Friday, July 18, 2008

How dollar accountancy of the costs of the Iraq war could be deceptive

Review Article
Joseph Stiglitz and Linda Bilmes, The Three Trillion Dollar War, The True Cost of the Iraq Conflict, Allen Lane (Penguin Books), London, 2008, pp 311, Rs 595; ISBN 978-1-846-14128-7
It was election year in the U.S. and the country was trapped in what seemed an endless war. Confronted with a colossal loss of public confidence in his leadership and widespread revulsion at the tableau of destruction he was staging in a faraway land, the U.S. President took to the airwaves, vowing that he would utilise every forum and opportunity, to discuss “means of bringing (an) ugly war to an end”.
The moral dimension, explicit in the use of the term “ugly”, was not the only consideration. The war as the U.S. president put it, was taking a heavy toll of government finances. Failing the imposition of fresh taxes or stringent expenditure restraints, the U.S. budget deficit would spiral up -- and out of control -- putting at risk the foundation of the nation’s unparalleled prosperity since World War II: the role of the U.S. dollar “as the keystone of international trade and finance”.
If George W. Bush had been capable of acknowledging error, if he had in him the human capacity for contrition, this script could well have been written for him in 2004. In reality, it was the scenario played out by Lyndon Johnson in March 1968, as he renounced his candidacy for a second full term in the U.S. presidency and determined that his remaining days in office would be devoted to ending the Vietnam war (it is quite another story though, that his effort proved futile, partly on account of sabotage from within).
Bush in 2004 followed a rather different script, defying all polls to eke out a narrow win and in that moment of dubious triumph, announcing that he had surmounted a crucial moment of accountability and would not hesitate to make an already ugly conflict positively repellent. What followed was a slash-and-burn offensive through the Iraqi city of Fallujah, borrowed straight from the World War II playbook.
Despite a display of military machismo that reduced Iraq’s city of mosques to smouldering ruins, the insurgency showed little sign of yielding. And even if Bush’s bravado remained undimmed, his approval ratings began a rapid downward plunge.
If this accidental president had at all been interested in arresting the free-fall in his credibility, he could have sought a pathway back from the fatal error of Iraq. As Stiglitz and Bilmes (hereafter S&B) point out in this important book, Bush was given his best opportunity when the report of the bipartisan Iraq Study Group was submitted, shortly after his Republican party was pummelled in the mid-term elections of November 2006. He passed that moment by with no explanation, repudiating the findings of an expert group he had appointed and entrusted with a broad mandate.
Ever since, the U.S. President has used a familiar trope to deter all talk of withdrawal: to reverse course, he has said, would be to dishonour the sacrifices made by U.S. soldiers in a noble cause. With a wealth of documentation on all current and future human costs of the Iraq war, S&B conclusively establish that this is one of the most cynically insincere pleas ever advanced. The most significant contribution that S&B make to the accountancy of the Iraq war, perhaps, is in their treatment of the burden borne by U.S. military personnel – those killed who have families to be provided for, those incapacitated, who need lifelong care, those returned time and again to the field of battle, who progressively lose their capacity to deal with “normality” because of accumulated traumas.
These costs however, do not go into the headline figure of $3 trillion (or $3,000 billion), which earned S&B the instant attention of those who inhabit the rational fringe in the U.S. and the instant derision of the vociferous band of right-wing commentators and Bush supporters, who called it a lame attempt to coin a “catchphrase”. Contrary to what the diminishing but voluble band of Bush partisans may say, the “three trillion” estimate is arrived at on the basis of very cautious and conservative assumptions. S&B take all the known appropriations that have been made for the war and add them up. This process does not involve any arithmetical operation more complicated than addition.
Bookkeeping procedures in the U.S. defence department, though, are infamously – and deliberately – muddled and this compels S&B to undertake a fine-tooth search to factor in costs that may be hidden elsewhere. Once they track down all those elusive numbers, they add on costs that will likely be incurred in restoring the U.S. armed forces to the state they were in before the war – in terms of munitions replaced, equipment repaired and long deferred maintenance procedures implemented.
War imposes costs on all sectors of society. Higher energy costs, S&B argue, have meant that the U.S. economy has suffered serious harm. But the extra money paid by energy consumers do not figure in the $3 trillion price tag. S&B do however, factor into their cost calculations the consequences – in terms of lower tax accruals to the public exchequer – of the economic slowdown that soaring energy costs has caused.
