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The Cost of War, Unnoticed
Why Iraq and Afghanistan Haven't Squeezed the Average American's Wallet
By Lori Montgomery
Washington Post Staff Writer

The global war on terror, as President Bush calls the fighting in Iraq and Afghanistan and related military operations, is about to become the second-most-expensive conflict in U.S. history, after World War II.

Since the Sept. 11, 2001, terrorist attacks, Congress has approved more than $609 billion for the wars, a figure likely to stand as lawmakers rework their latest spending bill in response to a Bush veto. Requests for $145 billion more await congressional action and would raise the cost in inflation-adjusted dollars beyond the cost of the wars in Korea and Vietnam.

But the United States is vastly richer than it was in those days, and the nation's wealth now dwarfs the price of war, economists said. Last year, spending in Iraq amounted to less than 1 percent of the total economy -- about as much as Americans spent shopping online and less than half what they spent at Wal-Mart. Total defense spending is 4 percent of gross domestic product, the figure that measures the nation's economic output. In contrast, defense spending ate up 14 percent of GDP at the height of the Korean War and 9 percent during the Vietnam War.

And this time, the war bill is going directly on the nation's credit card. Unlike his predecessors, Bush is financing a major conflict without raising taxes or making significant cuts in domestic programs. Instead, he has cut taxes and run up the national debt. The result, economists said, is a war that has barely dented the average American's pocketbook and caused few reverberations in the broader economy.

"This war is easier to manage because it's a very small portion of GDP compared to the past," said Robert D. Hormats, a managing director at Goldman Sachs and a former Reagan administration official who recently published a history of war financing. "Even the borrowing of money is relatively small compared to past wars, so the impact on the economy is relatively minor."

Like all debts, however, the bill for Iraq and Afghanistan will eventually come due. While it is unlikely to cause economic upheaval, such as the devastating inflation that followed the Vietnam War, economists foresee substantial increases in government spending to rebuild the nation's exhausted armed forces, care for its disabled veterans and cover rising interest payments.

Administration officials say those payments will be easier to afford because Bush's tax cuts strengthened the economy and boosted tax collections. But even many conservative economists are skeptical. Some worry that the bill for Iraq will come just as the baby-boom generation starts retiring, further straining a budget that will require deep cuts, higher taxes or bigger deficits.

"When you borrow to pay for the war, you feel it less," said Alan D. Viard, a former Bush White House economist who is now a resident scholar at the American Enterprise Institute. "But if you do borrow, it may be future needs you're sacrificing. There's always a sacrifice."

Borrowing is common in wartime. According to Hormats, virtually every U.S. war has required some debt. The title of his book, "The Price of Liberty: Paying for America's Wars," comes from a 1790 report by the nation's first Treasury secretary, Alexander Hamilton. Hamilton wrote that the heavy debt that helped finance the Revolutionary War was "the price of liberty" and insisted that the new nation scrupulously repay it to preserve its ability to borrow in the future.

Hamilton won that argument, and the government's commitment to repaying its debts has become a bedrock American principle. At the same time, most wartime presidents have tried to cover at least part of the cost of their conflicts by means other than debt, Hormats writes, often pushing radical changes in fiscal policy aimed at restraining deficits and inflation.

To help pay for World War II, by far the nation's most expensive, Franklin D. Roosevelt expanded the number of taxpayers from 4 million to 42 million, tripled tax collections as a percentage of GDP and slashed spending on his treasured New Deal programs. As the military budget devoured more than a third of the economy, Roosevelt also called for mass sacrifice, rationing food and gasoline, capping prices and wages and exhorting Americans to spend any money they could spare on war bonds and stamps.

Heavy government spending on the Korean War set off a bout of inflation that neared 8 percent in 1951. To pay for the war, President Harry S. Truman raised the top tax rates to 91 percent for individuals and an all-time high of 70 percent for corporations, while imposing wage and price controls.

Lyndon B. Johnson, who tried to protect a 1964 tax cut and his Great Society programs while escalating U.S. involvement in Vietnam, eventually signed both a tax increase and spending cuts in 1968 -- too late to avoid touching off more than a decade of inflation.

Bush, in contrast, has allowed domestic spending to rise and cut taxes repeatedly since taking office, adding more than $3 trillion to the national debt. He signed a huge stimulus package two months after marching on Baghdad in March 2003. A few months later, he signed legislation to create a Medicare prescription drug benefit, the biggest expansion of the federal health program for the elderly since its creation in 1965.

That combination is unprecedented, Hormats and others said.

"This may be the first war in history -- in the history of the world -- in which there was a tax cut rather than a tax hike," said Alan S. Blinder, a Princeton University economist who was vice chairman of the Federal Reserve in the Clinton administration.

Administration officials say the 21st-century economy is different from that of the 1960s, when the U.S. government had no easy access to cheap capital. To the extent that fighting in Iraq has contributed to higher oil prices, it has added to inflationary pressures, economists said. But they added that military spending alone has not done so. And the low cost of borrowing today makes a rising debt worth the investment "in the safety and security of Americans," said White House spokesman Tony Fratto.

Though the administration has not cut domestic spending, it has managed to hold the budget for discretionary programs relatively flat in recent years, Fratto said. After the 2001 terrorist attacks, a tax increase to pay for the ensuing war could have devastated the economy, he said.

"Could it have been paid for by tax increases? I suppose it could have been," Fratto said. "But at what cost to the economy?"

Grover Norquist, a Bush adviser and anti-tax lobbyist, argued that the tax cuts have helped create millions of jobs and trillions of dollars in new wealth, which will ultimately make the debt easier to pay off.

"If you're going to finance a war, it's better to finance it through growth and higher revenue" than through raising taxes, Norquist said. "Would you be better off spending less money? Yes. But my argument is that economic growth that creates jobs is a fine policy whether we're at daggers drawn or at peace with the world."

Norquist was among the few analysts willing to offer a spirited defense of the administration. Many conservatives said they are troubled by Bush's inability to restrain non-military spending.

"In their defense, I think they would say they wanted to do that, but were basically unable to because Congress wouldn't comply," said Kevin A. Hassett, director of economic policy studies at the American Enterprise Institute.

Hormats called Bush's war financing "shortsighted," not only because of the potential fiscal consequences but also because it bypassed an opportunity to engage the support of the public, which has grown increasingly skeptical of the war.

"They tried to do this on the cheap and without a candid conversation with the American people about the cost," Hormats said. "But the irony is the great wartime leaders have seen it in the opposite way," theorizing that a call to sacrifice would "tie people to the war effort."

Joseph E. Stiglitz, a Columbia University professor who was chairman of the Council of Economic Advisers under President Bill Clinton and who was among the winners of the 2001 Nobel prize for economics, said Bush has undertaken a "deceptive policy of saying you can have both guns and butter" -- a strategy similar to Johnson's in the early years of Vietnam. In December, Stiglitz co-authored a study that predicts the Iraq conflict alone will eventually cost taxpayers more than $1 trillion, counting military rebuilding and health care for wounded veterans.

"It's actually turning out to be a very expensive war," Stiglitz said. But "it has been designed to be a war the American people don't feel."