WAR AT ANY PRICE?

The Total Economic Costs of the War Beyond 

the Federal Budget 

A Report by the Joint Economic Committee Majority Staff 

Chairman, Senator Charles E. Schumer 

Vice Chair, Rep. Carolyn B. Maloney 

February, 2008 

The long wars in Iraq and Afghanistan have cost the United States in many ways. For the 

American Armed Forces, the human toll has been profound: as of November 9, 2007, 4,578 

American soldiers have lost their lives, and 30,205 have been wounded, many of them 

gravely. The damage to our international reputation at a time when the United States faces 

grave security challenges all over the world has also been severe. And the full economic costs 

of the war to the American taxpayers and the overall U.S. economy go well beyond even the 

immense federal budget costs already reported. These “hidden costs” of the Iraq war include 

the ongoing drain on U.S. economic growth created by Iraq-related borrowing, the disruptive 

effects of the conflict on world oil markets, the future care of our injured veterans, repair costs 

for the military, and other undisclosed costs. 

In this report, the Joint Economic Committee estimates the total costs of the long war in Iraq 

to the American economy as a whole: 

• The total economic costs of the wars in Iraq and Afghanistan so far have been approximately double the total amounts directly requested by the Administration to fight these 

wars. 

• The future economic costs of a prolonged military presence in Iraq would be massive. 

Even assuming a considerable drawdown in troop levels, total economic costs of the 

wars in Iraq and Afghanistan (with the vast majority of costs a result of in the war 

Iraq) would amount to $3.5 trillion between 2003 and 2017. This is over $1 trillion 

higher than the recent Congressional Budget Office (CBO) Federal cost forecast for 

the same scenario, which counted only direct spending and interest paid on war-related 

debt resulting from that spending. 

• The total economic cost of the war in Iraq to a family of four is a shocking $16,500 

from 2002 to 2008. When the war in Afghanistan is included, the burden to the American family rises to $20,900. The future impact on a family of four skyrockets to 

$36,900 for Iraq and $46,400 for Iraq and Afghanistan when all potential costs from 

2002 to 2017 are included. 

The American people and Democrats in Congress have urged a dramatic change of course in 

Iraq. This war has cost Americans far too much, in terms of lives, dollars, and our reputation 

around the world. This report also demonstrates that a change in course would bring substantial economic savings to our country. 

February 2008 JOINT ECONOMIC COMMITTEE

1 

Executive Summary 
Through 2008, the True Cost of the War has been Double the 

Administration’s Budgeted Cost

To date, the President has requested a total of $607 billion for the Iraq war alone since 2003. This 

is over ten times higher than the $50 to $60 billion cost estimated by the Administration prior to 

the start of the war. Costs have increased every year since the start of the war in 2003. The Administration has requested $804 billion for the Iraq and Afghanistan wars combined (CRS 2007, 

Bumiller 2003).1

To provide some perspective on these figures, just the funds requested for the Iraq war through 

2008 would have been sufficient to provide health insurance coverage to all of America’s uninsured for the 2003-2008 period. (There were approximately 45 million uninsured Americans at 

the start of the war in 2003 and this number rose to 47 million by 2006, which is the latest figure 

available from the U.S. Census Bureau). 

But even beyond these direct fiscal impacts, there are a large number of costs that do not appear 

directly in Administration funding requests for the Iraq war. The most important of these include 

the following: 

• Borrowed money to finance the Iraq War has displaced productive 

 investment. Since taxes have been cut and other spending has increased since the beginning of the Iraq war, it seems clear that the war has been and continues to be funded using 

borrowed money. The increase in government borrowing displaces substantial amounts of 

productive investment by U.S. businesses, thus reducing productivity in the economy over 

many future years. Interest costs paid by taxpayers are only a subset of these costs. 

• Substantial Iraq-related costs have been borrowed from foreigners. The 

interest payments on this debt constitute a flow of funds from Americans to those foreigners 

who have bought our debt.

JOINT ECONOMIC COMMITTEE February 2008

2 

 IRAQ WAR ONLY IRAQ AND AFGHANISTAN 

Direct Appropriations* $607 Billion $804 Billion 

Total Costs** $1.3 Trillion $1.6 Trillion 

Costs per Family of Four*** $16,500 $20,900 

Table 1: Requested Appropriations and Total Costs Accrued So Far 

Period: FY 2002-2008

Budget costs in nominal dollars, flow of economic costs discounted to the relevant budget year. See Appendix B for 

discussion of methodology. 

* Based on CRS and CBO cost estimates of direct appropriations. Includes Administration’s FY 2008 request for war 

funding, which has not been passed by Congress. 

** Based on total sum of present value costs accrued in each budgetary year from 2002-2008 

*** Total over 2002-2008 period. 

1 As of November 2007, the Congress had already appropriated $449 billion of spending on Iraq, and $609 billion for 

both Iraq and Afghanistan combined. 
• The war in Iraq has disrupted world oil markets leading to increased 

prices. The Iraq war has occurred in a context of greatly increasing world demand for oil, as 

well as declining excess production capacity. Both the direct effect of the war in reducing 

Iraqi oil production and the indirect effect of creating greater instability in the Middle East 

can act to increase oil prices. Relatively small increases in oil prices can have substantial economic effects. 

• Other economic and budgetary costs have grown due to the Iraq war. 

These expenditures include the costs of treating the wounded and disabled, lost productivity 

from those injured, potential future expansions in the size of the military made necessary by 

the war, the costs of repair and refit for military equipment, increases in recruitment and retention costs for the military, and economic disruptions created by the deployment of the Reserves. 

The sum of the costs listed above raises the economic costs of the war from $607 billion in direct 

funding for the Iraq war to $1.3 trillion. If spending in Afghanistan is included, costs could reach 

$1.6 trillion by the close of FY 2008. 

There are numerous other impacts of these wars that are not listed above and are difficult if not 

impossible to measure. These include the horrible human cost of the nearly 4,000 U.S. fatalities 

since the start of military operations in Iraq, the impact on our reputation and credibility throughout the world, and the budgetary and economic costs to other nations besides the U.S. (most notably Iraq). Finally, the debate over the broader national security impacts of the Iraq war, and related costs or benefits, is a complex issue that goes beyond the scope of this report (DoD 2007). 

February 2008 JOINT ECONOMIC COMMITTEE

3 

$0 

$5,000 

$10,000 

$15,000 

$20,000 

$25,000 

2002 2003 2004 2005 2006 2007 2008 

Total Economic Cost 

Direct War Costs 

Source: CRS (2007) for prior appropriations and spending requests, JEC staff calculations. 2008 appropriation request 

drawn from Administration requested supplemental. 

Chart 1: Average American Family Will Bear Heavy Burden to Pay for the Wars In Iraq and 

Afghanistan (Family of Four) 
JOINT ECONOMIC COMMITTEE February 2008

4 

If We Don’t Change Course, the Cost of the War will Balloon to $3.5 Trillion 

The costs described above represent only the impacts of the Iraq war through the close of FY 

2008 (if the President’s current budget requests are approved in full). Yet at least some spending 

on the war will continue beyond FY 2008. Assumptions about the future course of the war are 

necessary to forecast the full eventual fiscal and economic impacts. Because the Administration 

has not been clear about future plans for U.S. forces in Iraq, these assumptions must be hypothetical. 

This study mainly examines potential future costs over a ten year window, up to the year 2017, 

similar to the budget spending window that the CBO used. The paper focuses on a scenario corresponding to the recent statement by Secretary of Defense Robert Gates that a protracted “Korealike” presence would be required in Iraq. This scenario involves a drawdown in Iraq troop levels 

of 66 percent by the year 2013, and a smaller drawdown of 33 percent in Afghanistan forces. The 

scenario also assumes that some active conflict with insurgents continues over the period (CBO 

2007a). 

In recent testimony, the nonpartisan CBO detailed Federal direct appropriations and interest costs 

for this scenario (CBO 2007b). These CBO estimates are used as a base for the analysis in this 

report. Once the full economic costs of the war are added to the approximately $2.4 trillion in 

Federal spending forecast under the CBO scenario, the total economic cost of the wars in Iraq and 

Afghanistan rise by over $1 trillion to $3.5 trillion. 