With the profusion of assumptions, numbers and calculations that S&B lay out, it is often difficult to retain attention on essential distinctions. The headline number of “three trillion”, they explain, relates only to the budgetary costs borne by the U.S. federal government. After full budgetary costs are added, S&B take on board the interest component and then add what they call the “macro-economic costs”, which refer to the benefits the economy has foregone because money has unaccountably gone into the pursuit of war. Finally, S&B add on the costs of the U.S. operations in Afghanistan.
When S&B declare that this process is “conceptually simple” they perhaps take too much for granted. To begin with, some of the costs they total up are real: they are actually paid out of the public exchequer. Others are notional, the outcome of “what might have been” calculations, such as revenues that have been lost to the public exchequer. Matters are not rendered any easier, by the authors’ choice of “three trillion” as shorthand. At no stage of the reckoning, does the total reach that comfortably rounded sum. Indeed, that sum turns out to be a compromise between two scenarios that the authors construct: strict budgetary costs and total economic costs. S&B could as well have titled their book “the five trillion dollar war”, since that is what they estimate “total economic costs” at. No reason is offered for the choice of the lower number, though this should be deemed a minor omission, since both figures are equally beyond ordinary human comprehension, whether as astronomical distances or dollar sums.
The larger part of S&B’s work is about costs that are outside the boundaries of both “budgetary” and “economic” costs – such as the costs to U.S. community life, and the costs to the two countries, Iraq and Afghanistan, which have to their misfortune been designated the principal theatres of the civilisational mission of the U.S. Exercises such as this, inevitably, involve several counter-factual assumptions. Besides, S&B face a considerable moral dilemma in transporting the standards applied in the valuation of the life of a U.S. soldier to a different milieu. S&B seek heroically to grapple with this dilemma: they recognise every estimate that has been made of the deaths in Iraq since the war began, and also take on board humanitarian consequences of exile and internal displacement. They occasionally throw up their hands in despair at the accounting complexities of reckoning with all these human tragedies. But their intent remains, firmly, on putting a dollar value on the consequences of the Iraq war.
So what does it involve to recognise the 100,000 and perhaps 500,000 Iraqi deaths from the U.S. invasion? Parenthetically, one may ask: what does it mean to acknowledge the one million casualties from the sanctions against Iraq that were so zealously enforced by the Clinton administration, which both the authors of this book loyally served?
S&B recognise some of the moral difficulties. But they have little problem branding Bush’s plea of honouring the sacrifices made by the U.S. armed forces, as a cynical ploy and an evasion of responsibility. It is a conspicuous failure of all systems of accountability, even in the most professedly perfect democracy, that decision makers rarely have to face the full consequences of their blunders. Corporate executives who make the most disastrous strategic choices while in authority can always count upon a golden parachute and a comfortable severance package when they leave their cosy billets. Similarly, no U.S. president has ever had to deal with the stigma of defeat in a military adventure that he started.
Discerning the cynicism of Bush’s strategy of leaving the reckoning with Iraq to his successor, does not mean yet, that the U.S. public, or for that matter, the global public, would consent to walking away from the disaster of Iraq. The public also need also to be convinced that this abdication will not entail consequences even more disastrous. S&B offer a simple moral pathway out of the conundrum, summed up in an age-old aphorism: “let bygones be bygones”. This aphorism, they say, also has a foundation in economic theory, in the concept of “sunk costs”.
Yet, what seem like “sunk costs” to the economist may well appear to those who have borne the brunt of U.S. military aggression, as a case for reparations. Even if withdrawal is the strategy of choice for the U.S., the rest of the world would have to reckon with the costs of, first, the illegitimate invasion and next, the dishonourable retreat.
It turns out that the rest of the world is already bearing a significant burden of the costs of the Iraq war. Every war that the U.S. or any other country has fought, has involved a burden of taxation. Johnson’s greatest worry as he renounced the presidency in 1968, was that, despite the tax surcharge he had decreed to pay for Vietnam, the U.S. budget was slipping rapidly into the red, making the sustenance of the dollar as a credible world currency, a virtual impossibility. His successor, Richard Nixon, though committed to a regime of low taxes, repudiated any possibility that the surcharge would be repealed, since there could be nothing more irresponsible for a country at war.
Contrast that with the current situation, when Bush is liable to characterise any suggestion of raising taxes as an act to treason. Between Johnson and Bush, (or between Vietnam and Iraq) there has been something that has changed, which has made nonsense of old-style economic orthodoxy. Simply put, the brutal reality is that the entire U.S. hegemonic drive today is financed through borrowed money. S&B recognise this fact, which they say, makes no difference to their basic arguments, since the borrowed money will have to be repaid. But is that really a reasonable belief?
