Expensive Wars

Here is the most depressing lede of the day:

$1.2 trillion would pay for an unprecedented public health campaign -- a doubling of cancer research funding, treatment for every American whose diabetes or heart disease is now going unmanaged and a global immunization campaign to save millions of children's lives.

Combined, the cost of running those programs for a decade wouldn't use up even half our money pot. So we could then turn to poverty and education, starting with universal preschool for every 3- and 4-year-old child across the country. The city of New Orleans could also receive a huge increase in reconstruction funds.

The final big chunk of the money could go to national security. The recommendations of the 9/11 Commission that have not been put in place -- better baggage and cargo screening, stronger measures against nuclear proliferation -- could be enacted. Financing for the war in Afghanistan could be increased to beat back the Taliban's recent gains, and a peacekeeping force could put a stop to the genocide in Darfur.

All that would be one way to spend $1.2 trillion. Here would be another:

The war in Iraq.

It's worth noting that the original worst case fiscal scenario for the Iraq war was only $200 billion dollars. That pessimistic estimate came courtesy of Lawrence Lindsey, a White House economic adviser, who was later fired for his crass honesty. A more typical estimate, put forth by the Bush Administration but rarely contested by either party, was $50 billion. In other words, the conventional wisdom was off by more than a factor of 20. Good job, Pentagon.

In Bush's defense, he isn't the first President to woefully "misunderestimate" the costs of war. As the Yale Historian William Nordhaus points out:

Lincoln's Secretary of the Treasury estimated that the direct cost of the war to the North would be $240 million, which amounted to about 7 percent of annual GDP at that time. The actual cost to the North turned out to be $3,200 million, or about 13 times the original estimated cost.3The cost to the South was much greater, for most of its capital stock was destroyed and output per worker was depressed for nearly a century. The most prophetic economic analysis of war and peace of all time, Keynes's Economic Consequences of the Peace, did not foresee the great German inflation that was virtually at hand, nor did it contain any hints of the coming Great Depressions in Britain of the 1920s or of the world of the 1930s. In recent times, the costs of the Vietnam War were grossly underestimated even as the buildup occurred. The original budget projection in early 1966 underestimated the cost for the subsequent fiscal year by $10 billion, or about 1.5 percent of GDP. In assuming that the war would end by June 1967, the Pentagon underestimated the total cost of the war by around 90 percent. The war in fact dragged on until 1973, and the total direct cost was in the range of $110 billion to $150 billion.

Why are war planners so bad at estimating the financial costs of war? Part of the answer, I think, lies in a truism of psychology: people are excessively optimistic. For example, just about everybody thinks they are above average in intelligence, talent and moral values. (Call it the Lake Wobegon effect.) In their recent Foreign Policy article, Kahneman and Renshon make precisely this point:

The optimistic bias and the illusion of control are particularly rampant in the run-up to conflict. A hawk's preference for military action over diplomatic measures is often built upon the assumption that victory will come easily and swiftly. Predictions that the Iraq war would be a "cakewalk," offered up by some supporters of that conflict, are just the latest in a long string of bad hawkish predictions. After all, Washington elites treated the first major battle of the Civil War as a social outing, so sure were they that federal troops would rout rebel forces. General Noel de Castelnau, chief of staff for the French Army at the outset of World War I, declared, "Give me 700,000 men and I will conquer Europe." In fact, almost every decision maker involved in what would become the most destructive war in history up to that point predicted not only victory for his side, but a relatively quick and easy victory. These delusions and exaggerations cannot be explained away as a product of incomplete or incorrect information. Optimistic generals will be found, usually on both sides, before the beginning of every military conflict.

If optimism is the order of the day when it comes to assessing one's own chances in armed conflict, however, gloom usually prevails when evaluating another side's concessions. Psychologically, we are receptive not only to hawks' arguments for war but also to their case against negotiated solutions. The intuition that something is worth less simply because the other side has offered it is referred to in academic circles as "reactive devaluation." The very fact that a concession is offered by somebody perceived as hostile undermines the content of the proposal. What was said matters less than who said it. And so, for example, American policymakers would likely look very skeptically on any concessions made by the regime in Tehran. Some of that skepticism could be the rational product of past experience, but some of it may also result from unconscious--and not necessarily rational--devaluation.

So the next time a President submits a cost estimate for a war, just multiply the number by 20. Then you might be getting close.