An Affordable War

But he has yet to address critics who contend that the expenditure of our money on the reconstruction of Iraq is not a good use of the nation’s material resources. The Democrats are asking why we should be building schools in Iraq when our own educational system is in disarray (implying that money rather than a retrograde teachers’ union is the problem); why we should be sending fire engines to Iraq when we are closing fire stations in New York City; and why we should be shipping billions to a less-than-grateful country when our budget deficit is reaching levels that even conservative Republicans find alarming.

The questions are reasonable, and highlight the fact that the administration has never managed to explain how we can be at war, which we are, asking sacrifices of our military, which we do, while at the same time inducing consumers to continue their delicious spending spree by mailing them tax refunds. Bush’s argument that the tax cuts helped to avoid a serious recession is certainly sound, but it does not explain why it is necessary to make those cuts permanent now that the economy is–there is no other way to put it–booming. The president is promising guns, butter, and continued trips to the shopping mall, not to mention a walk on Mars, all on a buy-now, pay-later basis. And a rebuilt Iraq on top of all of that. Lots of gain, with no pain, and the blood, toil, tears, and sweat reserved for those in uniform or working to rebuild Iraq–a recipe for an election victory, perhaps, but hardly a sustainable set of policies.

There are three issues to be considered in assessing whether the reconstruction of Iraq is worth the cost: the reasonableness of the president’s fiscal policy as it is affected by the needs of his Iraq policy; the affordability of the war and reconstruction; and the efficiency with which the reconstruction funds are being spent. If one were passing out grades, fiscal policy is the only failure here. But in the context of the Iraq debate, that hardly matters. The relevant question is whether our effort there has contributed importantly to the deficit, and the short answer is “no.” Some part of the deficit is due to the president’s tax cuts, and some part to the complicity of the president in the spending disease that afflicts the Congress. To the extent that past and recent deficits are due to the tax cuts, we can safely say they were worth incurring: They prevented the recession that the administration inherited from spiraling out of control. But to the extent that they are due to the president’s expansion of the welfare state at a pace that would make Lyndon Johnson turn green with envy, to his willingness to soak urban taxpayers to fund the lifestyles of rich farmers, and to his repeated refusal to uncap his veto pen, they can at best be characterized as compassion run wild. So don’t blame the poor score on anything we are doing in Iraq.

As for affordability, the stakes are so high, and the material cost so low by comparison, that there is no question we can and should bear the cost. Robert Kagan, in the new afterword to his influential Of Paradise and Power, does not exaggerate when he says “at stake is not only the future of Iraq and the Middle East more generally, but also of America’s reputation, its reliability, and its legitimacy as a world leader.”

The costs cannot be quantified as easily as the stakes can be identified. We don’t yet know how much will have to be spent restoring security to a level that will permit reconstruction contractors to do their work: Estimates by the Coalition Provisional Authority that security costs borne by those firms would come to some 10 percent of the value of reconstruction contracts were made before attacks on these contractors’ personnel reached their current level of ferocity. Those costs have undoubtedly risen. Indeed, some companies now say that security needs are eating up 20 percent of the total contract price.

Nor do we know how long we will have to maintain troops in Iraq, or in what numbers. Add to the list of unknowables the ability of Iraq’s oil industry to generate income for the country, the contributions that other nations might choose to make to the reconstruction effort, just how much private investment might flow into Iraq, and the increased cost of recruitment of military personnel as unpopular extensions of tours of duty coincide with a recovering private sector job market.

All of which is why the following calculations should be viewed as best guesses.

THE HIGHEST ESTIMATE of the funds needed to “restore Iraqi infrastructure to its pre-1991 state” (as the Congressional Budget Office puts it) and “set the country on the path to representative government and a market-oriented economy” comes from the World Bank: a total of about $55 billion over the 2004-2007 period, 22 percent of which would go to the investment-starved electricity sector. This is well above the $18 billion that would be required to meet the more modest goal of restoring Iraq’s infrastructure to the condition that existed before the recent conflict began in March 2003. Let’s assume the grander of the two goals–reconstruction on a scale that gives Iraqis an opportunity to construct a successful, democratic state.

If the Iraqis can maintain anything like current crude oil export levels of about 2 million barrels per day, and if prices remain around $30 per barrel, assumptions I consider reasonable in the absence of a complete breakdown of security, oil exports should produce upwards of $80 billion in revenue over this period. (Using a price of $21 per barrel, but a higher estimate of export volumes, Iraqis put the figure at $69 billion.) Revenues in the range of $69 billion to $80 billion over the 2004-2007 period would cover the estimated operating expenses of the new government ($51 billion), the payment of Kuwait war reparations as mandated by the U.N. ($3.5 billion), and some interest on foreign debt (written down substantially), and leave somewhere between $15 billion and $25 billion available for investment in infrastructure.

