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Joseph Stiglitz at the Frontline Club

In 2001 economist Joseph Stiglitz shared a Nobel Prize for his work on asymmetric information in markets, essentially rejecting the idea that markets are self-regulatory except in extraordinary circumstances. Stiglitz and his colleagues proposed almost the opposite - that unfettered markets are by default volatile and that market stability is the exception that proves this rule.

Stiglitz's later career has been one of bucking political trends and challenging received wisdom. As a senior economic advisor to the Clinton administration, he pioneered the 'third way' in economics, proposing that governments retain an important, though often limited, role in adjusting market fluctuations, in strict opposition to those he termed 'free market fundamentalists'. His role in drafting environmental legislation predated Al Gore's involvement in these issues, for example, and his critiques of globalisation - whilst chief economist at the World Bank - and the Bretton-Woods institutions saw him increasingly cast as an iconoclast.

Stiglitz has recently been much in the news again, with the February 2008 publication of The Three Trillion Dollar War: The True Cost of the Iraq Conflict (with Linda Bilmes). On Friday 13 June, I was at the Frontline Club in London to see Stiglitz in conversation with Stephanie Flanders, Economics Editor of the BBC.

The U.S. has now been in Iraq for five years, seven in Afghanistan, longer than in either World War. Stiglitz and Bilmes' contentious thesis is that the true costs of the war vastly exceed any of the estimates bandied around by the Bush administration, in private or in public, and that the American people have been lied to over the true cost of the expedition to Iraq. This has elicited predictably apoplectic reactions from the White House, whose spokesman Tony Fratto responded:

People like Joe Stiglitz lack the courage to consider the cost of doing nothing and the cost of failure. One can't even begin to put a price tag on the cost to this nation of the attacks of 9-11. It is also an investment in the future safety and security of Americans and our vital national interests. $3 trillion? What price does Joe Stiglitz put on attacks on the homeland that have already been prevented? Or doesn't his slide rule work that way?

And three trillion is a low estimate, Stiglitz says. His analyses were deliberately aimed at estimating lower-bound costs, with the actual range being $2.7tr to $5tr in the medium term. Compare this to the ballpark figures suggested by adminstration personnel in the run-up to the war and since 2003. Larry Lindsey, President Bush's economic advisor, suggested likely costs at $200bn, a figure ridiculed by Donald Rumsfeld as 'baloney', and which undoubtedly contributed to Lindsey's departure from the White House in 2002. SecDef Rumsfeld and Mitch Daniels, director of the Office of Management and Budget, arrived at a figure of $50-60bn, some of which would be recouped from other member nations in the alliance. Paul Wolfowitz, later himself of the World Bank of course, believed that post-war reconstruction could be paid for through increased oil revenues.

Stiglitz maintains that the current operating costs of the war in Iraq for 2008 exceed $12.5bn a month, $16bn once Afghanistan is taken into account, equivalent to the annual budget of the United Nations. Even these figures do not include the expenses of the Department of Defense, intelligence, or cross-departmental funds. The running total as of May 2008 is somewhere in the region of $634bn. The war has already cost more than 12 years in Vietnam and twice as much as the Korean war.

One particular thrust of Stiglitz's analysis is the price the government puts on the lives of soldiers. Each man or woman is 'valued' for accountancy purposes at approximately $0.5m, way below the $7.2m sum derived for civilians. Based on the latter figures, this column in the ledger totals $28bn, as nearly 4000 American troops have died thus far. Similar accounting blindness diminishes the number of casualties and invalided troops, and the disability benefits necessary to pay for their damaged futures. Government figures also do not include demobilisation costs, other 'resetting' contingencies, other healthcare costs (such as treatment for PTSD, estimated to affect a full third of serving personnel), and the interest on the loans the administration took out to pay for the war. Death benefit calculations exclude the high number of suicides, and actually claw back enlistment bonuses from families whose children die within the first month of active service.

And this is the real meat of Stiglitz's argument. In order to pay for wars, governments usually levy 'war taxes' on their populations. This not only raises money but keeps a cap on inflation, and engages the people in the democratic checks and balances required to regulate government actions. In the Iraq case, Bush actually lowered taxes, and went abroad instead to find loans to pay for the war. Foreign loans account for 40% of the raised finance, providing future leverage to the main beneficiary, China.  Not since WWI has a war relied so heavily on foreign finance. China itself is estimated to be sitting on a foreign exchange surplus of $1.75tr. three-quarters of which are in dollars. How this will affect the post-war realpolitik remains to be seen. Contrary to the oft-quoted adage that war is good for the economy, the Iraq war has not only decreased economic productivity in the short term, but will weaken an already-embattled U.S. economy in the long term. In Stiglitz's words, "borrowed money equals borrowed time".