Costs could far exceed these projections if the significant drawdown assumed in this scenario 

does not materialize. This CBO budgetary scenario projects that appropriations for the Iraq war 

Budget costs in nominal dollars, flow of economic costs discounted to the relevant budget year. See Appendix B for 

discussion of methodology. 

*Based on Administration funding request for FY 2008, CRS and CBO cost estimates of direct appropriations. 

**CBO estimate from 10/24/2007 testimony to House Budget Committee (CBO 2007b). 

***Based on total sum of present value costs accrued in each budgetary year over 2002-2017 period. 

IRAQ WAR ONLY IRAQ AND AFGHANISTAN 

Scenario 

(Troop Strength) 

Drawdown from 2007 level of 

210,000 troops to 75,000 troops by 

2013. Troop strength constant from 

2013-17. 

Direct Appropriations* $1.3 Trillion $1.7 Trillion 

Total Federal Spending 

Including Interest** $1.9 Trillion $2.4 Trillion 

Total Economic Cost*** $2.8 Trillion $3.5 Trillion 

Costs per Family of Four $36,900 $46,400 

Gradual drawdown from 2007 

level of 180,000 troops to 

55,000 troops by 2013. Troop 

strength constant from 2013-

17. 

Table 2: Possible Economic Costs of Staying the Course (Through 2017) 
5 

will begin to drop significantly in 2009. But historically appropriations for the Iraq war have increased every year since the invasion, by between 12 and 40 percent annually (CRS 2007). 

This report also presents costs for several alternative budgetary scenarios (Appendix A). These include costs for a rapid withdrawal from Iraq while maintaining troops in Afghanistan, and the costs 

to maintain current (post-surge) troop levels in Iraq for the next decade. These scenarios generate 

very different economic costs over the next decade. For example, maintaining post-surge troop levels in Iraq over the next ten years would result in costs of $4.5 trillion. 

Each state is assumed to bear a share of the total war costs proportional to its share of the total national economy. On this basis, the report presents total state costs accrued through FY 2008, as well 

as potential future costs through 2017. 

$0 

$10,000 

$20,000 

$30,000 

$40,000 

$50,000 

2002 2005 2008 2011 2014 2017 

Source: JEC staff calculation based on CRS (2007), and CBO projection of budgetary cost for “considerable 

drawdown” scenario. 

Chart 2: With No Change In Course, Total Costs Incurred Per Family Reach Almost $50,000 

By 2017 (Costs For Wars In Iraq and Afghanistan) 

Part I: Taxpayer Costs of the War 

This section estimates current and future taxpayer expenditures for the war, based on budgetary information from the Congressional Research Service (CRS) and Congressional Budget Office 

(CBO).2

 The taxpayer costs can be divided into direct appropriations for the war and interest costs 

for Iraq-related debt. (These interest costs are a subset of the wider economic costs calculated in 

this report). 

February 2008 JOINT ECONOMIC COMMITTEE
JOINT ECONOMIC COMMITTEE February 2008

6 

DIRECT APPROPRIATIONS FOR THE WAR 

Prior to the start of the Iraq war in 2003, the Bush administration estimated the total cost of the 

war at between $50 to $60 billion (Bumiller 2003). 

The President has now requested over ten times this initial estimate just in direct appropriations 

for the war between FY 2003 and 2008. If the President’s latest request for supplemental funding 

is approved, the direct expenditures authorized specifically for the Iraq war from FY 2003 to FY 

2008 will total some $607 billion (CRS 2007; JEC estimates). This includes $450 billion already 

authorized by Congress between FY 2003 and FY 2007, plus an estimated $158 billion for Iraq 

from the supplemental request that the administration has made for FY 2008.3

 

Estimates of budgetary costs after 2008 depend on assumptions about the future course of the 

war. Appendix A of this report outlines costs for a variety of alternative scenarios, ranging from a 

rapid drawdown of troops to a continuation of post-surge funding and troop levels through the 

foreseeable future. 

In the main body of this report, we focus on the CBO “considerable drawdown” scenario, which 

corresponds to the “Korea-like presence” recently predicted by Secretary of Defense Robert 

Gates. Following the war in Korea, force levels dropped to a level of between 50,000 and 60,000 

troops throughout the 1960s and 1970s (Kane 2004). This scenario assumes that force levels in 

Iraq drop from their current level of 180,000 troops down to 55,000 by 2013, and are maintained 

at this level through 2017. 

This level of drawdown implies that beginning in FY 2009 funding levels for Iraq will begin to 

drop for the first time in the history of the war. The scenario predicts direct appropriations for the 

BOX A: HOW IS WAR IN IRAQ FUNDED? 

War funding has been borrowed from the public. Since 2001, Federal government revenues as a share of 

Gross Domestic Product have decreased by one percent, while outlays have grown significantly and debt 

held by the public has increased by approximately $1.5 trillion (CBO 2007a). In this environment of 

growing public debt, it seems evident that the marginal dollar spent by the Federal government has been 

borrowed. The characterization of the Iraq war as a “war of choice” and the funding of the war through a 

series of off-budget emergency supplemental bills makes this even clearer. 

Given the already steep fiscal demands on the Federal government, and the Administration’s unwillingness to offer a proposal to pay for the war, it is fair to assume that the future costs of the war through 

2017 will also be paid for by borrowing from the public. 

The assumption that Iraq war spending is borrowed drives a number of findings in this report. These include the level of government interest costs incurred, and also the assumption that some of the borrowed 

funding would have remained available for additional U.S. capital investment. 

2 CRS 2007; CBO 2007a and 2007b. See Appendix B for full explanation of budgetary estimates. 3 These direct budgetary costs include estimates of all of the additional spending so far for the Iraq war by the Defense 

Department, State Department, and the Veterans Administration, as well as reconstruction payments to Iraq. 
war drop from $135 billion in FY 2007 to less than $60 billion in FY 2013. For these reasons, the 

scenario should be seen as a conservative one. This CBO scenario implies an additional $690 billion in Iraq war spending through 2017 (CBO 2007a). 

IRAQ RELATED DEBT AND INTEREST COSTS TO TAXPAYERS 

Since war costs have been borrowed, taxpayers must also pay interest costs on the war until Iraqrelated debt is retired. If the president’s FY 2008 budget request is fully approved, this debt will 

total almost $660 billion by the close of FY 2008. It will reach almost $1.7 trillion by the close of 

2017. 

This debt has many economic implications, but the immediate impact on taxpayers will be the 

annual interest payments required. If the President’s FY 2008 supplemental request for Iraq funding is passed, almost 10 percent of total Federal government interest payments in 2008 will consist of payments on the Iraq debt accumulated so far. 

Interest costs on Iraq-related debt will be over $23 billion in FY 2008, and are projected to far 

exceed spending on programs that address key national priorities such as education and health. 

Chart 3 shows the current and projected future time path of interest spending through 2012. The 

chart shows that the annual interest costs on accumulated war debt already far exceed spending 

for such national priorities as health insurance for children (under the proposed Democratic 

SCHIP expansion recently vetoed by the President) and health research. 

Under the “considerable drawdown” scenario, by the year 2017 projected interest costs on Iraq7 

Source: JEC Estimates based on data from Congressional Budget Office (CBO) and Office of Management and 

Budget (OMB). 

0

5

10

15

20

25

30

35

40

45

50

55

2003 2006 2009 2012

Annual Interest Payment on Iraq-Related 

Debt 

SCHIP (Under 

Administration 

Reauthorization 

Proposal) 

Health Research 

and Training 

Chart 3: Projected Interest Costs of Iraq War Alone are Higher than Costs of Children's 

Health Program and Health Research & Training 

Billions of Dollars 

February 2008 JOINT ECONOMIC COMMITTEE
JOINT ECONOMIC COMMITTEE February 2008

8 

related debt will rise to $80 billion annually. The sum of interest paid on Iraq-related debt from 

2003-2017 will total over $550 billion. 