This needs going back a bit in time to the Johnson abdication in 1968 and his decision to sue for peace in Vietnam, in part, because he thought the U.S. dollar was in jeopardy. And though Nixon refused to do away with the taxes that paid for Vietnam, he did make a decision in 1972 that would have momentous consequences for the future of the U.S. dollar. He took the U.S. currency off the system under which its value was calibrated with a certain weight in gold. From that point on, the dollar had to sink or swim on the strength of its acceptance by other economies. This required that all countries hold their national savings in dollars and that furthermore, transactions in the most widely traded commodities, such as petroleum, should be denominated in dollars.
Discussions of currency values, taxation, expenditure and the national debt tend to be confined to an esoteric corner where only supposed experts are allowed. Unfortunately, S&B, both charter members of that narrow enclave, do not venture into that discussion. Aside from providing an accounting of the Iraq war, they choose to avoid the broader political-economic motivations and consequences. It was not much talked about in expert circles then, but just over a month before the invasion of Iraq took place, the U.S. Treasury Department formally notified the U.S. Congress that the government had reached the limits of borrowing allowed under the law and was in danger of default on debt. The U.S. government, then hot and feverish for war, needed to borrow to merely service its national debt. How could a nation contemplate war in these circumstances?
The drama of raising borrowing limits had been enacted the previous year too and at various times over the preceding decade. The U.S. Congress has been remarkably hospitable to right-wing lunatics who describe tax cuts as a patriotic duty, argue for unending war in the next breath, and then quietly acquiesce in the raising of the national debt limit. It is an interesting coda to S&B’s analysis that between the beginning of the war in Iraq and now, the U.S. national debt has gone up by well over $3 trillion.
How is this figure going to be drawn down? How if ever, is this debt going to be repaid? S&B do not venture in to that territory, except to insist that the debt must be repaid. But finally, they remain blind-sided by the faulty assumptions of contemporary economic analysis. They fail to recognise that the danger Lyndon Johnson warned of -- as far back as 1968 -- is now an accomplished fact: the U.S. dollar as the cornerstone of world trade and finance is in its death throes. In seeking to designate every cost of war in terms of the U.S. dollar, S&B suffer several moral qualms, but never really deviate from their belief that the U.S. dollar provides an invariant standard of value. They prove unable in other words, to look beyond this conceit of the U.S. economy.
S&B put down the huge increase in oil prices in recent months to a variety of causes: the Iraq war, they cautiously say, accounts for just $10 out of the total increase of about $70 in the price of a barrel of oil (at the time this book was sent to press). The rest, in their estimation, could be put down to factors such as increased demand from China and India.
This argument is typical of the kind of loose practices that economics as a discipline is rife with. It offers the Bush administration precisely the alibi it needs, since it obscures the rampant speculation that is driving prices. And the forces behind this speculative drive are themselves part of the political-economic substratum of the Iraq war: briefly put, the dependence of the U.S., since the 1980s, on continuing infusions of world savings to support current consumption. The speculative increase in oil prices, contrary to the effort to cast it in terms of the supposedly neutral, apolitical forces of global supply and demand, is integrally related to the decline in the value of the U.S. dollar and the need to prime the pump that drives a large chunk of global cash surpluses into investments in U.S. government debt and other financial instruments. And yet, despite this priming of the pump, including through patently illegitimate exercises of military power, the mighty dollar continues to plunge in value. This in itself, is a circumstance that should deflate the S&B effort to construct a picture of the “true costs” of the Iraq war in terms of the invariant standard of the U.S. dollar.
With ample reason, S&B dismiss any notion that the Iraq war may have entailed benefits that could even remotely mitigate the severity of the multi-trillion dollar bill it has served up. What then was the motivation for the war? With all the critical literature produced in the U.S., there has yet been no credible public reckoning of this question. Perhaps the reason was that Iraq remained, with its fabled oil wealth, a recalcitrant element. Or perhaps it was because, quite in contrast to the subservience displayed by other major oil producers, Iraq made little secret of its belief that the U.S. dollar was no invariant standard of human value, but an instrument of U.S. cultural-economic hegemony.
The true cost of the Iraq war is not to be computed in monetary terms, certainly not in U.S. dollar terms. Nobody has yet begun the exercise of adding up the human costs of this enormous atrocity. And as these costs are totalled and as the U.S. dollar continues to slide in value – in part as a consequence of the bill that the Bush administration has run up in pursuing its fantasies in Iraq – it will become increasingly obvious that the invariant standard of value that S&B use, is really a very fickle measure. It will become increasingly obvious, in other words, that the claims made on behalf of this supposed standard of value are themselves a serious impediment to appreciating the true human consequences of war.