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War with Iraq could cost more than $40 billion

WASHINGTON—How much would a war with Iraq cost?

Most estimates fall in the $50 billion range, though a top White House economic adviser suggested this week it could rise as high as $200 billion.

With so many uncertainties in war, the reality is that nobody knows. Still, under most scenarios, the federal budget could absorb the financial cost of waging a war without much trouble, economists say.

From an economic standpoint, what's more worrying than the cost of invading Iraq is the potential impact of a war on the U.S. and global economies. A war could drive up the price of oil and depress consumer and business confidence. Steep oil prices and declining confidence could push today's anemic economy into recession.

That's unlikely to happen if a war is won quickly, as military experts expect. In fact, battlefield success could boost confidence and calm oil markets. But given the uncertainty of war, a recession can't be ruled out.

"The U.S. is moving forward in a way that is going to drag its economy down," worries Peter Navarro, a business school economist at the University of California-Irvine.

Any war costs would add to a projected federal budget deficit of $145 billion for the next fiscal year, which begins Oct. 1. But economists aren't concerned about the impact on the federal budget because it would be a one-time expense.

Short-term deficits generally aren't worrisome, and any war spending might even provide a boost to the sluggish economy. Budget deficits become a problem when they occur year after year. Then, the steady government borrowing to finance the deficits can push up interest rates, which can slow the economy by raising borrowing costs for consumers and businesses.

A one-time borrowing by the government for a war is unlikely to impact interest rates much.

"As far as the direct cost of the war, I don't think it's a big deal," said David Wyss, the chief economist for Standard & Poor's, the New York-based bond rating agency.

Gauging the costs, though, remains educated guesswork at best.

"It is not knowable what a war or conflict like that would cost," Secretary of Defense Donald H. Rumsfeld told a congressional committee Wednesday. "You don't know if it is going to last two days or two weeks or two months. It certainly isn't going to last two years."

Cost estimates tend to be based in part on the cost of the 1990-91 Gulf War, which came in around $60 billion, or about $80 billion in today's dollars.

Nearly 90 percent of the funds came from other countries, notably Saudi Arabia, Kuwait, Japan and Germany. This time the United States has far less international support and could have to bear the cost virtually alone.

Iraq's military is considerably weaker than it was in 1990, so military analysts believe an invasion today won't require the more than 500,000 troops that took part in the Gulf War.

Michael O'Hanlon, a military analyst at the moderate Brookings Institution, a Washington, D.C., research organization, puts the cost at $40 billion to $50 billion for the 250,000-troop deployment that some experts envision.

Some U.S. forces likely would remain in Iraq after the war to try to maintain stability, as they are doing in Afghanistan. That cost could run $10 billion to $20 billion a year, O'Hanlon said, though it could drop if Iraq becomes more stable.

Iraq eventually might be able to reimburse the United States for much of the cost, because it sits on huge reserves of oil that could produce revenues in coming years, said Cary Leahey, an economist at Deutsche Bank in New York.

White House economic adviser Lawrence Lindsey, in an interview published Monday in The Wall Street Journal, put the "upper bound" of the cost of a war at 1 percent to 2 percent of the gross domestic product, a widely used measure of the size of the U.S. economy.

U.S. GDP is about $10 trillion a year, so 1 percent to 2 percent works out to $100 billion to $200 billion.

Lindsey isn't saying how he arrived at his upper bound, but private sector economists speculated that he looked at the $60 billion cost of the Gulf War, which was about 1 percent of GDP at the time, and added another percentage point to be on the safe side.

"He simply did what I think is a back-of-the-envelope calculation," Leahey said.

Most analysts interviewed thought the $200 billion figure is on the high side. O'Hanlon said he doubts the cost would rise above $100 billion.

White House budget director Mitchell Daniels said the $200 billion figure is "likely very, very high." But he said it was too early to offer a formal estimate.

"One of the defining characteristics of war is its unpredictable direction and effects," Daniels said Wednesday.

Economists still worry about the dangers a war could pose for the overall economy, particularly if it disrupts oil supplies.

But that remains an outside risk. Saudi Arabia has enough spare capacity to make up for any cutoff in Iraqi oil exports, and the U.S. government maintains a petroleum reserve for emergencies. It would take an extreme event—such as an attack on Saudi oilfields by terrorists sympathetic to Iraq—to spark an oil crisis.

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(Knight Ridder Newspapers correspondent Jonathan S. Landay in Washington contributed to this report.)

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(c) 2002, Knight Ridder/Tribune Information Services.

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