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War's price tag

The Iraq conflict will raid our wallets for years to come, with California taking a huge hit.

March 16, 2008|Linda J. Bilmes and Joseph E. Stiglitz | Linda J. Bilmes, a lecturer on public finance at Harvard University's Kennedy School of Government, is a former assistant secretary of Commerce. Joseph Stiglitz, a professor at Columbia University, is a former chief economist of the World Bank and winner of the 2001 Nobel Prize in economics. They are the coauthors of "The Three Trillion Dollar War: The True Cost of the Iraq Conflict."

The war in iraq, which will enter its sixth year this week, is turning out to be the most expensive conflict since World War II, and the cost will fall especially hard on Californians.

By the end of 2008, the federal government will have spent more than $800 billion on combat operations in Iraq and Afghanistan (government accounts make it hard to separate the two). On top of that comes a mountain of future costs: caring for war veterans (to date, more than 1.6 million troops have been deployed), replacing the military hardware that is being used and worn out in Iraq and paying interest on the enormous sums of money we've borrowed to finance the war.

All told, we estimate that the cost of the war will easily reach $3 trillion in today's money. This number assumes that the U.S. begins a pullback from Iraq after the election in November but retains a small presence there for the next decade.

Californians are going to face a disproportionate share of the bill for three reasons. First, California's population is among the youngest in the U.S., with 26% under 18 (compared with 24% nationwide). Because of irresponsible fiscal policy (cutting taxes for the rich while a war is in progress and borrowing the money to pay for the conflict), the burden of paying for this costly adventure has been shifted to these younger Americans. The Iraq war is the first time since the Revolutionary War that we have borrowed from overseas to finance war spending (the colonists borrowed from France). The next generation will be paying all the interest on the money we have borrowed, including the 40% of it that comes from Middle Eastern countries, China and other foreign lenders. It will also be forced to confront the $9-trillion national debt, which has risen by 12% as a result of the war.

On top of servicing huge war debts, America's children will also have to pick up the tab for the rising cost of veterans' care. The intensity of the combat over the last five years and the high injury rates mean that close to half the current service personnel in Iraq and Afghanistan are likely to qualify for long-term disability compensation. The cost generally peaks many years after combat has ended -- claims from World War II veterans, for instance, peaked in 1993.

We will also need to provide a lifetime of medical care for many of the 70,000 men and women in the armed services who have been wounded in combat, injured in accidents or airlifted out of the region for emergency medical care, plus temporary care for an additional 250,000 returning troops who are seeking treatment for hearing loss, joint pain, post-traumatic stress disorder or other conditions at veterans medical facilities.

The 1991 Persian Gulf War lasted only a month, but the federal government pays out $4.3 billion a year in disability compensation to Gulf War veterans. If the Iraq war follows the same pattern, we can expect that the next generation of Americans will eventually spend $600 billion to look after the Iraq and Afghanistan veterans.

The second reason California will pay a disproportionate share for the war is because its residents are so rich. California already contributes a disproportionate share of federal taxes -- more than 14% of the total last year from a state that makes up only 12% of the nation's population. The tax burden is especially high in the Bay Area, greater Los Angeles and San Diego, places where individual taxpayers pay some of the highest total federal taxes, according to a recent study of 3,000 counties across the country. The average household in San Francisco is already paying $36,409 annually in federal taxes (combining income tax, payroll tax, excise tax, estate tax and corporate tax) -- the second-highest federal tax burden in the United States.

This means that Californians are already paying more to support the war effort than most Americans. Expect that burden to get considerably larger no matter what happens to incomes in the years ahead.

Third, the standard of living of car-dependent Californians is being hit especially hard by a steep increase in oil prices that are the result, at least in part, of the war in Iraq. It is easy to forget that oil prices were at $25 a barrel when the war began in March 2003. True, a lot of the increase has been driven by sharply higher demand from Asia and by a chronic shortage of refining capacity. But futures markets had predicted that oil prices would remain stable despite rising demand. Most experts blame at least some portion of the skyrocketing price of oil on the drop in supply caused by the instability in the Middle East.

In our book, we attribute just $5 to $10 of the increase in the cost of a barrel of oil directly to Iraq. But even this modest price increase accounts for a transfer of $300 billion to $800 billion from the pocketbooks of U.S. consumers to the oil-producing countries.

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