U.S. Military Intervention in Iraq: Some Economic Consequences

Report for Congress
U.S. Military Intervention in Iraq:
Some Economic Consequences
Updated May 16, 2003
Marc Labonte
Analyst in Economics
Government and Finance Division
Gail Makinen
Economic Policy Consultant
Government and Finance Division

Congressional Research Service ˜ The Library of Congress

U.S. Military Intervention in Iraq:
Some Economic Consequences
Going into the war, economists predicted that U.S. military operations in Iraq
could have had two distinct effects on the economy. First, the deficit financed
increase in military expenditures could increase aggregate demand in the short run.
A supplemental appropriation (H.R. 1559) has been signed into law (P.L. 108-11)
that includes $62.6 billion for Iraq-related outlays. Second, the effect of military
operations on the price of oil could have caused economic growth to fall and inflation
to rise in the short run.
Government borrowing from the public, through the issuance of U.S. Treasury
securities to finance a larger budget deficit, appears likely to be the primary financing
method for military operations in Iraq. This boosts aggregate demand in the short
run. Some of the boost would be directed to foreigners instead of domestic producers
since the operations would occur abroad. Some of the boost in aggregate demand
will be “crowded out” by higher interest rates, which reduce investment spending and
other interest-sensitive spending, and dollar appreciation, which reduces exports and
the production of import-competing goods. Because economic activity was sluggish
during the conflict, less of the boost in aggregate demand was crowded out. Lower
government spending may play a small role in financing any U.S. operation in Iraq,
reducing the size of the deficit. While wars may shift resources from non-military
uses to military uses, the shift would not lead to a recession since military spending
is included in GDP.
Military operations against Iraq were accomplished with little damage to the
Iraqi oil fields. As a result, further oil price spikes may be avoided, and the price of
oil is already coming down. Some would argue that the price spike before the war
was caused by anticipation of the coming conflict, and should therefore be counted
as a cost of the war. Economic theory suggests that oil shocks lead to higher
inflation, a contraction in output, and higher unemployment. Effective policy
responses are difficult because expansionary policy would exacerbate the inflationary
pressures while contractionary policy would exacerbate the contraction in output.
Studies suggest that an increase in the price of oil would have little effect on the
economy if it is transient.
In hindsight, we know that the size of military outlays relative to GDP and the
war’s effect on oil prices were both modest. Oil prices rose in the 4 months
preceding the war, but fell back to previous levels before the conflict had ended. The
war also had no significant effect on consumer or investor confidence. Thus, the
effects of the war on the economy were mild.
Most economists do not attribute the 1990-1991 recession to the Gulf War.
Rather, they attribute it to contractionary monetary policy, the spike in oil prices that
accompanied the Iraqi invasion of Kuwait, and problems in the U.S. banking sector.
The Gulf War did not begin until the recession was almost over. As a percentage of
GDP, military outlays actually fell during the Gulf War. This report will not be

The Potential Size of the Conflict.....................................1
The Economics of War Financing.....................................2
Borrowing from the Public..................................3
Equity Issues.............................................3
The Economics of Oil Shocks........................................5
The Role of Confidence.............................................9
The U.S. Economic Experience During the Gulf War.....................10
Conclusion ......................................................11
List of Figures
Figure 1: Monthly Oil Prices.........................................5
List of Tables
Table 1: Economic Indicators in the Gulf War..........................11

U.S. Military Intervention in Iraq: Some
Economic Consequences
Military operations in Iraq raise several macroeconomic questions of
congressional interest that this report will address. The economic effects of a conflict
take two distinct forms, the effects of increased military outlays and the potential
effects of a change in the price of oil, and it is crucial to separate those effects. This
report will analyze the effects of increased military outlays and then analyze the
potential effects of a change in the price of oil. It will conclude with an analysis of
the economic experience during the 1991 Gulf War. But first it will examine the
economic size of the conflict.
The Potential Size of the Conflict
A $78.45 billion supplemental appropriation has been signed into law (P.L. 108-1
11). Of the $78.45 billion, $62.6 billion is dedicated to Iraq-related outlays. The
Pentagon estimated that the war has thus far cost $20 billion and costs related to the
military effort are estimated to run $2 billion per month through the end of the fiscal
year.2 This appropriation could be followed by others if the pacification and
reconstruction follow a different route from that anticipated by the Administration.
By way of comparison, the Gulf War is estimated to have cost $80 billion in
inflation-adjusted terms and recent military operations in Afghanistan are estimated
to have cost $10 billion to date.3
One should also take into account the fact that many of the military resources
used in the conflict would be used in the absence of a conflict. For example, soldiers
must be paid (albeit at a lower rate) and equipment must be maintained in peace time
as well. Thus, when considering the economic effects, the relevant figure is the
incremental cost of the conflict, that is, the increase in military expenditures
compared to expenditures in the absence of a conflict. These incremental costs, and
the fiscal stimulus they generate, somewhat lag the conflict since it takes time to
replace the armaments and munitions expended.

