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U.S. will be paying for Iraq for years
By Paul Erdman, CBS.MarketWatch.com
Last Update: 4:03 PM ET Feb. 27, 2003

SAN FRANCISCO (CBS.MW) -- After deliberately avoiding the subject, the Bush administration has finally and grudgingly come out with it first "concrete" estimates of the cost of war with Iraq, and its aftermath.

They put the figure at somewhere between $60 billion and $95 billion.

Don't believe either number. In the end we are going to be talking in terms of hundreds of billions of dollars. If we are lucky, it might peak out at a half trillion.

The only component of the White House estimate that deserves credence is that related to the cost of fighting the war itself.

Assuming a two-month war involving 250,000 troops, it would add up to $40 billion. Tack on another half billion for each additional day of "high intensity fighting" we are told. If we follow that suggestion, and if the war has to be taken to the streets of Baghdad, a substantial add-on would be required. In the end, this phase of the operation will most probably come in at around $60 billion.

But that is just the beginning. In his speech on Wednesday at the American Enterprise Institute, President Bush pointedly compared what he intended to do in postwar Iraq with what we did in Germany and Japan after World War II, namely stay there as long as it takes to establish constitutional democratic governance.

What he did not say is that 58 years later we still have large numbers of American troops in both Germany and Japan, not to speak of another country that we also took over, namely South Korea. Best estimates of a five-year American presence in Iraq involving 100,000 personnel are $105 billion. Other opinions put both the number of personnel required at over 150,000, and the time period between 5 and 10 years. That would push the cost of occupation to at least $200 billion.

Then there are the payoffs: $15 billion now, perhaps a lot more later to Turkey; more billions to Jordan and Egypt. On top of this there will be the cost of establishing and maintaining a viable Palestinian state, which has now risen to the top of the foreign policy objectives of the United States after Iraq, as indicated in President Bush's most recent speech on the subject. Here we are talking tens of billions more.

So you have to tack on maybe another $50 billion to the overall financial cost of "reforming" the Middle East.

And who is going to pay for it? Last time around it was Saudi Arabia and Kuwait that picked up most of the bill. Not this time. Nor can America expect much from our partners in the so-called coalition of the willing. They simply cannot afford it.

The biggest illusion of all in some circles is that we will pay for this whole thing with Iraqi oil. Dream on. Iraq pumps only 2.5 million barrels a day. The Iraqi oil fields are so run down that we will be lucky if we are able to maintain that level of output during the next two years. And all of the income generated from such output, which today amounts to somewhere between 50 and 75 percent of Iraqi per capita income, will have to go where most of it is going today: to providing food and medical care to a large percentage of the Iraqi population that is totally dependent on government handouts for survival. Even when we are able to begin pushing up Iraq's output of crude oil, taking even a small fraction of that away to pay for our war costs would fly in the face of our stated objective for fighting this war in the first place -- to build a prosperous and free Iraq.

Therefore it is the United States government and ultimately its taxpayers that are going to have to foot this enormous bill. It could push the currently projected annual budgetary deficit of $300 billion closer and closer to the half trillion dollar range. Since tax revenues are stagnant, this means that we are going to have to borrow that half trillion now and pay later. Furthermore, because all of this is going to involve a lot of new offshore spending, our trade deficit is also bound to increase. Financing that larger trade deficit would require additional borrowing abroad -- to a level exceeding a half trillion a year.

To say that such immense foreign and domestic borrowing needs will put a huge strain on the global financial system is a crass understatement.

It could also put a huge strain on your personal financial system if you don't continue to play it safe. Then end of the war itself will just signal the beginning of the financial uncertainties stemming from that war which will haunt us for years to come.