy have gotten smaller and older fleets than before and the Army and Marines – the Army has grown a little bit but the Marines, the Navy, and the Air Force have stayed the same size.

But if we look where has all the money gone, the Pentagon’s accounting systems are so flawed that there’s no way to even to perform an audit. And the result, unsurprisingly, is not only we can’t track war costs but a legacy of rampant waste and cost overruns and war profiteering and co-mingling of war and non-war related funds.

I have spent years trying to untangle some of these co-mingled accounts but it shouldn’t be the fact that in a city where there are thousands and thousands of economists – many of them my former students – that it takes somebody sitting outside the government to track where trillions of dollars have been spent.

We have also created a system in which Congress can and has appropriated vast sums of money for war and yet circumvent the entire budget accountability system by calling it emergency money. We’ve had more than 30 emergency supplementals which have funded the war, and the whole point of these emergency supplementals is that they’re supposed to be for actual emergencies like earthquakes and hurricanes, where the priority is not to pay too much attention to anything except getting the money fast. So the actual requirements for the budget submissions and tracking where the money goes are very loose. So we have spent trillions of dollars through these emergency supplementals with minimal accountability by either side of the aisle.

I want to stop soon, so let me conclude by saying that one of the lessons of Iraq is that by underestimating the costs and ignoring the costs and refusing to think about how we pay for the war, we made it easier for the costs to grow and to make poor choices. Democracy relies on an informed citizenry but we have trillions of dollars that have sort of sneaked up on us without anyone really knowing how much was being spent.

We have spent $2 trillion at least to date in out-of-pocket money. We have committed at least an additional $2 trillion to date in veterans, Social Security, and defense spending. And if we add any of the micro or macro economic costs, any impact from oil prices, any impact from the thousands of people who’ve left their jobs to become caregivers, we’d easily reach $5 trillion. If we add in Afghanistan costs, which after all were precipitated by the fact that we diverted 80% of troops and money to Iraq in 2003, you know, we easily reach $6 trillion. That’s a lot of money on which to have almost no accountability, almost no transparency, and it’s money that has left us the poorer in many, many ways.


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2 Comments on “Transcript: Remarks by Harvard Professor Linda Blimes on the cost of the Iraq War on March 21, 2013

  1. Pingback: Transcript: Q&A with Emma Sky on the state of Iraq 10 years after the U.S. invasion | What The Folly?!

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