How Much Is the Iraq War Costing You?

In a previous article, "How Much is the Iraq War Costing You? Part 1," I laid out the facts and figures about the monetary cost of the Iraq war to U.S. taxpayers, assuming conservatively a low-end estimate of annual spending on the Iraq war. I concluded that the main American residents paying for the war are high-income people because the U.S. tax system takes a much higher percentage of income from high-income people than from low-income people. I promised to write a further article laying out an estimate of the cost of the war to Americans in higher oil prices. This is that article.

Before I address that issue, though, I want to respond to a critical letter I received in response to my last article. I'm responding to it here because her letter contains so many thoughts that I have heard people express about the burden of the current war. Deborah Lagarde writes:

"Enjoyed the first part of your 'How Much is the War on Iraq Costing You?' but would like for you to consider the following: first, though it seems upper-income people bear the brunt of taxation to fund the war, it would seem logical that they probably benefit most from the war; for instance, it is likely these folks invest in the military-industrial complex that drives this war or have family members that do.

"Second, they benefit by NOT being in the financial situation that would cause their children to feel joining the military is their best way out of poverty or low income, because their sons and daughters will likely be able to go to the most prestigious universities, and, thus (and with their upper-income networking connection) get the high-paying jobs after college, probably with no college loan debt to haunt them.

"Third, if they are well connected, even if their kids do join the military they are NOT likely to be sent to Iraq (or Afghanistan, for that matter) and are more likely to be sent to a cushier spot like Europe or South Korea or Japan, and also are more likely to be officers.

"Now, as for low-income people, though they pay little tax-wise for the war, they pay the most in lives lost. It is well known that the lowest incomes are in rural areas [and] a disproportionate number of killed troops come from rural counties, while [other] low-income area[s] are inner cities that also have high attrition rates. And yes, the higher cost of oil will affect low-income people the most, especially those in rural areas where there are longer driving distances to do anything so more gas is consumed by these people (plus, the price of gas is ALWAYS higher in rural areas!). Given this, however, I think it is possible that the quintiles in the middle, […] while not paying the higher percentage of taxes as those in the uppermost, still pay a high enough percentage of their incomes to truly bear the brunt of the war AND send enough sons and daughters there to die to truly feel the horror of this war [and thus] are being squeezed more than low- or high-income people.

"Further, should tax increases be necessary, it is the folks in the middle who (as they do not have upper-income connections nor the sympathy of the 'tax-and-spend liberals') will wind up, as always, paying the most."

Ms. Lagarde raises a number of important issues. On her first point, it's true, as she says, that high-income people are probably disproportionately invested in the military-industrial complex. And this does mean, as she says, that they will benefit from an expenditure on this complex. But their benefit from the expenditure will be less than their cost. Take a numerical example. Assume that the government taxes $1 billion and that, given my earlier estimates, high-income people pay half of that, or $500 million. Now, let's say that the government spends all of this $1 billion on a firm that's a member of the military-industrial complex. Say this firm produces bombs that are dropped on Iraq. The $1 billion spent is not a net gain to the firm. The firm must pay for manpower, material, buildings, etc. The typical profit as a percentage of revenue for a U.S. firm is somewhere between 5 and 10 percent. Let's apply the top end of that estimate to the $1 billion. That means that the firm's net gain is $100 million. So, even in the extreme case, which does not hold, that the firm was owned entirely by higher-income people, paying $500 million to get back $100 million is not a good deal. And notice that at each stage of this analysis, I have stated key numbers to lead to an upper estimate of the gain. Benefiting the upper-income class by spending on war is like feeding sparrows by feeding horses. And it's the horses in this example who have to pay. What this illustrates is the tremendous deadweight loss of war – that is, a loss to the economy that benefits no one. In my $1 billion example above, the deadweight loss (and that's assuming the bombs do no harm) is $900 million.

What this suggests is that one thing the antiwar movement should do is make the case against the war on self-interest grounds. The current war in Iraq is cutting a substantial swath out of the incomes of high-income people.

Ms. Lagarde's second point is incorrect. The most careful recent study I know about who joins the military is that of Tim Kane, an economist at the Heritage Foundation. He examined the ZIP codes of the recruits in 2005 and assumed that the income of the recruits' families equaled the median income of families in that ZIP code. Here's his key finding:

"By assigning each recruit the median 1999 household income for his hometown ZIP code as determined from Census 2000, the mean income for 2004 recruits was $43,122 (in 1999 dollars). For 2005 recruits, it was $43,238 (in 1999 dollars). These are increases over the mean incomes for the 1999 cohort ($41,141) and 2003 cohort ($42,822). The national median published in Census 2000 was $41,994. This indicates that, on average, the 2004 and 2005 recruit populations come from even wealthier areas than their peers who enlisted in 1999 and 2003."