1 See CRS Report RL31829, Supplemental Appropriations FY2003: Iraq Conflict,
Afghanistan, Global War on Terrorism, and Homeland Security by Amy Belasco and Larry
2 Estimate provided by the Pentagon’s Comptroller, Dov Zakheim, at a press conference on
April 16, 2003.
3 Gulf War estimates: CRS Report RS21013, Costs of Major U.S. Wars and Recent U.S.
Overseas Military Operations, by Stephen Daggett and Nina Serafino; Congressional
Budget Office, The Economic and Budget Outlook, (Washington: January 1992), p. 63.
Afganistan estimates: Congressional Budget Office, “Letter to the Honorable Pete
Domenici,” April 10, 2002.

For the purpose of estimating macroeconomic effects, the most important point
to recognize is that even the highest estimates of the military conflict are relatively
small given gross domestic product (GDP), which is now in excess of $10 trillion.
While the expenditures would be expected to have the effects on the economy
described in the next section, this means that the magnitude of those effects would
be small.
The Economics of War Financing4
People often assume that wars will lead to recessions, reasoning that the
spending on war will lead to less spending in the rest of the economy. While this
reasoning is correct, the conclusion is wrong. Recessions are characterized by a
reduction in spending in the entire economy, including the military sector. While it
is true resources must be shifted to the military sector, since the military sector is a
part of GDP, the shift does not lower GDP. Wars may lead to less spending on non-
military goods and services, but there is no reason to assume that it will lead to less
spending on total goods and services. In fact, under certain financing methods, it is
likely to lead to greater spending on total goods and services, which would increase
the growth rate of aggregate demand in the short run.
The increased government outlays associated with wars can be financed in four
ways: through higher taxes, reductions in other government spending, government
borrowing from the public (the issuance and sale of U.S. Treasury securities to the
public), or money creation. Major wars have relied upon all four measures.
The first two methods are unlikely to have an effect on economic growth
(aggregate demand) in the short run. The expansion in aggregate demand caused by
greater military outlays is largely offset by the contraction in aggregate demand
caused by higher taxes and/or lower non-military government spending.
The latter two financing methods increase aggregate demand. Thus, a by-
product of wars has typically been a short-term economic boom and increase in
employment in excess of the economy’s sustainable rate of growth. The sectors of
the economy that are recipients of the military spending, such as the transportation
sector and military equipment producers, would receive the biggest boost. Just as a
military buildup in wartime typically boosts aggregate demand, the reduction in
defense expenditures after a war typically causes a brief economic contraction as the
economy adjusts to the return to peacetime activities.
In the conflict with Iraq, money creation and higher taxes were not used as
financing methods. It is possible that some resources could be freed up through
lower government spending. But given the small projected size of the military
outlays in relation to GDP and the temporary nature of the expenditures, the bulk of
the financing will most likely come from borrowing (an increase in the budget

4 For more information, see CRS Report RL31177, Financing Issues and Economic Effects
of Past American Wars, by Marc Labonte.

Borrowing from the Public. If the economy’s resources are fully employed
when the government boosts aggregate demand, the increase in government spending
must be offset by a reduction in spending elsewhere in the economy. In the case of
borrowing from the public, prices and interest rates would be expected to rise, the
latter causing investment and other interest-sensitive spending to be lower than it
otherwise would be. Economists refer to this phenomenon as government purchases
“crowding out” private investment and interest-sensitive spending. Since private
investment is crucial to long-run growth, the long-run effect of these policies would5
be to reduce the private capital stock and future size of the economy.
Government budget deficits can be financed by foreigners as well as domestic
citizens. If a budget deficit is financed by foreigners, exports and import-competing
goods rather than private investment would be “crowded out” by government
expenditures through an appreciation of the dollar and a larger trade deficit. The
appreciation occurs because demand for the dollar increases as foreigners purchase
U.S. financial instruments.
In the case of expenditures on a military campaign abroad, there may be less of
an expansion in aggregate demand than from other forms of government spending
since some of the expenditures would be used for foreign goods and services. This
suggests that there would be less upward pressure on the exchange rate and less
crowding out of U.S. exports and import-competing goods.
Around the time of the war, most economists would agree that the economy was
operating below full employment. This reduces the extent of crowding out due
caused by the deficit because unemployed resources can be brought back into use to
match the rise in spending. The economy may not be that far from full employment,
however. Some economists estimate the full employment rate of unemployment to
be 5%; since the beginning of 2002, the unemployment rate has fluctuated between


