A War We Can Afford

A possible war with Iraq raises many unknowns, but "can we afford it?" is not one of them. People inevitably ask that question, forgetting that the United States has become so wealthy it can wage war almost with pocket change. A war with Iraq would probably cost less than 1 percent of national income (gross domestic product). Americans have grown accustomed to fighting with little economic upset and sacrifice.

The last time the United States truly mobilized for conflict was World War II. Roughly 16 million Americans served in the military; that was two thirds of all men from 18 to 34, reports historian James Patterson of Brown University. The costs were stupendous. In 1944, federal spending totaled 44 percent of GDP, with military spending at 38 percent of GDP. At home, Americans needed ration coupons to buy meat, gasoline and other staples.

Ever since, two things have transformed the economics of war: the U.S. economy has gotten bigger, and wars have gotten smaller. Measured by what it produces--and adjusted for inflation--the economy is more than five times larger than in 1945. Meanwhile, America's wars have been local, draining less of the nation's wealth.

In the Korean War, the defense budget reached 14 percent of GDP in 1953, but much of that spending went for a massive buildup of forces in Europe. "For every tank that went to Korea, two went to Europe," says historian Alan Gropman of the Industrial College of the Armed Forces. "The B-52s we built had nothing to do with the Korean War." In August 1949, the Soviet Union unexpectedly exploded its first atomic bomb, prompting President Harry Truman to order the National Security Council to undertake a major review of U.S. strategy. The resulting document (called NSC 68) envisioned huge deployments of U.S. troops to Europe to counter a conventional Soviet attack, which--once the Soviets had their own nuclear weapons --seemed more credible.

Although the cold war's costs remained large, defense spending during the Vietnam War went only as high as 9.4 percent of GDP in 1968. Even so, Lyndon Johnson's early attempt to finance the war without any tax increase--to have both guns and butter--helped raise inflation. After Vietnam, defense spending (again, as a share of GDP) drifted down and dropped sharply once the cold war ended.

It now runs about $350 billion annually. That's a lot of money but, in an economy producing more than $10 trillion annually, isn't much of a burden. It's slightly more than 3 percent of GDP.

How much a war with Iraq would cost is guesswork. It would vastly exceed the total in Afghanistan, which the Congressional Budget Office estimated at $10 billion for fiscal 2002. Spending on munitions and fuel would rise. Reservists might be activated. After September 11, 130,000 were called up. The Persian Gulf War cost $61 billion. Since then, military equipment (tanks, ammunition) has been repositioned in friendly Persian Gulf countries. That would lower transport expenses. An invading force might be smaller than in 1991. Informal estimates put a war's costs at up to $40 billion; even if twice that, it would be less than 1 percent of GDP.

Clearly affordable. Whether we should afford it is another question. So is the effect of a war on the economy, which could go either way. Extra spending might help. A swift victory might bolster confidence. Or a war might jeopardize oil supplies from Saudi Arabia and elsewhere, through terrorism or political upheaval. Protracted fighting might hurt confidence, consumer spending and the stock market.

"The economy is growing, but barely," says Mark Zandi of Economy.com. "It wouldn't take too much for the recovery to roll back into recession--or close to it."

Oil prices are the biggest vulnerability. In 1990, after Saddam Hussein invaded Kuwait, prices doubled, from about $18 a barrel in May to $36 in October. That helped tip a weak U.S. economy into re-cession--though prices quickly receded in 1991. Barring a calamity, many economists minimize the odds of a repetition.

A year ago Iraq was exporting 1.5 million to more than 2 million barrels daily, says John Lichtblau of the Petroleum Industry Research Foundation. Now the level is only about 700,000 barrels daily. "If its exports are lost, it wouldn't be a big factor," he says. The Saudis could offset any shortfall. (Total world oil use is almost 77 million barrels daily.) Moreover, the U.S. economy has become less energy-intensive and is less sensitive to higher prices. The economy is now growing at an underlying rate of 2 percent to 2.5 percent, says economist Nariman Behravesh of forecasting firm DRI-WEFA. War fears have already pushed oil prices to around $30 a barrel, but even if they rose to $40 for a year, GDP growth might drop only 0.5 percentage points, he says.

Because wars surprise, who knows? But the important questions are harder. Is this war justifiable? Should the United States go it alone? What would happen if we don't fight? What will happen if we do? By contrast, economic issues are a sideshow--and should stay so. If this war is necessary, we can afford it.