These interest costs are based on the assumption that interest rates will remain constant at a rate of 

4.5%. Interest payments could grow significantly compared to this forecast if interest rates rise in 

the future. 

Interest costs will continue to accrue beyond 2017 so long as the debt is not paid down. Paying 

down the debt will require cuts in government spending and/or increases in taxes. Alternatively, 

interest payments can simply be continued after 2017. Because this report projects costs accrued 

only through 2017, economic effects of the choices made about handling the debt after 2017 are not 

reflected in these estimates. It is assumed that the debt remains outstanding through the end of the 

forecast period. 

TOTAL TAXPAYER COSTS 

Total taxpayer spending is the sum of direct budget costs and interest costs. The total increase in 

taxpayer spending over 2003-2017 due to the Iraq war is a projected $1.9 trillion under the 

“considerable drawdown” scenario. If declines in future spending projected by CBO do not materialize, war spending could be substantially higher than forecast here (this issue is discussed further 

in Appendix A). 

To put annual spending on the war in perspective, it is useful to consider the spending on other national priorities that could be funded by just one year of Iraq spending. Chart 4 shows how Iraq 

funding just in the recently completed 2007 fiscal year compared to spending on various other public investment priorities. The FY 2007 total of $150 billion is greater than the combined sum of 

Federal spending on such priorities as the nation’s transportation infrastructure, health research, 

Source: Budget of the United States Government Fiscal Year 2008, JEC staff estimates based on CRS budgetary 

figures; Estimated interest costs for Iraq debt 

28

150

78

27

5

0

160 

Iraq War Infrastructure 

Repairs 

NIH College Tuition 

Assistance 

CHIP 

120 

80 

40 

Chart 4: Taxpayer Spending on Iraq War vs. Federal Spending on Other Priorities 

(FY 2007) 

Billions of Dollars 
9 

The budgetary costs alone of the war are high. But there are many additional economic costs of 

the war that go beyond the direct budgetary costs. In terms of magnitude, the most significant 

economic costs are: 

• Displacement of productive investment by U.S. companies due to increases in government 

borrowing. 

• Interest payments to foreign capital owners for Iraq-related debt. 

• Impact of the war on oil markets. 

In addition, there are a number of other, smaller, costs that we discuss below. Chart 5 shows the 

estimated division of all economic costs from the Iraq war alone. 

Chart 5: Breaking Down the Costs of War in Iraq 2003-2017 

All Figures listed in Billions of Dollars

Source: JEC calculations, Congressional Research Service, Congressional Budget Office, and Energy Information 

Administration. 

Direct 

Appropriations 

$1,300 

Oil Market 

Disruption 

$270 

Foregone 

Investment Return 

$870 

Other Costs 

$100 

Interest To 

Foreign Owners 

$220 

Part II: Additional Economic Costs 

customs and border protection, higher education aid, environmental protection, Head Start, and the 

CHIP program. 

Should the President’s recent supplemental request be fully approved, total taxpayer spending for 

Iraq would be even higher in FY 2008, approximately $180 billion or $500 million per day. 

February 2008 JOINT ECONOMIC COMMITTEE
JOINT ECONOMIC COMMITTEE February 2008

10 

THE EFFECT OF GOVERNMENT BORROWING 

As discussed above, the Iraq war has likely resulted in major increases in government borrowing. 

There is widespread consensus among economists that such borrowing has two effects (Friedman, 

2005): 

• First, it reduces the growth in productive private investment in the economy. Funds are 

diverted from private investment to purchase government securities. This depresses the 

future stock of productive capital below what it otherwise would have been without the 

borrowing. 

• Second, part of the debt is funded through borrowing from foreign capital owners. Interest 

payments on this debt flow out of the country and constitute an economic cost. 

Both of these effects have costs to the U.S. economy. For government borrowing that fully displaces productive investment, all the future returns on this capital investment are lost. The future 

growth rate of the economy is reduced. 

For government borrowing that is funded from world capital markets, investment is not displaced, 

but interest payments on this debt flow out of the economy to foreigners. (Interest payments to 

U.S. bond purchasers are a subset of the economic costs from displaced private investment in the 

U.S.). 

Although there is little dispute that both of these impacts occur to some extent, the exact balance 

between the two effects and the proper way to evaluate them is a subject of some controversy 

among economists. Appendix B describes the assumptions used in this report to estimate the economic costs of Iraq-related deficit spending. 

Because of these two economic impacts, the JEC estimates that Iraq-related borrowing between 

2003 and 2017 will create an additional income loss of almost $1.1 trillion in present value to 

U.S. citizens.4 

This loss of investment returns is the single largest cost of the Iraq war to the U.S. economy beyond the direct budgetary cost of the war itself. 

IMPACT ON WORLD OIL MARKETS 

Iraq is a significant oil producer, and is also located in a strategically vital region which is the 

center of world oil production. Since the start of the Iraq war in 2003, the price of oil has increased, from $37 per barrel (in the week prior to the war) to a recent peak of well over $90 per 

barrel in November 2007 (EIAa). This price increase has likely affected U.S. economic growth, 

and has transferred many hundreds of billions of dollars from U.S. consumers to foreign oil producers. 

The war in Iraq is certainly not responsible for all of this increase. Many other factors are also 

affecting oil prices, including large growth in oil demand from China and India. But the consistent disruptions resulting from the war have affected oil prices. 

4 This is the present value of the lost returns to investments that did no take place due to the diversion of capital into 

Iraq war spending, as well as the present value of post-tax returns to investments that were funded with foreign capital. 

The assumptions used to generate this estimate are further described in Appendix B. 
The Iraq War and Oil Prices 

The war in Iraq has two potential effects on world oil markets. The first is a direct effect, stemming from disruption in Iraqi oil exports to the world market. The second is an indirect psychological effect. 

The direct effect can be examined by considering Iraqi oil exports compared to capacity. The Energy Information Administration has stated that current Iraq production of roughly 2 million barrels per day (BPD) is “down from around 2.6 million BPD of production and a nameplate capacity of 2.8 to 3 million BPD in pre-invasion January, 2003.” (EIA 2007c). 

Taking the EIA estimate of 2.6 million BPD of actual pre-war production, the reduction in direct 

Iraqi oil production has ranged from roughly 1.3 million BPD (in the invasion year of 2003) to 

about 600,000 BPD today. These shortfalls likely impact world oil prices. As a CBO report discussing oil market developments from 2003-2006 stated: 

“Today, however, worldwide production is close to its short-term limits. As a result, oil markets 

appear much more vulnerable than before to an interruption in supply or a rapid increase in demand. Even the threat of a reduction in supply of a few hundred thousand barrels a day causes 

sharp fluctuations in prices” (CBO 2006). 

As a rule of thumb, the Department of Energy estimates that a 1 percent decline in world oil supply generally leads to about a 10 percent rise in prices (EIA 2004, GAO 2006). Using this rule 

leads to the prediction that shortfalls of the levels discussed above might be expected to increase 

oil prices by around 15% in 2003, and 7-9% in 2004-2007. Because of rising prices, this percentage increase creates a consistent rise in the price of oil of roughly $5.00 per barrel. 

The Iraq war could have a second, indirect effect on oil prices if events in Iraq have led to concerns about wider regional conflict, or increases in terrorism in the region that could affect oil 

fields. These kinds of fears would cause investors to bid up the price of oil on futures markets, 

and increase the stockpiles of oil they hold against an emergency. 

