Goin' Broke The Cost of War
 Events
Lincoln Revival
December 7 Volunteer Speaking Our Peace Socialist! Communist! Terrorist! Kill Him!
By Paul Olson, NFP President Global Warming Greenland’s Icemelt Speeding Up
By Professor Bruce E. Johansen Nebraska Peace Stratcom
The Most Dangerous Place on the Face of the Earth Whiteclay
Updates on Nebraska's tiny reservation border town. Dick Cheney
Impeachment is on the table. Peace Matters
Omaha NFP Newsletter Alexandra Svoboda
One Year Later StratCom Conference Space Conference
 Visions for Peace Visions for Peace

Congress Approves More War Funds
So What’s This All Gonna Cost Us?

Hendrik van den Berg
UNL Professor of Economics

Congress has just agreed to fund our occupations of Iraq and Afghanistan through next year. This guarantees that our longest foreign conflict will become longer yet. While some pundits point out that the stated $150 billion annual cost of our Iraq venture is just a little more than 1 percent of national income, several estimates suggest a much higher cost. For example, a well-known study by Nancy Bilmes and Joseph Stiglitz (2006) and my own analysis in the January, 2008 NFP Nebraska Report show that our invasion and occupation of Iraq will cost the U.S. more than $3 trillion. That cost will be spread over many years as we replace the military’s worn-out equipment, pay for the medical care of our many injured and disabled soldiers, and pay the interest and principal on the government’s debt incurred to pursue a war without raising taxes. We are effectively looking at a cost of 1 percent per year for many years into the future. Yet, the ultimate cost of the Iraq venture may be much greater yet.

We tend to forget that when the $3 trillion- plus bill for our government’s Iraq adventure comes due, we will be saddled with other (and even bigger) debts — ones we’re refusing to face by retreating into the same sort of self-denial we exhibited about the risks of invading Iraq. Among other things, our country has been borrowing massively from foreigners, we have been ignoring the environmental damage we are causing, we are preventing increasing numbers of people from contributing to our society, we continue to allow our failing healthcare system to take more of our income, and we permit our politicians to sharply increase our overall defense expenditures to confront unspecified and undefined threats. How we can continue to ignore these ‘debts’ is hard to understand—particularly when we see the ‘costs’ virtually every day.

Our Country’s Debt to Foreigners

We are currently consuming goods and services equal to 106 percent of what we actually produce in our country. We accomplish this seemingly impossible feat by importing much more than we export. To pay for these net imports, we must borrow from foreigners an amount equal to 6 percent of our national product each year. Specifically, American consumers, firms, financial institutions and government agencies have been selling hundreds of billions of dollars worth of stock, bonds, bank accounts, factories, condominiums, and all other types of assets to foreign investors to pay for our imports. Even Budweiser has now become a foreignowned brand! These foreign investors are usually firms, banks and individuals, but they are also often foreign governments.

Basic accounting principles require us to accurately state future obligations. Eventually, private foreign investors and foreign governments will stop lending us so much. They may even begin selling the assets they hold or simply not roll over their U.S. assets when their bonds or loans mature. In this case, the U.S. would have to begin consuming at least 6 percent below the current trend and sell more of the U.S.-produced goods and services to foreigners instead. Or, put another way, our long-run real income is about 6 percent less than our current level of spending may have led us to believe.

The Destruction of Our Natural Environment

We have also not been paying the full cost of the environmental damage caused by the growth of our consumption — such as our coal-fired power plants, our cars, our urban sprawl, our large homes and our airplane trips. Under the motto ‘the evidence is not yet in,’ we have largely ignored the damage global warming is likely to bring. Similarly, we ignore the thousand-fold increase in the rate of extinction of living species and our rapid depletion of our non-renewable resources. The Intergovernmental Panel on Climate Change, which shared the Nobel Prize with Al Gore last year, estimates that we must spend about 1 percent of total world income over the next 25 years to bring about the new technologies, alternative energy sources, and changes in lifestyles necessary to stop global warming. Because the U.S. has disproportionately contributed to global warming, fairness mandates that we bear a cost that is at least proportional to our share of economic wealth. Therefore, our implicit bill for mitigating global warming is at least 1 percent of our national income. The price of $4-dollar gas pales in comparison.