For the U.S., increased external debt servicing automatically reduces public spending. Stiglitz estimates that the amount spent on the Iraq war could pay for universal American healthcare for the next 50-100 years, the sort of figure deliberately withheld from the U.S. public.

Asked about how one would apply cost-benefit analysis to humanitarian wars, Stiglitz side-stepped a bit, but given that the Iraq expedition was touted as a war to end Saddam Hussein's aggression to his own people and the world, Iraq was sold as a humanitarian intervention. In this case, Stiglitz sees no benefits to anyone, merely costs. He was at pains to point out that his analyses only really apply to the U.S., and that the global ramifications of the Iraq war are likely to far outstrip the $3tr total he suggests. The U.K. for example, with a different regulatory regime, and better accounting practices, is likely to spend £20bn on the war, a drop in the ocean compared to U.S. spending, but still far more than the original $1bn war kitty. For the rest of the world, the war has helped push up the cost of oil, squeezing already impoverished nations still further, and has probably contributed to food shortages in many countries.

In Stiglitz's view there are only two winners in this conflict - the oil companies and the defence contractors. The oil companies can name their price, more or less, and the defence industry wins sole-source contracts and is subject to relaxed auditing practices. Accounting laxity also contributes to the $8.8bn that went missing from the Development Fund for Iraq, and the money that simply disappears from the DoD, a department that has failed every official audit for a decade.

As far as Iraq was a 'war of choice', it behoves any government to undertake the sort of economic analysis Stiglitz and Bilmes have now performed. As I was listening to him, a phrase kept coming into my mind - in the past, one looted the adversary; now one loots the taxpayer.

[You can see a recording of the event here]

Update: Robert Fox was there too.

Update: Also at The Guardian, Joseph Stiglitz on Scarcity in an Age of Plenty.

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Reader Comments (13)

Hmm, interesting post but I'm not sold on this.

In any cost-benefit analysis, isn't it normal to also present the benefits as well as the costs? Simply stating, "Well, I would, but there aren't any," doesn't really do it as far as I'm concerned. By refusing to describe or even acknowledge the case for intervention, Stiglitz weakens his own position.

Even saying something like, "The war has already cost more than 12 years in Vietnam and twice as much as the Korean war", doesn't really tell us that much. Is that in real terms? Nominal terms? As a percentage of GDP?

This is not to say that intervention & occupation was god or bad, BTW, but merely to note that there are seemingly some shortcomings in Stiglitz's analysis.

Jun 17, 2008 at 15:24 | Unregistered Commentervimothy

Hi Vimothy,

Fair points, but don't shoot the messenger. Plenty of people have picked holes in Stiglitz's arguments, for political reasons and from economic perspectives. I agree it was a somewhat unusual statement - the 'no benefit' one - for someone involved in a cost-benefit analysis. But isn't that Stiglitz's point? After all this, he can't find any benefits.

You'd have to read the book to find out exactly how the authors square costs from the 50s-70s with modern values. My understanding was that the comparative examples were expressed in real terms. Perhaps I should have made that clear. And $3tr is a shedload of money, whichever way you look at it, although I'd also be interested to see it as % of GDP.

I think the main lesson from Stiglitz & Bilmes is that this war is damnably expensive, and the true costs have neither been properly calculated (perhaps not even by S & B) nor communicated to the U.S. public. This is probably true of any war, and it is certainly hard to foresee the total financial ramifications of most state decisions, let alone an open-ended conflict half a world away. As a result of the combination of accounting oversight and political slyness the war is costing the U.S. public an awful lot more than it can ever benefit. Is this a humanitarian war? I hope history will say that it was - i.e. it succeeded in the long run in benefiting the Iraqis more than it cost them - but I doubt it. If this pessimistic scenario plays out then an ill-starred expedition will have cost all of us a lot more than we gained. Whether that's US taxpayers, UK homeowners, slum-dwellers in Sadr City, or East African farmers who can no longer afford to buy rice.

Jun 17, 2008 at 15:52 | Unregistered CommenterTim Stevens

Hi Tim, thanks for responding so quickly and ably -- this site looks really cool!

Obviously I can have no problem with the assertion that the war has been expensive. And I have objection to the idea that the costs may have greatly outweighed the benefits.