When borrowing is undertaken on a very large scale, the public will eventually
refuse to lend more resources to the government. This would then lead to a
budgetary crisis where the government would be forced to turn to other forms of
financing and/or default on its existing debt. Policymakers have little reason to be
concerned about the government’s ability to finance operations on the scale
undertaken in Iraq. The Administration’s current budgetary requests (war and
domestic) would increase the projected budget deficit to only about 4% of GDP. The
government faced no difficulty in persuading the public to finance deficits from 4-6%
of GDP in the mid-1980s and early 1990s, and the national debt today is substantially
smaller, both absolutely and relative to GDP. The fact that the borrowing would be
on a manageable scale does not imply it could not lead to a significant crowding out
of interest-sensitive goods and exchange-rate sensitive goods, however.
Equity Issues. All four methods of war financing raise equity questions,
since each method places the financing burden on different groups of individuals.

5 For a more detailed discussion, see CRS Report RL30583, The Economics of the Federal
Budget Deficit, by Brian Cashell.

The burden of financing wars through higher taxes is borne by the individuals who
have their taxes raised. The burden of financing wars through a reduction in other
government spending is borne by the individuals to whom the spending was
previously directed. The burden of financing wars through money creation is borne
by those whose real wealth and real income fall when prices rise. Uniquely, the
burden of financing wars through borrowing from the public is thought to be borne
in part by future generations rather than present generations. The result of borrowing
from the public is lower private investment, and lower private investment leads to a
smaller future economy, and hence lower standards of living in the future.
Philosophically, the debt financing of wars has often been justified on the grounds
that the peace or security that wars make possible is enjoyed by present and future
generations, and therefore the cost should be borne jointly by present and future
The Economics of Oil Shocks
Before the war, there were concerns that a military conflict could cause
widespread damage to the oil-producing capacity of Iraq and its neighbors, which
would lead to a large spike in oil prices. These fears did not come to pass: Iraq’s oil
fields were secured quickly by coalition forces and there was no damage to its
neighbors fields. As seen in Figure 1, monthly oil prices peaked in February – before
the war – and have fallen since then. Thus, the war had no contemporaneous effect
on oil prices, and through this channel, on the U.S. economy. However, some would
argue that fear of the war is what caused prices to begin rising from about $20/barrel
at the beginning of 2002 to $30/barrel by the end of the year, and this price rise
should be counted as part of the cost of the war. It is difficult to say what path prices
would have taken in late 2002 and early 2003 without the buildup to war. There were
other circumstances at the time that could have also pushed oil prices up, such as the
unrest in Venezuela. This report will not attempt to determine whether or not the
increase in prices should be attributed to the war, but will describe how a run-up in
prices affects the economy in general.

6 For more information, see CRS Report RL30520, The National Debt: Who Bears Its
Burden?, by Marc Labonte and Gail Makinen.

Figure 1: Monthly Oil Prices
Crude Oil, $ per Barrel
Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03
Source: Energy Information Administration
Due to the central role energy plays in the functioning of our economy, changes
in energy prices are not the same as changes in the price of most other goods. Energy
“shocks” can have macroeconomic consequences, in terms of higher inflation, higher
unemployment, and lower output.
Historically, energy price shocks have proven particularly troublesome for the
U.S. economy. Sharp spikes in the price of oil have preceded eight of the nine post-
war recessions, including the current one. When oil prices rise suddenly, the overall
inflation rate is temporarily pushed up because other prices do not instantly adjust and
fall. At the same time, because energy is an important input in the production process,
the price shock raises the cost of production. Because other prices do not instantly fall,
the overall cost of production rises and producers must cut back production, which
causes the contraction in output and employment, all else equal. There may also be
adjustment costs to shifting toward less energy intensive methods of production, and
this could have a negative effect on output in the short run. Typically, the effect on
output occurs over a few quarters. The recent energy price spike followed this pattern,
with oil prices rising in the second half of 1999 through the first half of 2000, and
output growth slowing in the third quarter of 2000.7