Our Oppressive Incarceration Rate

Our economy also suffers from the oppression of large segments of our population. For example, the U.S. incarceration rate is about seven times the world average, and it is highly skewed by race and income. About 2.3 million Americans, mostly poor and minorities, are currently incarcerated. The direct cost of housing, feeding, and guarding these 2.3 million prisoners is about $70 billion per year. Since increased incarceration has not been shown to reduce crime, much of these direct costs are wasted. Of course, dealing humanely with the addictions, the mental illness and the anti-social behavior that is now so cruelly addressed by oppression through incarceration will probably cost as much as our direct costs of incarceration, perhaps more. But unless we bear this cost, we will continue to lose several percent of our potential national product due to the indirect costs of incarceration.

Preventing 2.3 million adults — or about 1.5 percent of our total adult labor force — from carrying out productive work cuts our national product by about 1 percent, given that the majority of people in prison are less productive than the average worker. The high incarceration rate also implies there are nearly six million ex-felons, and there is ample evidence that, all other things equal, ex-felons remain less productive than people who have never been incarcerated. This lower productivity stems in large part from the fact that years in jail translate into less job experience. But, we also maintain many restrictions on what jobs ex-felons can hold, and employers routinely discriminate against exfelons. This loss of productivity steals perhaps another 0.5 to 1 percent of national income.

In addition to our oppressive incarceration, we also oppress our Native American population on reservations, our inner city youth in sub-par schools, and millions of undocumented immigrant workers who are easily exploited and mistreated because they have no legal recourse. It will take a wholesale reform of our social policies to reverse the discrimination, the incarceration, the neglect the unequal educational opportunities and the second- class status of immigrants which all suppress our long-run national product. Unfortunately, Americans are not yet willing to even recognize this oppression.

Our Underperforming & Overpriced Healthcare System

Americans endure an excessively high cost of healthcare. Other developed countries provide healthcare to their entire populations at costs that range from onehalf to two-thirds of what Americans now pay. We spend close to 15 percent of our national product on healthcare, but other advanced countries spend only between 7 and 10 percent. And they achieve consistently longer life expectancies, lower infant mortality rates and superior preventive care. We effectively overspend on healthcare by at least 5 percent of national product. Despite this huge cost, the mere mention of ‘socialized medicine’ seems to be enough to shut off debate on reform.

Obviously, we already have quite a bit of ‘socialized medicine’ in the form of Medicare, Medicaid, the Veterans Health system and the universal coverage provided to members of Congress. Our government also implicitly subsidizes healthcare by exempting contributions to health insurance from income tax. In all, the conservative weekly magazine The Economist estimates that the U.S. government is already paying or subsidizing about 60 percent of U.S. healthcare expenditures. Coincidentally, that 60 percent would fully pay for a European-style universal singlepayer healthcare system. Thus, we effectively waste at least 5 percent of our national product on overpriced drugs, overpaid private hospitals, private insurance companies organized to deny payments, and overemphasis on major operations rather than preventive care.

The Full Bill for Our Military

Finally, we greatly overpay for national security. The combined defense and security budgets that cover national defense, security, surveillance, intelligence gathering and military assistance to foreign allies sum to well over $1 trillion per year, or about 7 percent of national income. Our Congress suggests that we must endure this burden in order to protect ourselves from terrorism and to fight tyranny abroad. Critics of defense expenditures have used these numbers to quantify what they refer to as the ‘cost of American imperialism.’ I would argue that regardless of whether we are fighting terrorists, promoting democracy or colonizing the world, the true cost of accomplishing these goals is clearly much higher than 7 percent of our national product. We have not been terribly successful at any of these tasks by devoting 7 percent of our national product to them. Instead, we have pretty much destroyed our military capabilities after just two indecisive wars in small countries, and there is still plenty of conflict and terrorism.

While 7 percent of national income is apparently too little to accomplish our military goals, it is too much to achieve a peaceful coexistence with the rest of the world. Seven percent of our national product accounts for over half of the world’s total military expenditures. This level of expenditure is so threatening that, instead of making other countries less threatening, it has set off an international arms race that, in the end, gives no one except the militaryindustrial complex any advantage.