It's more the comparison with other wars, absent contextualising infomation, that I find problematic.

And the fact that Stiglitz doesn't even present a case for the benefits (I'm sure he can imagine one, even if he disagrees with it in fact) makes it look more like polemic than objective analysis.

So, is Iraq more expensive than Korea or Vietnam as a percentage of GDP? But more importantly, what does that tell us if we can't weigh the gains angainst the costs? Not very much, IMO.

I absolutely agree that as a war of choice, the government should have performed a cost-benefit analysis, but Stiglitz has only provided half of that picture.

[I'm also not sure about the oil & food prices -- isn't Iraqi oil prod now in excess of pre-war prod? I guess that decreased Iraqi capacity for the last few years has put inflationary pressure on food prices only while capacity has been under, but will Stiglitz then add deflationary price pressure to the non-existant gains from the Iraq war as Iraqi oil prod increases in the future? I don't think he will...]

Jun 17, 2008 at 16:29 | Unregistered Commentervimothy


Glad you like the site - it's early days yet, but things are coming together thanks to Mike's hard work. Stay tuned!

It's more the comparison with other wars, absent contextualising infomation, that I find problematic

This point was raised by a member of the audience actually. Has this sort of analysis been performed before, i.e. in situ, rather than with the benefit of hindsight. I don't recall a clear answer being given. I guess Stiglitz was comparing Iraq with Korea and Vietnam as they are examples of wars in which the U.S. was involved and which the U.S. government had to 'sell' to the people.

And the fact that Stiglitz doesn't even present a case for the benefits (I'm sure he can imagine one, even if he disagrees with it in fact) makes it look more like polemic than objective analysis.

There's a lot of people who would agree with that. Like I said before, I haven't read the book, so I don't know if they do address the possible benefits elsewhere. He certainly didn't that night, although he may have been playing to the crowd somewhat. My feeling is certainly that he's coming at the issue from a fairly clear political angle and a lack of analytical rigour - if that is the case - leaves him open for justified criticism. I quite frankly do not have the background to challenge a Nobel economist on these things!

About oil and food. Stiglitz makes the persuasive case that the Iraq war is partly (not wholly) responsible for the surge in oil prices, regardless of the volumes Iraq is currently producing. A hike in oil prices affects transport costs affects food costs. At the root of this is Stiglitz's firm belief that Iraq is not just an American problem, but a global problem due to economic interconnectedness, etc - functions of 'globalisation', of which he has been critical in the past. You'd have to dig a little deeper into the book to determine his methodology, as well as how he believes the Iraq war is partially responsible for the 'credit crunch'.

Jun 17, 2008 at 16:44 | Unregistered CommenterTim Stevens

Well, I have yet more questions (increased production of oil somehow causes prices to rise? Doesn't make sense... And having Iraq "cause" the credit crunch is certainly, er, novel), but I guess that I should address them to Stiglitz (actually a member of staff here), not you.

FWIW, the paper that the book was based on is available online, but I can't seem to find it and I'm in a rush (it's tea time)! If I can find it tomorrow, I'll post a link to it here. I don't think he does make a case for the benefits of the war in the book... but I could be wrong.

Jun 17, 2008 at 17:00 | Unregistered Commentervimothy

@Tim: Do I detect a book review coming on? ;)

Like I said before, I haven't read the book, so I don't know if they do address the possible benefits elsewhere.

Jun 17, 2008 at 17:36 | Registered CommenterMike Innes


I feel your pain. His arguments are definitely worth unpacking - I can't claim to have any great understanding here, as I'm sure you've realised ;-) So why are fuel prices going up? Remember it's not just Iraq that produces oil. Why has the UK become a net importer of oil for the first time in ages? If you find that article, do post it here. Btw, when's House of War coming back full-time?


You're a b*&%ard. Actually, I was thinking I might take a stab at Mike Davis' Planet of Slums, although it's probably been done to death by now.

Jun 17, 2008 at 21:54 | Unregistered CommenterTim Stevens

The Economic Costs of the Iraq War: An Appraisal Three Years After the Beginning of the Conflict -- Stiglitz & Bilmes, 2006:

You are welcome to email me if you have trouble accessing the above paper.

Re oil, I thought that the commonest explanation for rising prices is one of fundamentals, i.e. increased demand from emerging markets, not reduced supply per se (and so a problem not easily solved by simply returning prior production levels).

In addition, because oil is bought and sold in dollars, expansionary US monetary policy / high US inflation pushes up the price of oil (which in turn pushes up US inflation...).