11 

BOX B: MARKET PSYCHOLOGY 

A recent CRS report on world oil prices singled out the Iraq war as having an important impact on market psychology: 

“The war in Iraq has contributed to high oil prices in different ways as events have progressed. The predominant effect of the conflict on oil prices has been an increase in uncertainty. During the early stages 

of the conflict, concerns about a possible disruption of oil supply out of the Persian Gulf and disruption 

of Iraqi production due to military operations were prominent....Later, market uncertainty revolved 

around the ability of Iraq to export oil in the midst of political transition in which pipeline and other oil 

facilities were attacked by hostile groups within the country. Uncertainty with respect to terrorist attacks, 

both in Iraq, and spilling over to other Gulf nations, including Saudi Arabia, continue to unsettle the oil 

market and contribute to a “fear factor” being built into the price of oil.” (CRS, 2005) 

February 2008 JOINT ECONOMIC COMMITTEE
It seems likely that indirect psychological factors related to the Iraq war did contribute to increases in oil prices in 2003, and been one of several factors contributing to oil price volatility 

since then. 

It is hard to quantify the size of this effect on prices. But it seems clear that the Iraq war has been 

one factor contributing to a generally unsettled state of oil markets over the past several years. 

This is due to the combination of the timing of the war during a period when world oil markets 

have been under unusual stress from increased demand, and the psychological effects of the increased geopolitical uncertainty due to the war. The combination of direct and psychological effects helps to support the price effect discussed above. 

The Economic Impact of Higher Oil Prices 

What impact does this increase in oil prices have on the U.S. economy? There are two separable 

effects. The first impact is a direct transfer to wealth from U.S. consumers to foreign oil producers driven by the rise in oil prices. This estimated effect can be counteracted somewhat by reductions in oil consumption by consumers or if foreign oil profits are spent in the U.S. JEC estimates 

find that from 2003-2008 this effect will transfer approximately $124 billion from U.S. oil consumers to foreign producers.5

 

Most economists agree that there is likely a further impact of oil price increases on the economy. 

Beyond any direct transfer effect, oil price shocks reduce economic growth, due to reductions in 

consumer demand and various adjustment costs by industries that use oil. However, there is substantial controversy over the exact size of the effect. It is generally agreed that these economic 

impacts of oil price increases have declined in today’s economy as compared to the 1970s 

(Nordhaus 2007). Estimates using macroeconomic simulation models often find small costs 

(CBO 2006). However, estimates based on examining the actual past responses of the U.S. economy to oil price changes often find much larger impacts, ranging from five to fifteen times those 

found in model-based estimates. 

It seems likely that the impact varies substantially depending on the exact type of oil price shock 

and how it is sustained, with sharp, surprising increases in oil prices having the largest negative 

effects on growth, and slow and expected increases having smaller or potentially no effect (Li, Ni, 

and Ratti 1995; Huntington 2005). But the Iraq war has produced a consistent series of surprises 

as the insurgency has grown, unforeseen interference with oil fields has continued, and new political disruptions have occurred (such as tensions with Iran and conflict between Kurdistan and 

Turkey). As discussed above, this has taken place in an environment of limited spare production 

capacity, and new peaks in world oil prices almost every year. 

For this reason, the analysis assumes that Iraq-related oil price increases have had a wider economic effect. In particular, the analysis assumes a consistent effect throughout the 2003-2008 period that is proportional to the roughly $5 per barrel price increase described above. However, no 

further economic impacts from rising oil prices are assumed for 2009 or after.6

 The magnitude of 

JOINT ECONOMIC COMMITTEE February 2008

12 

5 This is based on the assumption of a – .1 elasticity for oil consumption by U.S. energy consumers and a recycling of 

10% of foreign oil revenues into the U.S. economy. 

6 Such additional impacts in 2009 and following years are in quite possible, but since they cannot be reasonably predicted they have not been included in the analysis. 
the GDP impact is assumed to be moderate to low. It is consistent with a wide range of recent 

studies.7 

Under these assumptions, oil price increases from 2003-2008 due to the Iraq war reduced total 

U.S. income GDP by a total of approximately $274 billion, a direct transfer of about $124 billion 

and a further GDP effect of $150 billion. 

OTHER ECONOMIC IMPACTS 

There are numerous other costs of the wars in Iraq and Afghanistan that are not reflected in 

budget estimates. However, these impacts are even more difficult to estimate than the costs discussed above. They are also generally somewhat smaller than the impacts discussed above. The 

JEC estimates that a fuller accounting of these impacts would add at least $110 billion to the total 

future costs of the two wars. 

The Impact of Wounds and Disabilities 

One such economic impact is the costs of care for wounded and disabled veterans. Some 28,000 

troops have been wounded in Iraq through October 2007 and almost half could not be returned to 

duty within 72 hours (DoD 2007). Should the war continue through 2017, it is reasonable to expect additional casualties. 

Estimates of the costs of disability compensation and medical care for these injured veterans vary 

significantly. CBO has estimated the direct Federal cost of disability payments and medical care 

for Iraq War veterans over the 2003-2017 period (CBO 2007b). This estimate of approximately 

$10 billion is included in the budgetary estimates given above. The cost rises to $13 billion when 

Afghanistan veterans are included. 

Other estimates of the entire eventual economic costs of disability among all Iraq war veterans are 

far higher than CBO, running as high as several hundred billion dollars (Bilmes 2007). But these 

estimates may not fully separate out the incremental impact of the Iraq war. Some veterans would 

likely have incurred disabilities during their army service even if they served during peacetime. 

Further study is needed to determine the full increment in injury and disability to veterans serving 

in wartime as opposed to peacetime. 

But it is still likely that the CBO estimate underestimates the total economic cost experienced due 

to injuries or disabilities created by the war. Since the CBO cost estimate runs only through 2017, 

it does not include the full lifetime cost of care for these injured veterans. In addition, CBO may 

have underestimated the number of veterans not wounded in action who will eventually seek disability benefits or medical care due to war-related health issues. Finally, there is evidence that 

veterans disability benefits do not always fully compensate for earnings losses due to certain conditions. 

13 

7 Specifically, the assumption is that a 10 percent rise in oil prices reduces GDP by two-tenths of one percentage point. 

This produces GDP impacts consistent with the recent Global Insight simulation of a $10 rise in oil prices (Huntington, 

2005). It is smaller than the effect found in a recent literature survey by Jones, Leiby and Paik (2004) and the most recent study by Hamilton (2004), who both estimate an impact of between five and sixth tenths of a percentage point of 

GDP per ten percent rise in oil prices. However, this GDP impact is somewhat larger than that estimated by the Congressional Budget Office (2006). 

February 2008 JOINT ECONOMIC COMMITTEE
The types of injuries and disabilities sustained in the war add to the uncertainty about future 

medical costs. As battlefield medical care has advanced, the number of seriously injured soldiers 

who survive their wounds has increased. Iraq therefore has a higher ratio of wounded to fatalities 

than previous wars, and the severity of wounds has correspondingly increased (CBO 2007d). For 

example, about 800 wounded soldiers have been injured severely enough to require amputations. 

In addition, the widespread use of improvised explosive devices by insurgents has led to a high 

incidence of traumatic brain injury (TBI) among both wounded troops and those soldiers who survive explosions without other injuries. A recent estimate is that 10 to 20 percent of returning soldiers who believed themselves to be healthy had in fact experienced mild to moderate TBI 

(PCCWW 2007). The future potential health impacts and costs of TBI (especially in its mild to 

moderate form) are not yet well understood. 

Post-traumatic stress disorder (PTSD) is another important health issue related to the Iraq conflict. This psychological reaction to traumatic stress appears to affect a substantial number of returning soldiers. Estimates indicate that between 10 and 20 percent of returning soldiers show at 

least some symptoms of the disorder (Hoge et. al 2007; PCCWW 2007). Some 40,000 returning 

soldiers have already received an official diagnosis (CBO 2007d). Research on the economic effects of PTSD indicates that it can lead to substantial reductions in earnings and employment capacity (Veterans Commission 2007; Savoca and Rosenheck 2000). Advances in treatment have 

been made, but there is still a great deal of uncertainty about the future economic impacts of this 

disorder and the number of veterans who will eventually be affected. 

The JEC estimates that these factors are likely to add $25 billion to the total economic costs of 

injury in the Iraq war, beyond the 2003-2017 costs projected by CBO: 

• A projection of the present value of the lifetime disability and medical care costs for injured veterans beyond 2017 gives a result of approximately $11 to $15 billion in additional expenses for the Iraq war.8

 When the cost of the Afghanistan war is included, this 

rises to about $13 to $17 billion. 