7 If rising energy prices affect the economy through this transmission mechanism, then
falling energy prices should have the opposite effect on the economy: they should
temporarily reduce inflation and raise output. Indeed, some economists partly attribute the

Both the inflation and output effects of energy shocks are temporary: once prices
adjust, the economy returns to full employment and its sustainable growth path. This
observation yields an important insight: it is not the level of energy prices that affects
economic growth and inflation, but rather the change in energy prices. Thus, if
policymakers’ priority is to mitigate the effect of energy prices on output and inflation,
they should be concerned with rising energy prices and should not be concerned with
“high” energy prices, even if the high prices are permanent. The only permanent
macroeconomic effect of higher energy prices is their negative effect on the terms of
trade. The “terms of trade” is a measure of standard of living that refers to the labor
and capital embodied in U.S. exports that can be exchanged for the labor and capital
embodied in foreign imports. Permanently higher energy prices lead to a one-time
permanent decline in the terms of trade and the standard of living of U.S. consumers,
all else equal.
Historically, formulating an effective policy response to oil shocks has been
difficult. Expansionary fiscal or monetary policy increases aggregate demand and
inflationary pressures. In typical downturns, monetary and fiscal policy can safely
become expansionary without triggering a significant increase in inflation because the
fall in demand reduces inflationary pressures. In oil shocks, policymakers must be
simultaneously concerned with the fall in economic activity and the rise in prices. By
tackling one problem, they risk exacerbating the other. For example, if policymakers
use expansionary fiscal or monetary policy to offset the fall in output, prices may rise
further and inflationary expectations could become embedded. This was the problem
in the 1970s. Inflation, which was already rising before the oil shocks, continued to
accelerate following the oil shock of 1973 until it reached double digits in 1974. Once
the public came to expect higher inflation, the subsequent expansionary policy
measures had less and less of a positive effect on aggregate demand, making the
purported tradeoff between inflation and unemployment less and less favorable.8
Following the second oil shock of 1979, a Federal Reserve that was determined to
stamp out double-digit inflation chose instead to tackle the inflationary pressures
caused by the oil shock by raising interest rates. This decision exacerbated the effect
on output, contributing to the deepest economic contraction since the Great Depression.
With inflation quiescent today, the tradeoff has been easier to manage.
Empirical evidence suggests that the cumulative effect of a sustained 10%
increase in oil prices9 would be to reduce economic growth by 0.7-1.4 percentage

7 (...continued)
salutary combination of unusually low inflation and high economic growth of the late 1990s
with the fall in energy prices during that time.
8 Expansionary monetary policy leads to an increase in output only because prices do not
adjust instantly to the increase in the money stock. If prices adjusted instantly, there would
be no increase in output. Thus, a given change in the money stock would have a smaller
effect on output when inflationary expectations are high.
9 The estimate assumes that the price of oil increases by 10% in the first quarter and then
stays constant (at the higher level) for the next three quarters.

points over the next year.10 But if the price rise were short lived and quickly reversed,
there would likely be little effect on the economy.11 Since the price of oil fell during
the war, that had a positive but mild effect on the economy. In the runup to the war,
prices were above $25/barrel from April 2002 on, and above $30/barrel from January
to March 2003. But since prices averaged about $30/barrel in 2000 and $25/barrel for
the first 9 months of 2002, arguably there was no new shock to oil prices, but merely
a continuation of the previous one, after a brief respite at the beginning of 2002. Since
it is the change in oil prices, rather than the level of prices, that affects economic
activity, oil prices in 2002 probably had little effect on the economy, and the increase
in prices in the first 3 months of 2003 was not long-lasting enough to have a serious
effect on the economy. That assessment is based on current trends, since prices have
been declining since April 2003. If high prices soon returned and were sustained, then
the effect on the economy could be significant.

10 The literature estimating the economic effects of oil shocks is reviewed in CRS report
RL31608, The Effects of Oil Shocks on the Economy: A Review of the Empirical Evidence,
by Marc Labonte.
11 Hamilton offers evidence that oil price increases only have an significant effect on the
economy if they persist. James Hamilton, “What is an Oil Shock?” National Bureau of
Economic Research, working paper 7755, June 2000.

