The Economic Fallout from 9/11
The Power Problem: Second in a series of views on lessons learned in the exercise of American power in the decade since 9/11.
The US response to 9/11 has been a major contributor to America’s current economic malaise.
The most economically costly decision post 9/11 was not whether to attack Iraq and Afghanistan, but how to pay for the ensuing conflicts and the related increases in defense and homeland security. War costs always linger well after the last shot has been fired. But this is especially true of the Iraq-Afghanistan conflicts. The $1.6 trillion or so already spent has been financed wholly through borrowing. Add to this a further $800 billion in defense increases that are not directly war-related and hundreds of billions in new homeland security measures. The resulting debt accounts for well over one-quarter of the increase in US national debt since 2001.
Financing wars and defense-build ups in this way is an historical aberration. Americans have typically paid for wars through higher taxes. Ronald Reagan, no fan of bigger government, raised taxes three times to pay for the Cold War. To find a precedent for external debt financing you have to go back as far as the Revolutionary War when the colonies borrowed from France to pay for the fighting. Even this is not an exact parallel because the Bush administration, far from raising revenues, actually cut taxes — both in 2001 when the Afghan operation was launched and again in 2003 after the invasion of Iraq. As Robert Hormats put it in The Price of Liberty: “We are living in a post 9/11 world with a pre 9/11 fiscal policy.”
These wars will continue to be expensive even when US troops are withdrawn. Higher casualty rates, higher survival rates, and more generous benefits for veterans means the nation already owes some $600-$900 billion in long-term medical care and disability compensation for military veterans. This number is growing daily. As I pointed out in my recent paper, “Current and Projected Future Costs of Caring for Veterans of the Iraq and Afghanistan Wars”, more than half of all returning troops have been treated at VA health care facilities. Some 600,000 new veterans have qualified to receive lifetime disability benefits. In addition, there are enormous costs for replacing military equipment and weapons which are being used up at 6-10 times the peacetime depreciation rate. On top of all this is the recurring interest bill on all the money we have borrowed.
The war on terror – and the way we chose to pay for it – thus contributed substantially to the debt problem at the center of national political debate. It also harmed the broader economy. While the wars did not cause the financial crisis, they were certainly a significant factor in creating the conditions that led up to it. To understand this relationship, one has to “connect the dots.” First, the Iraq war and the resulting instability in the Gulf put upward pressure on oil prices, which rose from $25/barrel in 2003 to $140/barrel four years later. Second, these higher oil prices depressed US economic activity, prompting the Federal Reserve to loosen monetary policy. Finally, this additional liquidity contributed to the housing bubble and the financial collapse that followed.
The policies that were adopted after 9/11, including the decision to wage two wars with a small all-volunteer force, to rely on a large supplement of private contractors, and to pay for the entire campaign through debt, are still reverberating through our society. The vast economic costs may ultimately be dwarfed by the social costs of the wars, which are evident in the epidemics of suicides and post-traumatic stress disorder among returning military veterans. But this much is certain: the attempt to get both guns and butter for free is an important factor in the financial mess. The fallout of this mistake will continue to burden the US economy for decades to come.
Linda J. Bilmes is Daniel Patrick Moynihan Senior Lecturer in Public Policy at Harvard Kennedy School. She has held senior positions in government, including Assistant Secretary and Chief Financial Officer of the US Department of Commerce. Bilmes is co-author (with Joseph Stiglitz) of The Three Trillion Dollar War: The True Cost of the Iraq Conflict.