• There are additional economic costs of injury that are not reflected in VA disability benefits or medical expenses. One of these is earnings losses that are not fully compensated for 

by disability benefits. As estimate of earnings losses related to PTSD alone finds an additional $10 billion in lost earnings to Iraq veterans that are not reflected in VA benefits.9

• The families of injured veterans expend considerable time and effort to provide care for 

their loved ones. This can have significant economic costs. A survey by the Dole-Shalala 

commission found that almost 20% of injured veterans stated a family member had to quit 

a job to provide care for them. This implies additional economic costs potentially as high 

as $1 billion. 

• Future disabilities resulting from past wars have typically been underestimated early in the 

conflict (Veterans Commission 2007). However, at this time it is very difficult to project 

what level of additional disabilities beyond CBO forecasts may result from the Iraq war. 

JOINT ECONOMIC COMMITTEE February 2008

14 

8 Based on projecting the present value of CBO disability and medical care costs for the year 2017 over an additional 

30 years, with an adjustment for the proportion estimated to come from Iraq. The exact figure depends on what the 

starting year of discounting is; discounting to 2008 dollars produces the $9 billion figure, while discounting to 2017 

dollars yields a $12 billion cost. 

9 See Appendix B. The cost rises to $12 billion when Afghanistan veterans are included. 
15 

10 CBO has raised some question over how much of the repair, reset, and reconditioning costs related to Iraq are in fact 

purchases of new equipment that was not made necessary by the Iraq war (CBO 2007f). However, in this report we 

accept the DOD estimate.

These costs do not represent the total cost of injuries and disabilities to veterans. Instead they represent only the additional economic costs not already included in estimated Federal spending on injured veterans and should be understood as highly conservative. 

Additional Military Costs

Between 2003 and 2006 alone, the cost of retention bonuses and re-enlistment incentives for the 

Army, Marines, Reserve, and National Guard have skyrocketed, rising by $800 million annually 

(Associated Press 2007). If these increased costs stayed constant over the 2003-17 period, they 

would add $13 billion to military budgets over the period. These costs are not reflected in the budgetary costs previously mentioned. 

The military and other sources have also estimated a variety of potential repair and reset costs for 

replacing and repairing equipment damaged in the Iraq conflict. Iraq-related reset costs in the FY 

2007 military budget alone totaled some $27 billion (DoD 2007). This figure is included in the 

budgetary costs already totaled previously. 

However, the Department of Defense estimates that approximately $40 billion in reset costs will be 

required after withdrawal from Iraq (DoD 2007). These future costs are not included in the budget 

estimates described previously, and therefore they are added under “additional costs”.10

Finally, the Administration has requested a significant long-term increase in the number of enlisted 

personnel in the Army and Marine Corps (CBO 2007e). This increase will eventually total 65,000 

additional troops for the Army and 27,000 additional for the Marine Corps. The CBO calculated 

costs of approximately $17 billion annually for this expansion between 2008 and 2012. But these 

costs were not included in CBO tallies of the costs of the Iraq or Afghanistan wars, since the Administration has not justified this proposed increase in the size of the military solely with reference 

to these wars (CBO 2007e). 

However, it seems clear that the wars in Iraq and Afghanistan have contributed to the need for an 

expansion in the size of the military. For this reason, the JEC analysis adds one-quarter of the estimated cost of this increase in military forces (or $4.25 billion annually) as an additional cost of the 

war beginning in 2009. This is a conservative estimate of the level of increase in military forces 

that could be required by these wars. 

These additional military costs add approximately $85 to $90 billion to total war costs for Iraq and 

Afghanistan combined. Based on the split in force levels between Afghanistan and Iraq going forward, the report assigns 80 percent of this total, or about $70 billion, to the Iraq war. 

Costs of National Guard and Reserve Deployments

Some half a million of the National Guard and Reserve have so far been deployed in Iraq. Some of 

the costs of this mobilization are reflected in government budgetary costs. But some are not, including the disruption for employers created by the loss of staff. 

February 2008 JOINT ECONOMIC COMMITTEE
ADDITIONAL (UNQUANTIFIED) IMPACTS OF THE IRAQ WAR 

This report does not attempt to quantify any demand-side macroeconomic effects of war spending 

on the economy. Because the war began in the wake of the 2001 recession, some of the war 

spending could have worked to close a small part of the recessionary gap between potential and 

realized production. However, the bulk of the war spending took place well after the recession 

and any additional demand-side macroeconomic effects (difficult to estimate in any case) are not 

likely to be large with respect to the ongoing effects of war spending on the economy. 

The over 3,800 American fatalities that have resulted from the war so far are a tragedy that is difficult to quantify in economic terms. These losses can be seen as creating a direct economic effect 

of many billions of dollars in lost productivity and creativity for the nation. To this must be added 

the psychological costs of the loss to loved ones, families, and communities. The national security 

and foreign policy impacts of the war are beyond the scope of this study. Finally, the impact of 

the war on the nation of Iraq is also beyond the scope of the report. 

JOINT ECONOMIC COMMITTEE February 2008

16 

Part III: State-by-State Cost Estimates for the War 

War costs can also be expressed in terms of the costs to each U.S. state. Table 3 shows the budgetary costs and total economic costs divided between all fifty states, in proportion to each state’s 

share of the Federal tax burden. Each state’s share of total economic costs is also shown, divided 

in proportion to their share of national GDP. (States will incur the full economic costs of the war 

in proportion to their share of the economy). State shares of total costs vary from $358 billion in 

California to $5.5 billion in Wyoming. 

The direct appropriations alone devoted to the Iraq war are staggering. President Bush has already 

requested Iraq war appropriations over ten times his original pre-war cost estimate. The President’s 

appropriations request for FY 2008 for Iraq alone exceeds total U.S. state, local, and Federal spending on our entire surface transportation system. Yet this report has demonstrated that the indirect 

costs to the American economy are roughly twice these direct appropriations. 

If the President’s supplemental funding request for FY 2008 is approved, the accrued costs to the 

economy accrued through 2008 for the wars in Iraq and Afghanistan through FY 2008 will exceed 

$1.6 trillion. This is over $20,000 per family of four. 

Yet the costs that we will incur if the war continues are far greater. Even assuming the optimistic 

scenario of a significant drawdown in troop strength and no further impacts on oil markets, a continuation of the war through 2017 will lead to total economic costs for Iraq and Afghanistan of 

some $3.5 trillion over the 2003-17 period under the considerable drawdown scenario. 

Conclusion 
 Costs 2003-2008 (Billions) Costs 2003-2017 (Billions) 