The balance of the needed $55 billion in investment over four years, some $30 billion to $40 billion, would under these assumptions be covered by miscellaneous income that import duties and similar charges will generate for the Iraqi government, by about $2 billion in frozen Iraqi assets in the United States, and by the $36 billion already pledged by international donors, of which $18 billion will come from the United States.

Of course, oil prices might fall, and exports might not be sustained at present levels. But it is also possible that the rapidly recovering Iraq oil industry might ramp up exports, and that private investment might flow into the country, as it did when mobile telephone franchises were put up for auction. In the end, all will depend on the restoration of security so that foreign contractors who are now fleeing Iraq to avoid hostage-taking can do their work.

The safest conclusion for the 2004-2007 period–subject to change as the situation on the ground changes–is that of the Congressional Budget Office, the source of some of the figures cited above: “If oil exports and prices meet or exceed the assumptions made by the Iraqi government, and if the country’s debt is reduced sufficiently to permit a reasonable level of annual payments, further U.S. assistance beyond the $18.4 billion already appropriated may not be necessary. Iraq itself could fund a robust reconstruction.”

Note that these are not very weighty “ifs.” For “if” oil exports do not meet Iraq’s projected 3.3 billion barrels per day, it becomes even more likely than it now is that supplies will be tight and that oil prices will therefore exceed Iraq’s forecast of $21 per barrel. The other “if”–foreign creditors will accept a substantial write-down of Iraq’s debt–also seems to be a safe assumption. Arab countries hold about one-third of Iraq’s IOUs. These autocracies may be far from enthusiastic about having a model democracy on their doorsteps, but they cannot be seen to drown the new nation in red ink. Next in line is Russia, which is eager to ingratiate itself with the new government so as to participate in the development of Iraq’s oil industry, and has thus already announced that it will tear up about two-thirds of Iraq’s IOUs.

In short, worries that we will have to starve domestic programs, or run the deficit even higher, to pay for the reconstruction of Iraq are overblown. The real money will be spent on eliminating threats to security so that reconstruction can proceed at a reasonable pace. Given the uncertainty that exists at this writing, the administration’s reluctance to come up with a firm estimate is more understandable than it was just a few weeks ago. About the best we can do is start with the estimate contained in the Emergency Supplemental Appropriations Act of 2003, which calls for $62.6 billion for the Department of Defense to support military operations in Iraq and in other theaters in which the war on terror is being fought. Round that up to $100 billion, and add another $100 billion for each of the four years, 2004-2007, a reasonable period to use as the time span over which we will have to maintain a major military presence in Iraq.

That is not chopped liver, as we used to say in the old neighborhood. But the sum total of the probable costs of reconstruction and military operations over the next several years comes to no more than approximately one percent of American GDP. That is the number around which the debate should be framed.

This is the nub of it all. The cost of our intervention in Iraq is one percent of our massive output of goods and services; the possible benefits are a pacified Iraq with its sadistic dictator deposed, a terrorist base eliminated, notice served on other nations in the region not to tread on America, and a Middle East in which democracy has taken root. These benefits are not certain to accrue to us, less certain in my own view than in the opinions of more enthusiastic believers in the president’s nation-building program. But betting a tiny part of our national treasure for a few years on a successful outcome in Iraq that will pay off for years and years (in perpetuity, if we are lucky) doesn’t seem wildly imprudent, especially for a country with the responsibilities of the world’s only superpower.

THIS LEAVES OPEN one question: Are we increasing the chances that we will win our bet by spending the money efficiently? Certainly, the dollars we have poured into the revival of the oil industry, Iraq’s largest cash-generator by far, seem to have been well spent, after a rocky start. The success is due in part to the skill with which the Pentagon recruited Americans to guide the reconstruction, and in part to the fact that Iraqi oil field personnel have had long experience in getting the most out of every bit of equipment, using the proverbial spit and baling wire under the old regime. Add to that the rise in the price of oil–a source of much grousing by motorists and on-the-make politicians here–and you have a revenue stream that just might cover the cost of rebuilding other sectors of Iraq’s economy. The negative is that the Bush administration has decided not to privatize the industry, but to leave it in the hands of the state. That means that ministers will be in control of revenues, jobs, contracts, and other perks, as is the case in other dysfunctional economies in the Middle East. Good news for the posh hotels and shops of London, Paris, and New York, bad news for the average Iraqi.

