Larry Lindsey was right. And wrong.

As noted in my recent posts, prospects for the budget deficit do not look good in the out years. However, it is possible that the Administration will find that conditions in Iraq meet the requirements the President has set forth for withdrawal, and hence reduction in outlays for operations in the Iraq theater of operations will result. Alternatively, it is also possible that the President will again readjust the pre-conditions for withdrawal. Indeed, in my (post of
November 29 )
I laid out a trajectory for the debt-to-GDP ratio predicated upon the CBO’s phasedown scenario; this scenario involves deploying “about 200,000 active-duty, Reserve, and National Guard personnel overseas to support those operations through 2006, but over the longer term, U.S. involvement would shrink to about four brigades (40,000 troops) and domestic military operations for homeland security would diminish.” (CBO, Budget and Economic Outlook, August 2005, p. 18)

But forecasting expenditures with an optimistic bias is fraught with hazards. It may be useful to recall that Administration officials forwarded figures of $50-$60 billion, vigorously criticising as too high Larry Lindsey’s prediction of expenditures of $100 to $200 billion.

It turns out that that Lindsey was more right than the other senior Administration officials.

“Based on data from DOD, CRS estimates that DOD expected to spend about $100 billion for Iraq, $50 billion for Afghanistan, and $23 billion for enhanced security through the end of FY2004. Between FY2002 and FY2005, Congress appropriated about $27 billion to other agencies for reconstruction and embassy operations in Iraq and
Afghanistan. With those costs, total funding would be about $148 billion for Iraq and $58 billion for Afghanistan as of the end of the 108th Congress. If Congress approves the $75 billion requested and if the cost for Afghanistan remains steady, CRS estimates that DOD’s contractual costs could total about $192 billion for Iraq, about $58 billion for Afghanistan, and about $20 billion for enhanced security by the end of FY2005.” (A. Belasco, “The Cost of Operations in Iraq, Afghanistan, and Enhanced Security,” Congressional Research Service RS 21644). [Author’s note: the $75 billion was approved]

What are the budgetary implications of retaining the current force levels for the foreseeable future? My rough math indicates that $200 billion has been expended 2 1/2 years; this works out to $80 billion per year. Since the FY 2005 budget deficit was $318 billion, operations in Iraq therefore accounted for 25% of last year’s shortfall.

I also said that Lindsey was wrong. His estimate is too low, insofar as total expenditures are likely to very soon exceed his upper bound estimate of $200 billion, if they have not already done so.

In this discussion, I have only included listed budgetary costs. While the appropriations and obligations do include funds for repairing and replacing worn out equipment, it is not clear to me that the entire cost is being covered.

“For the next several years, funding to sustain or modernize aging equipment will have to compete for funding with other DOD priorities, such as current operations, force structure changes, and replacement system acquisitions. Without sufficient plans that provide for sustaining and modernizing all key equipment systems through the end of their expected useful lives and without identifying the risks associated with not fully funding or developing sustainment plans, DOD may be unable to meet future requirements for defense capabilities.”

From GAO, “Military Readiness,” Report GAO-06-141, October 2005),
Or described in ordinary language:
see here

Heightened expenditures for medical care (in the Veterans Administration) also do not appear to be included in the CBO calculations, although I may be wrong on that point.

Consequently, my view is that a debt-to-GDP ratio of 56% by FY2015 is as plausible as my previous conjecture of 52%.

One final note. I’ve only discussed budgetary costs. I have deliberately excluded non-pecuniary costs associated with deaths and casualties, costs associated with higher oil prices that may have resulted from military operations in the region and the reduction in Iraqi supply, reduced investment and output resulting from higher interest rates, among other items.