And because of this inflationary effect, speculators move away from increasingly worthless paper assets to commodities and tangible assets to hedge against currency devaluation.

Finally, there are re-investment and supply chain issues in the oil industry and oil producing nations.

But I believe the later two are lesser effects; fundamental increases in demand and dollar devaluation are the key drivers.

(NB: I'm no expert either)!

On House of War: I'm moving house at the moment, so everything is all up in the air, and my home PC is in some strange kind of funk, and wordpress crashes my net browser at work every time I try to write a new post... If any of those things get sorted out, I'll post more stuff!

Jun 18, 2008 at 10:12 | Unregistered Commentervimothy

Barclays Capital, Goldman Sachs and others love to blame inflexibility in supply and consumption for high prices. But as ever, it's only part of the story.

In agreement with your third reason, a recent article in the Independent blames the weak dollar in encouraging the move into commodities.

You can also thank Milton Friedman and chums. The current price of oil is strongly linked to speculative trading in futures. You can trade Light Sweet Crude up to nine years forward at NYMEX. In 2004, instability in the Middle East (read Iraq), coupled with diminishing reserves in the Gulf of Mexico and the North Sea, made it appear oil five years thence would be pretty expensive.

Despite the recent announcement of Saudi plans to increase production to 9.7m barrels a day, you are still going to have to stump up the price you agreed back in the day. Lots of people are getting very rich because of this:

"At least 3,008 options contracts have been purchased giving holders the right to buy oil at $250 a barrel in December, data compiled by Bloomberg show. The options closed at 64 cents on June 13."

Jun 18, 2008 at 11:49 | Unregistered CommenterChris


Thanks for the link. Anyone without an NBER subscription can find it at <>. I've added it the source references above. Glad House of War might be on the way back - I started following it, and then it stopped.


Alright, Hedge. Glad to see you made it over here at last! I'll let you and t'other Tim slug out the details ...

Jun 18, 2008 at 14:43 | Registered CommenterTim Stevens

This is an interesting post re. Al Qaeda and oil at Jihadica.

Jun 18, 2008 at 21:31 | Unregistered CommenterTim Stevens

Hey Tim, it's cool -- and something of a suprise -- that anyone has even notied that House of War has been inactive for the past few months!

Re the oil question -- Ok, we can all agree that if dollars lose their value, the price of oil will go up to reflect the loss of purchasing power for oil exporting countries.

For the demand side, go to this post at Econbrowser (1), a blog written by James Hamilton, an economics prof specialising in macro and energy / oil. He notes that supply is stagnant (not reduced!) though demand is consistantly increasing, reflecting the new pressure on commodities from emerging markets.

Next, go to this post (2), which is more recent and takes into account the effects of the credit crunch and resulting turmoil. Hamilton notes that the Fed has caused the move into commodities by pushing the "real interest rate strongly into negative territory".

See also this post by renowned energy economist A.F Alhajji (3), who sums up the situation as follows:

As the dollar declines, commodities – including oil – attract investors. Investing in futures becomes both a hedge against a weakening dollar and an investment vehicle that could yield substantial profit, particularly in a climate of vanishing excess oil production capacity, increasing demand, declining interest rates, a slumping real estate market, and crisis in the banking industry.

As to who's at fault: Blame that on Goldman Sachs if you want... but I think they're the symptom, not the cause. AQ ideologues can try to claim responsibility for some price shocks, but the effect of terrorist actions looks pretty minimal to me (given the strong fundamentals and Fed policy effects). As for Friedman, well, blaming a dead economist for the effects of bad de-regulation (if that's what you're doing) makes as much sense as blaming Keynes for the effects of bad central bank policy.


Jun 19, 2008 at 12:57 | Unregistered Commentervimothy


Thanks for those links: we are basically in agreement. But I find it interesting that most of the commentators who downplay the significance of speculation are themselves speculators. Their choice of oil as an investment vehicle is clearly not solely motivated by a desire to reduce their exposure to volatility: indeed the instability itself maximises the potential for returns.

I'm still troubled by the option to buy $250 barrels. I can see why you would want to put those options, but you would only call if you believe the day price in December will be higher. What possible supply-side event could cause prices to treble in a year?

My (somewhat overly flippant) finger-pointing towards Friedman's grave was really meant as a general criticism of laissez-faire economics, rather than a specific criticism of deregulation in this sector.

Jun 19, 2008 at 16:24 | Unregistered CommenterChris

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