State Budgetary Economic Total Budgetary Economic Total 

United States $600 $700 $1,300 $1,300 $1,470 $2,770 

Alaska $1.0 $2.2 $3.2 $2.2 $4.6 $6.8 

Alabama $5.5 $8.5 $14.1 $12.0 $18.0 $29.9 

Arkansas $5.7 $4.9 $10.5 $12.3 $10.3 $22.5 

Arizona $8.3 $12.4 $20.7 $18.0 $26.0 $43.9 

California $76.0 $92.0 $168.0 $164.7 $193.1 $357.8 

Colorado $9.2 $12.3 $21.4 $19.9 $25.8 $45.6 

Connecticut $14.7 $10.9 $25.5 $31.7 $22.8 $54.6 

District of Columbia $2.6 $4.7 $7.3 $5.7 $9.8 $15.5 

Delaware $3.8 $3.2 $7.0 $8.3 $6.7 $15.0 

Florida $32.9 $38.0 $70.9 $71.3 $79.8 $151.1 

Georgia $17.3 $20.2 $37.5 $37.5 $42.4 $79.9 

Hawaii $1.9 $3.1 $5.0 $4.2 $6.5 $10.7 

Iowa $4.6 $6.6 $11.2 $10.0 $13.9 $23.8 

Idaho $1.6 $2.7 $4.2 $3.4 $5.6 $9.0 

Illinois $32.5 $31.4 $63.9 $70.4 $65.9 $136.3 

Indiana $9.1 $13.3 $22.3 $19.7 $27.8 $47.5 

Kansas $4.7 $5.9 $10.7 $10.3 $12.5 $22.7 

Kentucky $4.6 $7.8 $12.4 $10.0 $16.3 $26.3 

Louisiana $4.6 $10.3 $14.8 $9.9 $21.6 $31.5 

Massachusetts $17.0 $18.0 $34.9 $36.8 $37.7 $74.5 

Maryland $11.6 $13.7 $25.4 $25.2 $28.8 $54.0 

Maine $1.6 $2.5 $4.1 $3.4 $5.3 $8.7 

Michigan $15.9 $20.3 $36.2 $34.5 $42.6 $77.1 

Minnesota $14.4 $13.0 $27.4 $31.2 $27.3 $58.6 

Missouri $9.2 $12.0 $21.2 $20.0 $25.3 $45.2 

Mississippi $2.4 $4.5 $6.9 $5.1 $9.4 $14.5 

Montana $0.9 $1.7 $2.6 $2.0 $3.6 $5.6 

North Carolina $16.2 $19.9 $36.1 $35.1 $41.9 $76.9 

North Dakota $0.7 $1.4 $2.1 $1.6 $2.9 $4.5 

Nebraska $4.3 $4.0 $8.4 $9.4 $8.5 $17.9 

New Hampshire $2.5 $3.0 $5.5 $5.4 $6.3 $11.7 

New Jersey $27.4 $24.1 $51.5 $59.3 $50.7 $110.0 

New Mexico $1.8 $4.0 $5.9 $4.0 $8.5 $12.5 

Nevada $5.4 $6.3 $11.7 $11.7 $13.2 $24.9 

New York $53.8 $54.4 $108.2 $116.6 $114.2 $230.8 

Ohio $21.0 $24.6 $45.6 $45.6 $51.6 $97.2 

Oklahoma $9.1 $7.2 $16.3 $19.7 $15.1 $34.8 

Oregon $4.8 $8.1 $12.9 $10.5 $16.9 $27.4 

Pennsylvania $22.9 $27.2 $50.0 $49.6 $57.0 $106.6 

Rhode Island $2.4 $2.4 $4.8 $5.2 $5.1 $10.3 

South Carolina $4.4 $7.9 $12.3 $9.5 $16.7 $26.2 

South Dakota $0.9 $1.7 $2.6 $2.0 $3.6 $5.6 

Tennessee $9.3 $12.7 $21.9 $20.0 $26.6 $46.7 

Texas $49.1 $56.7 $105.8 $106.3 $119.2 $225.5 

Utah $3.2 $5.2 $8.4 $7.0 $10.9 $17.9 

Virginia $16.3 $19.7 $36.0 $35.4 $41.3 $76.6 

Vermont $0.9 $1.3 $2.2 $1.9 $2.7 $4.6 

Washington $13.6 $15.6 $29.3 $29.5 $32.8 $62.3 

Wisconsin $9.6 $12.1 $21.7 $20.8 $25.4 $46.2 

West Virginia $1.6 $3.0 $4.5 $3.4 $6.2 $9.6 

Wyoming $1.0 $1.6 $2.6 $2.2 $3.3 $5.5 

Sources: Budgetary and Economic Costs derived from JEC calculations based on data from the U.S. Census Bureau, Congressional Budget 

Office and Office of Management and Budget.

Table 3: State-by-State Breakdown of Total Iraq War Economic Costs 
JOINT ECONOMIC COMMITTEE February 2008

18 

Map: States Bear Billions in Iraq War Costs 

Total Economic Costs of the Iraq War 2003-2017 

Source: JEC Calculations. 
19 

We have already experienced massive economic costs due to our failed strategy in Iraq. The nation will experience even more significant costs if we do not change course. 

The Economic Burden of The Iraq War 

The economic costs calculated in this report are a conservative estimate of the potential costs to 

the U.S. economy if we do not change course in Iraq. This study does not include such unquantifiable impacts as the cost of thousands of U.S. fatalities in these wars or the effect of the Iraq war 

on U.S. international prestige and security. The report assumes no oil market impacts of a continued Iraq occupation beyond 2008. The report uses conservative economic assumptions throughout, especially for the economic burden of injuries and disabilities resulting from the war. Finally, 

the report focuses on costs for a future scenario that assumes a substantial reduction in troop levels and budgetary costs of the war. 

Despite these conservative assumptions, the economic cost of the war so far is already well over a 

trillion dollars. The combined costs of the wars in Iraq and Afghanistan is forecast to climb to 

some $3.5 trillion over the next decade if the occupation of Iraq is maintained. This will be true 

even if a considerable drawdown takes place and annual direct appropriations for the Iraq war decline by more than half over the next five years. By any measure, the economic costs of continuing our current course in Iraq would be enormous. 

February 2008 JOINT ECONOMIC COMMITTEE
JOINT ECONOMIC COMMITTEE February 2008

20 

Appendix A: Costs of Alternative Scenarios 

War costs through 2007 can be directly calculated. In this study, war costs for FY 2008 were estimated by taking the figures in the President’s supplemental spending request, as allocated by the 

Congressional Research Service. 

Cost projections for FY 2009-17 require forecasting the future course of the war. The main body 

of the report focused on the CBO’s “moderate drawdown” scenario to project future costs. This 

“moderate drawdown” scenario assumes a 64% drop in the number of troops in Iraq by 2013, and 

constant force levels from 2013-17. The scenario implies a sharp decline in war costs beginning 

in 2009. 

This appendix supplements this scenario with two others. The first is a “sharp drawdown” scenario under which forces in Iraq are rapidly reduced to 10,000 by 2010, and withdrawn altogether 

by 2011. This scenario corresponds roughly to withdrawal scenarios advanced by House Democrats. The underlying budgetary figures are based on CBO fiscal estimates for a sharp drawdown 

scenario, with costs in later years assumed to occur entirely in Afghanistan and not in Iraq. FY 

2008 funding is assumed to be somewhat lower than the President’s request. The future costs for 

disabilities, as well as additional military costs such as recruitment, force expansion, and repair, 

are also assumed to be a total of $35 billion lower under this scenario. 

The second is a “no drawdown” or “status quo” scenario which assumes post-surge cost levels for 

the war continue throughout the budget window until 2017. This scenario corresponds to an indefinite continuation of the war. To perform this estimate, JEC staff adopted a CBO estimate of 

FY 2009 costs. At $121 billion per year, this estimated spending would still be over $10 billion 

lower than Iraq war spending in FY 2007, and over $30 billion lower than FY 2008 spending will 

be if the President’s supplemental is approved. (It would thus represent the first annual decline in 

Iraq spending since the start of the war). The “no drawdown” scenario then assumes this spending 

stays constant in real terms (adjusted for a 2% inflation level) through 2017. This reflects a continued commitment of 155,000 troops to the occupation of Iraq. The costs for disabilities, as well 

as additional military costs such as recruitment, force expansion, and repair, are also assumed to 

be a total of $35 billion higher under this scenario. 

Table A-1 and Chart A-1 show force levels and total costs in Iraq and Afghanistan for all three 

scenarios. Because such a large amount of war costs have already been incurred, all of the scenarios show large total expenses for the war. (For example, all three scenarios require continued interest payments on war-related debt accumulated so far). However, the difference between the 

“sharp drawdown” and “no drawdown” scenarios amounts to a savings of approximately $2 trillion in total economic costs incurred between 2003 and 2017. 
$2.6 

$4.5 

Sharp Drawdown (Democrats) Moderate Drawdown (CBO) Stay-the-Course (White House) 

Total economic costs of wars in Iraq and Afghanistan, 2002-2017 

21 

Scenario 

Troop Levels in Iraq and Afghanistan Estimated Total Economic 

Costs ( 2003-2017) 

2007 2008-2017 Iraq and 

Afghanistan Iraq Only 

No Drawdown 

(Status Quo) 

210,000 

(180,000 in Iraq) 

Reduction to 180,000 

troops total (155,000 in 

Iraq) by FY 2009. No further reduction. 

