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How Syria could derail the U.S. recovery: Erica Alini

The downside of always saving the world.

Syria has long featured at or near the top of various lists of “black swans,” the kind of unpredictable event that could derail the world economy leaving the vast majority of forecasters as puzzled as the European explorers who first sighted black swans in Australia in 1697.

Over the past couple of weeks, though, news that Bashar al-Assad’s regime might have used chemical weapons, and thereby crossed President Barack Obama’s “red line,” has put the country far above any other potential spoiler on the probability scale. In Washington, the debate over whether the U.S. should lead a military intervention is heating up. Newspaper columnists, former diplomats and think-tank wonks are sparing no ink to call for a Syria mission, either on diplomatic grounds (protect Israel, fend off Iran, avoid anarchy and, potentially, al-Qaeda infiltrations) or out of humanitarian concerns (protect the civilians, fend off the brutal dictatorship, avoid  the complete collapse of an entire society). But how would another engagement in the Middle East affect the U.S. recovery?

Iraq and Afghanistan: modern warfare is pricier than ever

Any attempt to assess the potential economic impact of a Syria mission depends on a key assumption about foreign policy: Should President Obama decide for intervention, will the mission look more like Iraq and Afghanistan or Libya?

My assumption here is that a relatively quick, painless strike like the one that unseated Libya’s Muammar Gaddafi isn’t feasible in Syria. The latter has a much more sophisticated and well-armed military, powerful, dedicated allies in Tehran and is a key piece of the Arab-Israeli puzzle, which means regional fall-outs will be as serious as they’re unpredictable. Even if the White House planned for a limited engagement, chances are, it will get sucked in.

Now, if a Syria intervention is bound to look somewhat like Iraq and Afghanistan, looking at how much those two wars cost should give us an idea of what the bill for a new conflict could be.

The latest research has put the price tag for the War on Terror at an exorbitant $4-6 trillion, more than any armed conflict in U.S. history. WWII, by comparison, cost only $3.7 trillion in current dollars. That’s because war, at least as it’s done by the U.S., is a lot more expensive than it used to be.

That key intuition comes from Nobel Prize winner Joseph Stiglitz, of Columbia University, and Linda Bilmes, of Harvard University, who’ve been studying the matter for years trying to bring some method to the madness of accounting for the budgetary and broader economic costs of war (which remains, by their own admission, a bit of an educated guess).

The direct outlays for the two conflicts are generally estimated at nearly $2 trillion, roughly double the federal deficit expected for 2013 and about 12% of the country’s $16 trillion debt. That’s already very high, but Stiglitz and Bilmes argue that the U.S. hasn’t even started footing the bulk of the bill.

“Historically, the bill for these costs has come due many decades later,” Bilmes noted in a recent study, disability expenses for WW I veterans peaked in 1969 and for WW II veterans in the late 1980s, the cost of caring for Vietnam and first Gulf War veterans is still climbing. But the bill for Iraq and Afghanistan is likely going to be steeper still due to higher rates of survival, more generous benefits and more expensive medical treatments. Of the 1.56 million troops that have been discharged, over half applied to receive lifetime disability payments, she found.

Another reason why the two relatively small wars will rack up an unprecedented bill is debt-servicing costs. Though it’s rather normal for governments to borrow in order to finance some of the expenses of war, Iraq and Afghanistan are historical outliers in that Washington funded all of the effort via debt—on the home front, taxes were cut and public spending kept growing.

What Syria could do to the recovery

If the U.S. becomes entangled in a drawn-out conflict in Syria, it will likely face many of the same steep bills. Naturally, it’s also possible that a new war could end up costing less than Iraq or Afghanistan. After all, the Bush administration’s over-reliance on expensive independent contractors (for anything from painting walls and repairing trucks to interrogating prisoners and monitoring the performance of other contractors) is widely thought to have wasted billions of dollars. The White House has presumably learned that lesson and it’s reasonable to imagine that mismanagement costs in a hypothetical Syria mission might be lower.

Still, a conflict with cost structures similar to Iraq-Afghanistan would be disastrous for the U.S. economy, for two reasons:

1. It could precipitate a fiscal crisis. Uncle Sam would still have to tap international investors to pay for most of, if not all, the cost of a new war. This would not only mean high, long-term debt-servicing-costs, it could also challenge the U.S.’s credit worthiness. Money markets might well interpret another overseas engagement as a sign that Washington isn’t serious about paying its bills. America’s creditors might demand a higher return for their loans, and the Federal Reserve could be forced to hike up interest rates before the economy is strong enough to do away with cheap money. Also, higher rates and a new load of veterans requiring lifelong medical attention would add to the the kind of structural public costs that weigh down growth. A slow-growing economy, in turn, would make a burgeoning federal debt less sustainable.

2. It would suck in resources that could otherwise revive growth. Another war would also compete with the recovery for scarce resources, in terms of both public funding and the attention of the president and policy makers. Of course the expenses of war can be an economic stimulus—WWII is generally thought to have shaken the U.S. out of the Great Depression—but, generally, they’re not a very powerful one, write Stiglitz and Bilmes.  There are many other types of government spending for which the same taxpayer dollar would produce a higher GDP increase. A new war front could also sway the country away from key reforms it needs to implement in order to fix its economic engine, such as immigration and education reform and finishing the job of overhauling financial markets regulation.

The U.S. is in no shape to handle another major military engagement. Gambling the recovery over another war of choice makes no sense, even from a foreign policy point of view. America’s best diplomats know this well.