Hence, the 7 percent of our national product spent on the military and national security is largely wasted. A much smaller percentage could effectively combat international crimes if it is channeled to a cooperative global security effort that discourages senseless arms races that leave no one better off. Given that Japan manages to protect itself very well devoting little more than 1 percent of its national product to its military, U.S. defense and security expenditures equal to 2 percent of national product should be more than enough to provide for our security and protect the world’s shipping lanes from piracy.

The Total Cost of Our Denial

In summary: (1) our militaristic approach to world affairs, therefore, implies a waste of perhaps as much as 5 percent of national product; (2) because we have for years been borrowing from foreigners, in the future we will have to repay well over 5 percent of national income to foreigners in interest, profits, rents and principal; (3) it will cost us at least 1 percent of national product (and more if we wait much longer) to deal with global warming, plus more for other forms of environmental destruction our past and present production and consumption cause; (4) incarceration and other forms of oppression

cost us as much as 2 percent of national product; and (5) our publicly subsidized but privately operated healthcare system costs us at least 5 percent of national product too much. Hence, the many debts that we have been building up will leave our children with an economy that may be 20 percent poorer than the one most Americans think they are leaving them.

There are obvious signs that we are, in fact, already living in an economy that is 20 percent smaller than we like to think. Declining real wages, lagging adjustments in the minimum wage, actual declines in life expectancy in nearly one third of U.S. counties, the dismantling of our government-provided social safety net, increased work hours, more family members working, the collapsing household saving rate, and the falling value of the dollar are all signs of fundamental economic weakness. Our environmental, social and healthcare debts also show up in the erosion of our public education system, large tuition increases at universities and colleges, growing income inequalities, collapsing levees and poor public transportation. And, even more discreetly, we are increasingly paying these debts in the form of rising utility rates, road tolls, explicit service fees and deteriorating services because desperate state and local governments increasingly resort to privatization schemes to meet short-run budgetary gaps caused by lagging tax revenues.

What Now?

Fortunately, we have the wealth to deal with the debts described above. Yes, our environmental destruction will cost us 1 or 2 percent of national product to reverse, and foreigners will, sooner or later, want to be repaid the trillions we have borrowed. Those are real costs we must pay for by reducing our own consumption. Our huge military expenditures, on the other hand, can be reversed however by simply cutting the spending. Also, if we can overcome the resistance of the special interests, a governmentfunded single-payer universal healthcare system can begin reducing health costs and improving coverage as soon as it comes on line. Dealing with these debts will not slow down economic growth or cause unemployment to rise either, because American labor and capital freed from producing bombs, training soldiers or producing Hummers can be used to build public transportation, design alternative energy systems, educate and inspire our youth, and produce the huge volume of exports with which to repay our foreign lenders. The problem, of course, is that special interests are well-entrenched in our political system, and it will take time to carry out these changes. Until we make them, the costs will accumulate.

It is encouraging to see poll results showing that 80 percent of Americans think the U.S. is moving in the wrong direction. Apparently, many people are, to some degree, aware of the huge debts we will have to pay off in the future. Recent polls also reveal, however, that Americans favor John McCain, the more pro-war candidate, when it comes to foreign policy. This is not encouraging. If Americans opt to support wasteful militarism and the continued occupation of Iraq, our government will continue to borrow more, our real incomes will stagnate and individuals will not save, foreigners will continue to buy more of our assets and lay claim to more of our future income, and social expenditures will likely be cut even further, leaving our children even less prepared to pay the debts our militarism passes on to them. In short, we may very well end up in a vicious downward economic cycle from which we cannot recover. The postponement in dealing with our foreign, social and environmental debts, and a longterm decline of the U.S. economy, could then become the real legacy of our invasion and occupation of Iraq.

In closing, it may have occurred to you that the efforts of Nebraskans for Peace to promote peace between nations, peace within our society, and peace with our natural environment very nicely address our most pressing economic problems.

Peace, it turns out, is good economic policy.