$4.5 Trillion $3.5 Trillion 

Considerable 

Drawdown 

(Korea-like 

Presence) 

210,000 

(180,000 in Iraq) 

Gradual reduction to 

75,000 troops total (55,000 

in Iraq) by 2013. This force 

strength maintained 

through 2017. 

$3.5 Trillion $2.8 Trillion 

Sharp Drawdown 

(House 

Democratic Plan) 

210,000 

(180,000 in Iraq) 

Rapid reduction to 30,000 

troops total (10,000 in Iraq) 

by 2010. Full withdrawal 

from Iraq after 2010; 

20,000 troops maintained 

in Afghanistan 

 $2.6 Trillion $1.7 Trillion 

Table A-1: Descriptions and Costs of Alternative Future Scenarios 

Chart A-1: Total Economic Costs Under Future Scenarios 

$4.0 

$3.5 

$3.0 

$2.5 

$2.0 

$1.5 

$1.0 

$0.5 

$0 

$3.5 

$4.5 

February 2008 JOINT ECONOMIC COMMITTEE
JOINT ECONOMIC COMMITTEE February 2008

22 

Table A-2 Alternative Ways to Spend the $435 Million We Spend In Iraq Every Day 

 Current Enrollment per 

Year Potential Enrollment 

People Insured through SCHIP 6,400,000 330,700 

Head Start Participants 909,200 57,500 

Pell Grants 5,000,000 153,000 

Border Patrol Agents 17,800 10,800 

State and Local Police 624,400 9,000 

Teachers 215,600 5,500 

Provide Health 

Insurance for 

330,700 

Low-Income Children 

Through S-CHIP 

Hire 

10,800 

Border Patrol Agents 

Put an Additional 

9,000 

Police Officers 

on the Streets 

Hire 

5,500 

More Teachers 

Make College More 

Affordable for 

153,000 

Low-Income 

Students through 

Pell Grants 

Enroll an Additional 

57,500 

Children in Head Start 

Sources: Expect More Data (expectmore.gov), Congressional Budget Office Data (cbo.gov) and the President’s FY 

2008 Funding Requests for Appropriations 
23 

Appendix B: Methodology 

11 These figures differ slightly from CBO figures, as CBO is willing to leave some costs unallocated to either Iraq or 

Afghanistan while CRS analysts allocate the entire amount to a specific war. 

The Economic Cost Concept 

Conceptually, economic costs in this paper are the sum of all costs to taxpayers, plus additional costs to 

Americans that are not reflected in government budgets. To be a valid measure of total costs, this method 

requires the assumption that costs to taxpayers exactly reflect the true resource cost of the goods or services being purchased by government. 

Of course, this assumption may not be completely true. Some government costs may include, for example, 

profits in excess of normal rates of return for government contractors. In many analyses of overall economic costs these profits would be scored as transfers and not costs at all (they would act as offsetting 

benefits to government costs). But in this case the results of adopting such a technique would be misleading and counterintuitive. For example, if profits were scored as transfers, this would imply that cases of 

contractor fraud in which Americans earned large profits by cheating the government would reduce the 

overall costs of the Iraq war to the taxpayer. 

Because of the assumption that government costs reflect true resource costs, those resource costs that appear in government budgets are not counted twice. To take one example, when disability payments to injured veterans make up for part or all of their lost earnings, these lost earnings are not counted again in 

economic costs. 

Calculations of Budgetary Spending 

Figures from the Congressional Research Service (CRS) were used to determine the total amounts expended on the Iraq and Afghanistan wars through the close of 2007, and also in the President’s 2008 supplemental request (CRS 2007).11

Budgetary figures for 2009 and after were drawn from testimony by the Congressional Budget Office 

(CBO). These figures are drawn from Tables 5 through 7 of Robert Sunshine’s testimony to the House 

Budget Committee in July, 2007. They are increased by 10% to reflect higher levels of spending than expected at that time. (This increase is explained in CBO director Peter Orszag’s testimony before the House 

Budget Committee in October 2007). The scenario used in the main body of the report corresponds to Scenario 2 in this CBO testimony, with the 12-month sustained surge option assumed. Based on discussions 

with CBO staff, 80% of these budgetary costs are assumed to be incurred in the Iraq war. 

The two other scenarios described in Appendix A also draw on these CBO budgetary figures, but are 

modified as described in Appendix A. 

Accrued Costs of Foregone Investment 

The accrued costs of foregone investment related to borrowed funds are estimated using a shadow cost of 

capital approach. This approach converts lost investment into the present value of a stream of future consumption. There is substantial agreement that this approach is theoretically correct (Cline 1992). However, 

there are a variety of methods to calculate the shadow cost. Some methods can have results that depend 

heavily on assumptions (Lyon 1990). 

This report uses a comparatively stable and conservative means for calculating the shadow cost of capital, 

that is less fragile to assumptions than other methods. The description and justification for the technique is 

outlined in Cline (1992). This method involves summing the real present value of total returns to capital 

February 2008 JOINT ECONOMIC COMMITTEE
JOINT ECONOMIC COMMITTEE February 2008

24 

over a 15 year time horizon. Capital investment returns are calculated using the marginal pre-tax return to 

private investment, and discounted by the social rate of time preference. All of the capital return is assumed to be consumed, except for whatever share is necessary to compensate for depreciation. 

The key assumptions involved are: 

1. The amount of borrowed money that represents displaced capital investment. This study assumes 60% 

of Iraq-related government borrowing represents displaced investment. The other 40% is assumed to 

be replaced by foreign investors. This figure is directly drawn from an estimate of the economic impact of deficits by the Bush Administration Council of Economic Advisors in 2003 (CEA 2003). 

2. The pre-tax real marginal rate of return to capital. This report assumes a 7% real rate of return on capital, net of depreciation. This is the standard assumption that the Office of Management requests that 

agencies use as the alternative return to capital used in government expenditures (OMB 1992).12

3. The social rate of time preference, or discount rate. This report assumes a 3% discount rate. The inflation-adjusted cost of Treasury borrowing in recent years has been between 2 and 3% (OMB). The use 

of this Treasury borrowing rate is also recommended by OMB when using the shadow price of capital 

approach. The rate is higher than the standard 2% rate used by CBO. (OMB 1992; Kohyama 2006). 

The economic costs of foregone investment are then summed in the following manner: 

1. The increase in Federal borrowing each year is calculated using assumptions about the fraction of appropriations that are spent in each year. 

2. Sixty percent of increased borrowing is assumed to displace capital. 

3. The discounted real present value of the displaced capital is summed over a 15 year time horizon. 

4. The present value of costs are counted as accrued in the year in which the Iraq-related borrowing took 

place. 

The stream of foregone investment earnings is discounted to the year in which the borrowing took place. 

This is done to match economic costs with the reported budget figures from CBO reports and testimony 

(CBO 2007b, c). The costs in the body of the report can therefore be understood as describing future losses 

to the economy over the entire 2003-2017 period. 

Interest Payments to Foreign Creditors

The 40% of borrowing that does not represent displaced capital is assumed to be borrowed from foreign 

purchasers of debt. Outflows of interest to these foreign creditors represent an economic loss. Therefore, 

each year 40% of payments on Iraq-related debt are counted as an economic loss. Based on discussions 

with CBO staff, interest payments are calculated at a 4.5% interest rate. 

Other Costs: Medical Costs

As discussed in the main body of the report, CBO has attempted to forecast Federal medical and disability 

costs for war-related injuries up to the year 2017. This report adds on the present value cost of a continuation of these medical and disability costs for a 30-year period, discounted at a 3% rate. Medical costs are 

assumed to decline at a rate of roughly 10% per year due to the healing of injuries and illnesses. Disability 

costs remain constant. 