The Role of Confidence
This report has discussed the effect of the military expenditures and oil price
on the economy. Before the war, many of the reports and projections of the war’s
effects on the economy were highly pessimistic. Most of the war’s negative
economic effects in these forecasts came through another channel: by reducing
consumer and investor confidence. According to this story, independent of the
effects of higher oil prices and military expenditures, households and businesses
would reduce their spending because of a psychological malaise and heightened
uncertainty brought on by the conflict. This, they predicted, would depress
economic activity.
For example, the Center for Strategic & International Studies evaluated the
macroeconomic effects of four scenarios (no war, benign, intermediate, worse)
using the Macroeconomic Advisers model. In the “worse case” scenario (which
includes an oil price of $80/barrel), GDP would contract by 3.8% in the first
quarter following the invasion and 3.2% in the second quarter of the invasion. As
disastrous as the results in these simulations are, what is even more telling is a
chart that separates the direct macroeconomic effects of the war (oil prices and
military expenditures) from the confidence-induced macroeconomic effects
(decline in confidence, rise in bond spread, fall in stock markets, and fall in the
exchange value of the dollar). If the confidence-induced effects are removed,
GDP never shrinks under the worse case scenario, and the economy’s
performance is virtually indistinguishable from the “no war” scenario.
The likelihood of these effects occurring was highly speculative, since it was
not clear if there was a rational reason for them to occur. A small conflict (as a
percentage of GDP) far from the homeland should have little long-term effect on
the future profitability of U.S. corporations and the future earnings of U.S.
workers. Only the rise in oil prices should affect profitability and earnings, but
the length and severity of the price spike was unknown. Furthermore, the
economy has boomed during most wars, and the growth in consumer spending
showed no decline following the large decline in consumer confidence caused by
9/11. Because psychological effects were so uncertain, but so important to the
outcome of the projection, the projections themselves became highly uncertain.
As it turned out, consumer confidence fell slightly in March 2003 (4%), but
rose sharply in April (30%). It fell significantly in 2002 (42% in the year ending
March 2003), but it did not collapse. By comparison, the index was at a similar
value in 1993. How much of that fall is attributable to the buildup of the war is
highly debatable – there were many factors that could have been reducing
consumer confidence in 2002. For example, consumer confidence is highly
correlated with the unemployment rate. Signs of investor panic during the war,
such as widening yield spreads or falling stocks did not materialize. Presumably
these confidence factors were mild since the military conflict was so successful.
Source: Joel Prakken, “After an Attack on Iraq: The Economic Consequences,”
Macroeconomic Advisers, prepared for a conference sponsored by The Center for
Strategic and International Studies, November 12, 2002.

The U.S. Economic Experience During the Gulf War
The Gulf War was the only major military operation of the 20th century that did
not require any increase in military expenditures as a percentage of GDP. In fact, it
took place during the long reduction in military spending (as a percentage of GDP) that
accompanied the end of the Cold War. In this broad sense, there is no reason to
consider the economic effects of financing the buildup. In fact, an economic
contraction occurred during the Gulf War, unlike the typical wartime economic boom,
proving that small conflicts have small economic effects. (See Table 1 for data on the
economic environment before, during, and after the Persian Gulf crisis.) The 1990-
1991 recession is not typically attributed to the war, except for its possible negative
effects on confidence. Instead, it is typically attributed to contractionary monetary
policy (undertaken in 1988-1989 to quell the rising inflation rate), problems in the
banking sector, and the spike in oil prices associated with the Iraqi invasion of12
Kuwait. Timing supports this argument: the monetary tightening took place in 1988
and 1989, the recession began in July 1990, the oil price spike began in August 1990,
and military operations began in January 1991. After the conflict ended, the economy
began to expand again (in March 1991) – it did not experience a typical post-war
Unlike previous military conflicts, in which the Federal Reserve had tolerated
excessive money creation, during the Gulf War the Federal Reserve sought to stamp
out inflationary pressures that originated before the conflict, even at the risk of
recession. The budget deficit rose during the conflict, but it would be difficult to claim
that military spending contributed to the rise in the deficit when overall military
spending was declining during this time. Instead, the rising budget deficit was
characterized by falling tax revenues and rising non-military outlays, both of which can
be largely accounted for by automatic changes in revenues and outlays caused by the13
economic slowdown. To reduce the widening deficit, the Omnibus Budget
Reconciliation Act of 1990 cut spending and increased taxes. It was estimated that
over the following 5 years, 57% of the deficit reduction would come from spending
cuts and 29% from tax increases (14% would come from lower interest payments).
Changes to excise taxes, payroll taxes, and individual income taxes accounted for the
bulk of the tax increases. The revenue raising provisions of the Act were estimated to
raise tax revenues by 0.3% of GDP in 1991. Most of the spending reductions were to
come from reductions in military outlays and Medicare spending.14