The news from the largest claimant on this cash, the electricity sector, is not quite as good. It is widely known that the original team sent over to get the electricity flowing proved not to be ideally suited to the difficult task confronting it, and that American advisers revealed a tendency to survey needs rather than meet them, and to ignore immediate needs in favor of the construction of a U.S.-style gold-plated system.

The latest White House Quarterly Report on Iraq Reconstruction claims that generation capacity has been restored to its prewar level, and that further additions will bring capacity to 50 percent above that level by June 1. Unfortunately, having capacity is not the same as being able to use it to supply electricity reliably, without frequent interruption. Which is why Paul Bremer’s announcement last October that Iraq was producing more electricity than under the Saddam regime was so misleading. Output reached that level by cranking up every decrepit piece of equipment in the country–equipment that promptly failed, resulting in a sharp drop in output only a few days after Bremer’s photo op.

Unfortunately, even the enhanced level of capacity is incapable of keeping pace with the burgeoning demand created by liberated Iraqis’ purchases of air conditioners, satellite dishes, and other equipment. Students of irony will appreciate a situation in which Iraqis are blaming America for the lack of electricity to power the equipment that they own only because the American-led coalition removed barriers to imports, cutting the cost of imported small television sets from $150 to $80 according to the Los Angeles Times, and raised their incomes sufficiently to enable them to buy goods unavailable to all save Saddam’s family and friends until the hated occupiers arrived.

Part of the power shortfall is due, of course, to the ubiquitous security problem. The Los Angeles Times reports that Washington Group International, an Idaho construction and engineering firm, deployed 700 security personnel to protect its 350 employees who were setting up power lines around Falluja. And the Wall Street Journal notes that the Bechtel Group, which is also working on the electric system, originally estimated that it would need 6 security guards; it now has 169.

The result is that we are likely to see serious power shortages as the summer heat descends on Iraq, and battles by areas in which generators are located to prevent “their power” from being shared with the sweltering residents of Baghdad. A new team sent by the Pentagon to Iraq has, I am told, a better grip on the situation, and is giving a greater priority to the short-term needs to keep Iraq cool, even if that means the slower introduction of longer-term efficiencies such as a switch from diesel oil to natural gas as a generating fuel. The importance of this effort was underscored last week by the Washington Post‘s David Ignatius, who listed adequate electricity first among the specific needs reported by his Iraqi friends: “Provide electricity everywhere, 24 hours a day, by the scheduled handover of sovereignty. If it takes an airlift of C-17s carrying generators, do it; if it means expensive temporary fixes, do it. The lack of electric power has been a symbol of U.S. failure in Iraq; make reliable electricity a symbol of success.”

Good advice. But it had best be accompanied by a warning given in my presence by Harvard professor William Hogan, a leading energy expert, to those working on the problem. “Make short-term fixes. Buy diesel generators that are everywhere available and cheap since power prices collapsed in the United States. And then be prepared to explain to a congressional committee a few years from now why you short-circuited procurement procedures and wasted money on short-term fixes.” Indeed, both the General Accounting Office and the Pentagon auditors have already announced investigations to see if some items were purchased without completion of the necessary paperwork.

Which explains why contractors are proceeding with caution, and why too little of the appropriated money has yet to find its way into the hands of Iraqi construction workers and others. This is the government, after all. So we have auditors worrying about dotting every “i” and crossing every “t”; the Labor Department starting to hunt down contractors who have knowingly or otherwise violated an old World War II law requiring them to provide adequate insurance not only for direct employees in Iraq but for subcontractors (premiums in Iraq can be 25 times those in the United States); environmentalists likely someday to attack companies for degrading air quality in Baghdad by using available diesel generators rather than waiting for the construction of natural gas pipelines; and Congress poised to roast anyone its famous hindsight will one day show might have done things more efficiently.

Still, given the security problems that have income-starved Iraqis too frightened to work for foreign contractors, and even countries that supported the war withdrawing their construction teams, you have to give the Pentagon and others high marks for the progress they are making in getting schools rebuilt and refurbished, basic services restored, and some money into the pockets of some Iraqis. After all, the flood of consumer goods choking the markets and streets of Iraq’s cities do tell us something that the statistics are missing–life is getting better, much better, and will get better still when the administration provides its generals with enough troops to eliminate hostile militias, assorted terrorists, and yearners-after-Saddam.

All at a cost that cannot be called excessive in a nation of three-car and two-home families, and in which 92 percent of the families classified as “poor” have color television sets.

Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).