But, just as important, what Ms. Lagarde leaves out is the crucial fact that every person in the military volunteered. That means that each person saw himself or herself as being better off by joining. These people might have made mistakes and might be disappointed, but that doesn't distinguish them from the rest of us who make career mistakes and are disappointed. Using the language of burden to talk about a volunteer force doesn't make sense. It made sense during the draft era when many people in the military were draftees or were "draft-induced," that is, motivated to join because of the threat of the draft if they didn't. But no one who joins voluntarily bears a burden, at least in prospect, because he (typically he, not she) is choosing an option that looks like the best one he has. Ms. Lagarde could well be right, and probably is right, that the military looks like a good option to some people because of their low family income. But that still doesn't mean that giving them this option imposes a burden on them.

Finally, Ms. Lagarde gets to the point about oil, and that is what I want to discuss in the remainder of this article. It's hard to know how much of the higher oil price today is due to the Iraq war. What is virtually certain is that some of it is. Why? Because even less oil is produced in Iraq now, in part due to disruption by insurgents and, probably, to the chaos that the U.S. and British war effort has imposed on Iraq's economy. During the last five years of UN sanctions, 1998 to 2002, production averaged 2,328 million barrels per day (MBD) ; in 2004 and 2005, by contrast, production was 2,011 and 1,878 MBD, respectively. (These data are from Table 4.1a.) This is a shift of about 400,000 barrels a day, or about one half of 1 percent of world production. Assuming an elasticity of demand of about -0.1 – that is, assuming that for every 1 percent fall in output, prices rise by 10 percent – this 0.5 percent reduction would cause a 5 percent increase in price. Approximately three dollars of the current $60 price of oil, therefore, can reasonably be attributed to the Iraq war. This hurts all consumers of oil and helps all producers. Because the U.S. is a net importer of oil, the cost to consumers substantially outweighs the gain to U.S. producers. The net cost to the U.S. economy is approximately $3 per barrel on about 12 MBD of imports, or $36 million a day, which is about $13 billion a year.

This amounts to about $43 per year per person in the United States. Higher-income people use more oil, both in gasoline and in other products they purchase, than lower-income people do. But they use oil, directly or indirectly in the goods they buy, less than in proportion to their income. In 2005, the average income of households in the top income quintile was $159,583 dollars (.pdf file, see Table A-3). That same year, the average income of households in the bottom quintile was $10,655, and the average income of the middle-quintile households was $46,301. (All income numbers are in 2005 dollars). But because the bottom quintile in any year contains a disproportionately high number of households whose pay is unusually low that year and also contains many people who are hiding income in order to qualify for welfare, the bottom spends a higher percentage of its income on products (including products containing oil) than the middle quintile does. Similarly, because the upper quintile contains a disproportionately high number of households whose income is unusually high that year, this quintile spends a lower percentage of its income on products than the middle quintiles do. The ratio of the average bottom-quintile household's income to the average middle-quintile household's income was $10,655/$46,301, or 0.23. The ratio for the high-income quintile was $159,583/$46,301, or 3.4. It would be reasonable to assume that the middle quintile pays an extra $43 per year per person in higher oil prices. The average low-quintile household probably pays not 23 percent of this $43, but more like 40 percent, given its higher expenditure on oil as a percentage of income, which would make its loss about $17 per year per person. The average high-quintile household would spend not 3.4 times this $43 per person, but probably more like 2.5 times this $43, or about $107 per year per person.

These estimates probably understate the loss to low-income people, because they spread just the net cost (net of gains to oil producers), and few low-income people (at least few non-elderly low-income people) own stock in oil companies. So we could plausibly increase our estimate of the loss to low-income people and reduce the loss to high-income people. The exact numbers are probably different from the above, but the order of magnitude is probably correct. These are not huge numbers, but they are not trivial, either. In a choice between a war with little good likely to come from it and possibly much bad (some of which has already come, especially in lives lost, foreign and American), and $107 per year times three (for my household of three people), I'll take the $321 in cash, thank you.

How Much Is the Iraq War Costing You?

Part 2