By John W. Schoen Senior Producer
msnbc.com
updated 10/22/2006 5:33:18 PM ET 2006-10-22T21:33:18
COMMENTARY

With no end in sight to turmoil in Iraq and Congress borrowing hundreds of billions to pay for the war, Dave in North Dakota wants to know: Just what is all this costing us? Meanwhile, all that spending has Gary in Pennsylvania worried about whether Uncle Sam can afford it — without going bankrupt.

How much money is our government spending, per week, in Iraq?
— Dave D., Mayville, N.D.

Given the chaotic nature of war and the complexities of government accounting, it’s pretty much impossible to come up with a hard number. And as soon as you come up with one, someone will come along and challenge what you’ve chosen to include or leave out.

When economists or financial analysts make estimates like these, they often take one of two approaches: “bottom-up” or “top-down.” In a bottom-up estimate, you’d try to add up all the individual costs on your list of war-related expenses: everything from the preparation of a meal for the troops to the manufacture of each bullet. The top-down approach just looks at what has been spent and estimates the level of future spending. The two methods are almost guaranteed to come up with different numbers.

So you’ve got several comprehensive studies to choose from. One of the most up-to date comes from the National Priorities Project, and Amherst-Mass.-based group that tracks the impact of federal spending on local communities. Using a “top-down” calculation based on U.S. budget appropriations, the group estimates the total money spent or allocated comes to about $255 million per day, or a little less than $1.8 billion a week. That figure includes both military and non-military spending on things like reconstruction.

Other estimates cast a wider net in their definition of total costs — including things like the loss of life. Insurance companies and juries in wrongful death cases inevitably come up with a dollar figure, but any number used to represent the financial loss resulting from the death of more than 3,000 soldiers is only an estimate of the true economic impact. Such estimates also include the short- and long-term cost of caring for the tens of thousands of those disabled in combat.

Then there are future costs that don’t show up in current appropriations, like the money needed to replace equipment that's wearing out faster that it would if wasn’t being used in combat. And, since the government is running deficits —  and borrowing to make up the difference — at least some of the interest on the national debt has to be added to the Iraq war bill.

If you add these costs, and others, to the total tab, the cost of the war has jumped from $4.4 billion to $7.1 billion a month since the 2003 fiscal year, according to a paper co-authored in January by Columbia University professor and Nobel-prize winning economist Joseph Stiglitz, an outspoken critic of the war. The paper estimates the total cost could top $1 trillion.

There are some savings that offset the costs. Scott Wallsten at the American Enterprise Institute noted in a Sept. 2005 study that the the U.S. no longer bears the cost of enforcing the “no fly zone” that was in place before the war began. That report estimates the total cost of the Iraq war of up to $1 trillion. But, as Wallsten noted, a lot depends on the assumptions you make about future costs. To come up with your own estimate, Wallsten has created a calculator that let’s you make your own estimate.

Some estimates include what economists call the "opportunity costs" — all the things you could have done with the money if you didn't spend the money on the war. So, if you take that view, you can add to your list all the roads that didn't get built or public school programs that didn't get funded because the money was spent on military operations.

Lastly, no accounting would be complete without looking at the financial and economic impact on Iraq. If part of the reason for going to war was to liberate the country from dictatorship, end global sanctions and allow Iraqis to thrive economically, that hasn’t happened yet.

In the short term, for example, the Iraqi economy has been hit by substantial lost oil production, at a time when oil prices approached record (inflation adjusted) highs. From level of more than 2.5 million barrels a day in 2001, production fell to less than 1.5 million in 2003 and was less than 2 million last year. Ironically, the 2006 spike in oil prices — which raised the cost of fighting the war — was due, in part, to uncertainties about oil supplies created by the war itself.

And any final accounting will have to include the loss of life and injuries to the Iraqi people. For now, that number is unknowable.

What would happen if the federal government goes bankrupt? 
-- Gary R., West Mifflin, Penn.

Bankruptcy usually refers to the process individuals or companies go through when they can’t pay their debts. It’s a legal proceeding that adds up everything you own (your assets) and then uses that money to pay off what you owe (your debts) — or as much as possible. The court ultimately signs off on a plan for who gets what.

Countries don't go bankrupt. For starters, when a country borrows, it often doesn’t promise to use specific assets to pay back the loan. A U.S. Treasury bond, for example, is backed only by the “full faith and credit” of the U.S. government to pay interest and repay the principal when the bond comes due.

Governments can — and occasionally do — default on their debts, and the results aren’t pretty. Though the process often involves a restructuring similar to a bankruptcy proceeding, a default brings immediate — and lasting — economic pain. One of the worst recent cases was the 2002 default by Argentina, which included a steep devaluation of its currency and an unemployment rate that hit 25 percent.

Even before a government gets close to default, investors who believe its finances are a mess demand higher interest payments before they’ll part with their money to buy that government’s bonds. That's how the bond market punishes countries (and companies) that don't manage their finances well: by raising the cost of borrowing.

There is certainly cause for concern about U.S. budget deficits — now running in the hundreds of billions of dollars —  and the looming costs of paying baby boomers’ bills for Social Security and Medicare. But Uncle Sam is a long way from going broke.

Like any retirement plan, for example, Social Security can get off track from time to time, just as it did in the 1980s after a decade of high inflation threw the numbers out of whack. During the Reagan administration, a compromise was reached to make adjustments to taxes and benefits, and the plan was put back on track.

Even at current levels, the U.S. budget deficits are not all that high by historical standards as a percentage of the Gross Domestic Product. Since government borrowing is ultimately paid back with taxes, the size of the economy is a pretty good measure of the government’s ability to raise those taxes. Today, the deficit represents about 3 percent of total U.S. GDP.  By comparison, in 1943, at the height of borrowing to pay the cost of fighting World War II, the deficit came to something like 30 percent of U.S. GDP

So the risk of default is still extremely low — if Congress can get its financial house in order and address the problem. Congress was able to tame its spending habit in the 1990s, and there’s not reason it can’t bring back the “pay as you go” rules that got budget deficits under control. The idea is pretty simple: If you’re going to spend money on something, you have to raise the taxes to pay for it. And if you’re going to cut taxes, you have to find places to cut spending.

While the problem of taming out-of-control government spending is daunting, you have a chance to do something about in the next few weeks. If you haven't already done so, check out the Web sites of candidates for Congress in your area — and vote accordingly.

After all, it's your money.

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