U.S. economists see long-term ills from Iraq war.

Of course the war also benefits select groups of military suppliers and contractors both U.S. and foreign who get lucrative reconstruction and supply contracts. The decline in the U.S. dollar means that the U.S. is paying its debt in cheaper dollars than when it borrowed. However, foreign holders of U.S. dollars are becoming less and less happy about the situation and are switching to other currencies. The role of the U.S. dollar as THE global currency has been eroding over the last few years and the pace of change is accelerating with the plunge in the dollar.


ANALYSIS-U.S. economists see long-term ills from Iraq war


Richard Cowan
Reuters North American News Service

Mar 13, 2008 07:00 EST

WASHINGTON(Reuters) - What's over $100 billion a year in Iraq war costs to a $14 trillion U.S. economy? Not much now, but the tab is growing on a "buy-now-pay-later" plan that threatens long-term problems.

Money was not much of an issue five years ago when President Bush led the country into war in Iraq. Instead, all eyes were on allegations, later proven unfounded, that then-Iraqi President Saddam Hussein had weapons of mass destruction and could use them against the United States.

But $500 billion later, experts worry about the impact on the world's biggest economy, already facing a crippling housing crisis.

"The short-term economic consequences of the war have been manageable and modest. But the long-term consequences will be substantial," said Mark Zandi, chief economist of Moody's Economy.com.

Much of the problem, economists say, is that every month of combat adds more than $10 billion to a U.S. debt that now tops $9 trillion.

"Extra government debt is undoubtedly a bad thing for our economic performance in the long run," said Doug Elmendorf, senior fellow at the Brookings Institution and a former economist for the Federal Reserve Board.

Other expenses -- such as health care costs for the poor and a new prescription drug plan for the elderly -- combine to increase the government's debt at a much faster rate than the Iraq war, Elmendorf noted.


'STOP DIGGING'

"The rule when one is in a hole is to stop digging," Elmendorf said of debt and war costs.

Robert Reischauer, head of the Urban Institute and a former director of the Congressional Budget Office, said the benefits of war spending for the U.S. economy had been "muted" because so much of the money is spent on goods and services abroad. That, he said, was "stimulating economies elsewhere, not the least being the economies of Iraq, Kuwait and Saudi Arabia."

War backers would point out that failing to secure the United States after the Sept. 11 attacks would have a severe impact on economic well-being, he said.

"If one thinks this war is very important for our national security, then ultimately, it is important for our economic success as well," Elmendorf said, adding that "if it was, it was also worth paying for" it instead of borrowing.

At some point, government debt comes due and the Treasury Department either must pay it off or roll it over and pay more interest, just like a family facing monthly credit card bills.

Higher government borrowing also could push up interest rates, making it more expensive for consumers to borrow for home mortgages and businesses to finance investments.

In early 2003, it seemed a remote possibility that the U.S.-led invasion could create economic problems at home.

On Jan. 29, 2003, less than two months before the war, then-Defense Secretary Donald Rumsfeld said the White House budget office "has come up with a number that's something under $50 billion for the cost." And of that, he added, a portion might be paid by "other countries."

Vice President Dick Cheney tried easing economic concerns by saying Iraqi oil revenues could cover some costs.

Five years later, the war may have helped some local economies, where bullets and tank armor are made, or enriched contractors working in Baghdad. But none of Iraq's oil revenues have been tapped and U.S. taxpayers have bankrolled an effort that so far has cost them not $50 billion, but around $500 billion, with hundreds of billions of dollars more ahead.


U.S. ELECTION

As November's U.S. presidential and congressional election nears and voters worry about pocketbook issues, Democrats have begun tying the war to the faltering economy.

"You cannot separate the economy from the long, bloody civil war in Iraq," Senate Majority Leader Harry Reid, a Nevada Democrat, told reporters. Democrats were hearing from voters back home that "we (the U.S.) don't have money for anything anymore. We're borrowing all the money for Iraq," he said.

Washington's overall spending on domestic programs outside of defense, such as education, highways and law enforcement, has grown. But over the seven years of the Bush presidency, that funding represents a declining share of the budget and economy.

Nobel Prize-winning economist Joseph Stiglitz, who says the Iraq war could end up costing $3 trillion when factoring in combat and other long-term related costs, also blames the war for part of the run-up in world oil prices.

At the beginning of March 2003, just before the fighting began, U.S. crude oil was $37.21 a barrel. This week, that same barrel hit a record $110.

The war accounted for $5 to $10 of oil's higher price, Stiglitz told Congress.

Robert Ebel, a senior energy adviser at the Center for Strategic and International Studies, said Mideast political instability always factored into oil prices. But the huge increase over the past five years, he said, was not so much due to Iraq.

"Growth in demand has not been matched by substantial growth in supply," with China's oil thirst rising, oil- exporting countries' spare production capacity down and no new U.S. refineries being built.

Largely because of World War Two, which brought a huge expansion in industrial production and millions of jobs, there has been a notion that wars are good for the economy.

That may have been the case in the 1940s. But in 2003, with an economy growing and full employment, war did not bring the kind of investment that was needed or in the long-term interest, according to Stiglitz.

"America is a rich country. The question is not whether we can afford to squander $3 trillion or $5 trillion. We can. But our strength will be sapped," he told Congress. (Editing by Patricia Zengerle)

Source: Reuters North American News Servic