The Costs of the War on Terror
by James Dunnigan
January 21, 2003

Cost of War On Terror has so far cost $65 billion ($30 billion for Afghanistan, rest for homeland defense) in direct costs. Historically, this is not a big war. Defense spending in the next year will be under four percent of GDP. During World War II, it was ten times that. At the end of the Korean war, defense spending was 15 percent of GDP. During the height of the Vietnam war, defense spending was 9.2 percent of GDP. Our peak spending during the Cold War (without a major war) was 6.5 percent of GPD in 1986. Despite the relatively small number of troops in the combat zone, and, historically, very low casualties, the population still maintains a healthy fear and respect for combat operations.
The direct costs of war in Iraq will probably not be that great, although it will cost the American taxpayer more than the 1991 Gulf War did ($80 billion 2003 dollars.) The 1991 costs were largely covered by contributions from nations that could not, or would not, contribute a lot of troops. Actually, because of the sensationalistic way "war costs" are calculated, we actually made money on the 1991 Gulf War. What many forget is that the only real cost is the additional cost above what you would be spending on these troops anyway. Even mobilizing reserves is not all that expensive, as thousands are mobilized in a normal year for special training, and these reserve troops are paid on the same wage and benefit scales as the active duty troops. The biggest chunk of additional expense is transportation (mainly air and sea) and temporary housing (mostly tents in the Persian Gulf) for the troops deployed. Ammunition costs are going down, largely because of smart bombs and better methods of using them. Most of the American military activity in the Persian Gulf so far is what would normally be spent on overseas training exercises. But as the latest group of troops heads out there, and the number of American military personnel hits 150,000 in February, the costs go up. But that force will still be only 30 percent of what we used in 1991. Less than a quarter of the reservists have been called up, compared to 1991. As for lengthily occupation costs, let us not forget that Iraq has a hundred billion barrels of proven oil reserves, and a need to cut government corruption and misapplication of oil revenues. U.S. administration would rapidly increase the living standard of Iraqis and pay for a lot of the occupying forces costs (who could be billeted in newly built barracks that would eventually be turned over to the new Iraq army.)
Indirect costs of a war in Iraq could be large. These will include less air travel, cancelled vacations, fluctuating oil costs, and possibly more terrorist attacks. All will depend on how long the war lasts and what the outcome it. If history is any guide, the war will be short and the Iraqi people will be happy to see us. But history has been wrong before, so there is an element of risk.
The major economic hit from the war on terror will continue to be the damage to the airline and tourist industries. U.S. airlines lost $8 billion in 2002 (worldwide, airlines lost $13 billion.) Aggressive cuts in capacity and costs in general in the wake of September 11, 2001 stopped the damage from being worse. But U.S. losses in 2003 could still be $4 billion, or more. If the terrorists get lucky, air traffic could slow more and increase losses. Meanwhile, the tourism sector is taking a beating as well. In 2002, foreign visitors to the U.S. dropped ten percent. Worldwide tourist demand dropped nearly three percent. Costs are up in the U.S. because of more stringent airport security measures, and this is discouraging travel, and will continue to do so long term. People are rediscovering auto travel (which is actually as safe as air travel depending on the age of the driver and size of the car.)
The War in Iraq will have some positive aspects for the American economy. The war is expected to be won with relatively little damage to Iraqi infrastructure. But Iraq has largely deferred infrastructure maintenance for a decade. American firms can be expected to get the bulk of the reconstruction work that requires non-Iraqi resources. For example, the capping of the 750 oil Kuwaiti wells Iraq set on fire in 1991 was $1.5 billion (the rest of the clean up cost nearly $4 billion.) Most of that money went to foreign firms, and U.S. companies got most of that. But it's doubtful that Iraqis will set fire to their own oil fields. If Saddam orders wide scale demolition, the orders will probably not be obeyed, except in a few cases. Adolf Hitler tried the same thing in 1945 ("The German people do not deserve me") and was generally ignored. Iraq is potentially the largest, most vibrant and innovative economy in the Middle East. They have the educated people, culture of enterprise and the oil wealth. All they have to do is lose Saddam and the Baath party.
A war in Iraq will increase U.S. weapons sales, and see more impressive performances by American military equipment, and the introduction of yet more new military equipment. This will cause another jump in sales of American military equipment. The U.S. has exported over $100 billion in weapons since the 1991 Gulf war. Russia, however, has been very competitive, able to sell roughly equivalent weapons at half, or a third the cost of American models. As a result, in 2001, Russian arms sales $5 billion) surpassed American sales ($4.6 billion). But the spectacular success of U.S. equipment in Afghanistan has made U.S. weapons more attractive, even if they cost more. Moreover, foreign buyers are lining up to buy the new F-35 attack aircraft, which looks like it will have a locks on fighter-bomber sales for the next decade or two. While China and India are the two big buyers of weapons in general and Russian stuff in particular, NATO nations are eager (and legally able, as allies) to buy more American high tech equipment. Partly this is out of national pride at not being able to keep up with U.S. capabilities, but also for the practical reasons that operating with American forces means you need either high quality gear, or be prepared to play a very secondary role.
Operations in Iraq will help beleaguered airline flight crews, by keeping more reserve air transport crews on active duty, putting a dent in the unemployment created by the drop in air travel.
War in Korea is another matter. We spend some $3 billion a year to maintain 37,000 troops in South Korea. While the North Koreans have nearly twice as many troops (1.1 million) than the South Koreans (650,000), the south has a substantial advantage in weapons quality and readiness. The terrain (steep hills and high mountains) along the DMZ favors the defense. The north has responded with mysterious plans using thousands of commandos and chemical weapons. Bottom line, the north can cause a lot of damage in the south, but will lose in the end. And, unlike 1950, the southerners can handle most of the fighting. Cost to the U.S. of another Korean war could vary from $10-100 billion or more, depending on how clever and determined the undernourished northern troops are (Americans have noted that the big, beefy troops the north has always stationed at the tourist stops on the DMZ have been rather more scrawny in the past two years.) The destruction of a large chunk of the South Korean economy not be disastrous for the global economy, because of the current over-capacity.
But there are other potential dangers to the American economy. Terrorists could easily infect North American beef herds with hoof and mouth disease. This is very difficult to clean up, and would be a noticeable hit to the overall economy, as well as the $50 billion a year beef industry. Another Anthrax attack, via the mail, could contaminate large numbers of work places. The 2001 attack cost several billion dollars (decontamination, lost productivity, medical expenses.) A more ambitious, and stealthier, Anthrax attack could cost $100 billion or more to deal with. Al Qaeda getting access to genetically engineering is a long shot. Gathering the equipment and personnel needed would throw off plenty of detectable signs, and al Qaeda needs a nation willing to risk hosting such an effort. Cyberwar is a similar situation, although, as I explain in The Next War Zone, this form of warfare is a matter quantity as well as quality. The Moslem world has neither when it comes to Internet expertise. And most of the net savvy Moslems are professionals not interested in attacking their own livelihood. But it is possible to assemble a qualified group of black hat hackers. But given what this group is up against, I would not expect anything beyond nuisances and cheap headlines for the media.
New military technology used in combat will accelerate use of this stuff in civilian uses. For example, UAVs will eventually replace traffic helicopters because of lower cost and greater capabilities. However, successful use of GPS jammers by Iraq might slow down the adoption in GPS technology in some areas.

The Costs of the War on Terror by James DunniganJanuary 21, 2003

The Costs of the War on Terror
by James Dunnigan
January 21, 2003