12 Other estimates are higher; for example, Gomme, Ravikumar, and Rupert (2006) estimate 7.7% as the average of the 

real marginal return over the 1950-2001 period. This would result in a larger amount of lost investment. 
25 

February 2008 JOINT ECONOMIC COMMITTEE

The report also adds on a cost of lost earnings for one sample war-related disability, post-traumatic stress 

disorder (PTSD). The majority of lost earnings costs due to war injuries are assumed to already be counted 

in VA disability payments, which compensate for such earnings losses and are included in budgetary costs. 

However, a recent study commissioned by the Veterans Commission on the adequacy of disability benefits 

found that such benefits only compensate about 80 percent of the earnings losses due to mental disabilities 

such as PTSD (Christensen et. al 2007). 

The report assumes that 15 percent of serving veterans over the 2002-17 period will eventually experience 

PTSD (Hoge et. al 2007; PCCWW, 2007). The report also assumes that they will experience earnings losses 

of roughly 20 percent (Savoca and Rosenheck 2000). Finally, the assumption is made that the average present value of lifetime earnings for a veteran absent PTSD is $2 million. (This estimate is based on inflationadjusted results from civilians from Day and Newburger 2002). The $10 billion figure in the text was calculated based on these assumptions combined with the average under compensation from VA benefits discussed above. 

Discounting Costs Over The Budget Window 

This report discounts war costs to each specific budget year. For example, the lost future consumption due to 

debt-related displaced investment is discounted to the year the money was borrowed. Likewise, the future 

costs of disabilities and injuries for veterans are discounted to approximately the estimated year of the injury. However, costs are not discounted across budget years. This was done to maintain comparability with 

actual budget figures and future CBO budgetary estimates, which are not discounted. 

An alternative method would be to discount all war costs to some specific budget year, such as FY 2008. 

Discounting and deflating total costs to real FY 2008 dollars does reduce the overall cost of the Iraq war between 2003 and 2017. However, the effect is not large. This is partly because discounting to 2008 increases 

costs incurred in FY 2003-2007. It is also because under the “moderate drawdown” scenario the bulk of total 

costs are incurred in years close to 2008. 

As an example of the effect of discounting, discounting all costs to real FY 2008 dollars at a 3% discount 

rate and an assumed 2% inflation rate reduces the total costs of the Iraq war under the “moderate drawdown” 

scenario from $2.77 trillion to $2.58 trillion. The combined costs of the wars in Iraq and Afghanistan are 

reduced from $3.48 trillion to $3.25 trillion. Costs of the war between 2002 and 2008 alone would of course 

be increased by this exercise. 
JOINT ECONOMIC COMMITTEE February 2008

26 

Bilmes, Linda, 2007. “Soldiers Returning from Iraq and Afghanistan: The Long-term Costs Providing Veterans 

Medical Care and Disability Benefits.” Working Paper, Harvard University. 

Bumiller, Elizabeth, 2003. “The Cost of War.” The New York Times, p. 4.2. 

Christensen et al, 2007. “Final Report for the Veterans’ Disability Benefits Commission: Compensation, Survey Results, and Selected Topics.” The CNA Corporation, CRM D0016570.A2. 

Cline, William R, 1992. The Economics of Global Warming. Peterson Institute for International Economics. 

Congressional Research Service (CRS), 2007. “The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11.” 

 

-- 2005. “World Oil Demand and its Effect on Oil Prices.” 

Congressional Budget Office (CBO), 2007a. “The Budget and Economic Outlook: Fiscal Years 2008 to 2017,” available at http://www.cbo.gov. 

 -- 2007b. “Statement of Robert A. Sunshine: Estimated Costs of US Operations in Iraq and Afghanistan and 

of Other Activities Related to the War on Terrorism.” 

 -- 2007c. “Statement of Peter Orszag: Estimated Costs of US Operations in Iraq and Afghanistan and of 

Other Activities Related to the War on Terrorism.” 

 -- 2007d. “Statement of Matthew S. Goldberg: Projecting the Costs to Care for Veterans U.S. Military Operations in Iraq and Afghanistan.” 

 -- 2007e. “Estimated Cost of the Administration’s Proposal to Increase the Army’s and the Marine Corps’s 

Personnel Levels.” 

 -- 2007f. “Replacing and Repairing Equipment Used in Iraq and Afghanistan: The Army’s Reset Program.” 

 -- 2006. “The Economic Effects of Recent Increases in Energy Prices.” 

Council of Economic Advisors, 2003. “Economic Report of the President.” United States Government Printing Office: pp. 54-55. 

Day, Jennifer Cheesman and Eric C. Newburger, 2002. “The Big Payoff: Educational Attainment and Synthetic Estimates of Work-Life Earnings.” Current Population Reports, United States Census Bureau. 

Department of Defense (DOD), 2007. Casualty estimates available at http://www.defenselink.mil/news/casualty.pdf 

Energy Information Administration, 2007a. “Cushing, OK West Texas Intermediate (WTI) Spot Price.” Available at 

http://tonto.eia.doe.gov/dnav/pet/hist/rwtcw.htm. 

 -- 2007b. “World Crude Oil Production, 1960-2006.” Available at http://www.eia.doe.gov/emeu/aer/txt/

ptb1105.html. 

 -- 2007c. “Iraq Energy Data, Statistics and Analysis.” Available at http://www.eia.doe.gov/cabs/Iraq/

Oil.html. 

 -- 2004. “Energy Security: Oil.” Available at http://www.eia.doe.gov/emeu/security/Oil/rule.html. 

Bibliography 
27 

February 2008 JOINT ECONOMIC COMMITTEE

Friedman, Benjamin M, 2005. “Deficits and Debt in the Short and Long Run.” Working paper, National Bureau of Economic Research. 

Gomme, Paul, B. Ravikumar, and Peter Rupert, 2006. “The Return of Capital and the Business Cycle.” Working Paper, 

Federal Reserve Bank of Cleveland. 

Government Accountability Office, 2006. “Strategic Petroleum Reserve: Available Oil Can Provide Significant Benefits, but Many Factors Should Influence Future Decisions about Fill, Use, and Expansion.” 

Hamilton, James, 2004. "Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy." Journal 

of Money, Credit, and Banking, 36: 265-286. 

Hoge et al, 2004. “Combat Duty in Iraq and Afghanistan, Mental Health Problems, and Barriers to Care.” The New 

England Journal of Medicine, 351(1): 13-23. 

Huntington, Hillard G, 2005. “The Economic Consequences of Higher Crude Oil Prices.” Stanford Energy Modeling 

Forum report for the US Department of Energy. 

Jones, Donald W., Paul N. Leiby, and Inja K. Paik, 2004. “Oil Price Shocks and the Macroeconomy: What Has Been 

Learned Since 1996.” The Energy Journal, 25(2). 

Kane, Tim, 2004. “Global U.S. Troop Deployment, 1950-2003.” The Heritage Foundation. 

Kohyama, Hiroyuki, 2006. “Select Discount Rates for Budgetary Purposes.” Briefing Paper No. 29, Harvard Law 

School. 

Lyon, Randolph M, 1990. “Federal discount rate policy, the shadow price of capital, and challenges for reforms.” Journal of Environmental Economics and Management, 18(2.2): S29-S50. 

Nordhaus, William, 2007. “Who’s Afraid of a Big Bad Oil Shock.” Prepared for Brookings Institution Panel on Economic Activity. 

Office of Management and Budget (OMB), 1992. “Guidelines and Discount Rates for Benefit-Cost Analysis of Federal 

Programs.” Available at http://www.whitehouse.gov/omb/circulars/a094/a094.html 

President’s Commission on Care for America’s Returning Wounded Warriors (PCCWW), 2007. “Serve, Support, Simplify Report of the President’s Commission on Care for America’s Returning Wounded Warriors.” Available 

online at http://www.pccww.gov. 

Savoca, Elizabeth and Robert Rosenheck, 2000. “The Civilian Labor Market Experiences of Vietnam-Era Veterans: 

The Influence of Psychiatric Disorders.” The Journal of Mental Health Policy and Economics, 3: 199-207. 

Veterans’ Disability Benefits Commission (Veteran’s Commission), 2007. Available at http://

www.vetscommission.org/.