12 For more information, see CRS Report RL31237, The Current Economic Recession: How
Long, How Deep, and How Different From the Past? by Marc Labonte and Gail Makinen.
13 When adjusted for the effects of the economic slowdown, the structural budget deficit was
equivalent to 2.1% of GDP in 1989, 2.1% of GDP in 1990, and 2.5% of GDP in 1991.
Source: Congressional Budget Office, The Budget and Economic Outlook, (Washington:
January 2001), Table F-1.
14 CRS Report 91-20E, Tax Provisions of the Omnibus Budget Reconciliation Act of 1990,
by David Brumbaugh and Gregg Esenwein; Congressional Budget Office, Budget and
Economic Outlook, January 1991, “Special Supplement,” Tax Notes, October 29, 1990.

Another unique aspect of the financing of the Gulf War was the financial
contributions that the U.S. received from its allies. In effect, foreign governments
financed a large part of the war effort for the United States – contributions from foreign
governments equaled $48 billion, while the overall cost of the war was $61 billion in
current dollars.15 In the balance of payments, these contributions represented a
unilateral transfer to the United States, which is recorded as a reduction in the current
account deficit. The exchange value of the dollar was unlikely to have been
significantly affected, however, since a substantial portion of the contributions came
from Saudi Arabia and Kuwait, both of whom have a de facto fixed exchange rate with
the dollar. Foreign financing of possible military operations in Iraq seems less likely,
given the geo-political environment.
Table 1: Economic Indicators in the Gulf War
YearMilitaryTaxBudgetNon-Real GDPInflationReal
Outlays Reve nue De f i c i t Military Gr owt h Ra t e Corporate
(% of(% of(-) Outlays(PriceBond
GDP)GDP)(% of(% ofDeflator)Yields

1989 5.6% 18.3% -2.8% 12.5% 3.8% 3.8% 5.4%

1990 5.2% 18.0% -3.9% 13.4% 2.3% 3.8% 6.0%

1991 4.6% 17.8% -4.5% 14.4% 0.0% 3.9% 5.6%

1992 4.8% 17.5% -4.7% 14.2% 2.2% 2.6% 6.0%

Source: Office of Management and Budget, Historical Tables; Bureau of Labor Statistics,
Consumer Price Index; Federal Reserve.
Note: Non-Military Outlays do not include interest payments on the federal debt; real
corporate bond yields are for Moody’s BAA series as recorded by the Federal Reserve less
the consumer price index (CPI); all data are calculated on a fiscal year basis except for
corporate bond yields which are calculated on a calendar year basis.
Prior to the conflict, it was highly uncertain how a war would affect the U.S.
economy. It was not clear if the world oil market would be disrupted by the conflict;
if it was disrupted, and the disruption was long-lasting, the negative economic effects
could have been serious. Additionally, had the war gone poorly, the effect on U.S.
consumer and investor confidence could have also had serious, negative effects on the
economy. It was more certain that the military expenditures would have a positive
effect on the economy, but their size was uncertain since the scope and duration of the
conflict was unknown.

15 Department of Defense, Report of the Secretary of the Defense to the President and the
Congress, (Washington, DC: January 1993), Table 4. Foreign governments also contributed
$5.7 billion of in-kind assistance.

In hindsight, we now know how all these factors played out, and a more definitive
analysis of the war’s economic effects can be given:
!Military Expenditures. At about $60 billion in 2003, the deficit-
financed military expenditures have had a positive, if mild, effect on
the economy in the short run.
!Oil Prices. Oil prices did not rise during the war and have been
falling since. If the decline continues, this will boost economic growth
over the next year. Some would argue that the increase in oil prices in
the run-up to the war should be counted as a cost of the war. While
this report makes no judgement on the validity of that argument, if one
were to count that run-up as a cost of the war, it had a mildly negative
effect on the economy. Prices rose from roughly $25 to $30 barrel
from December 2002 to March 2003. This price increase was too brief
to do serious, lasting damage to the economy. Counting the oil price
rise to $25 in early 2002 as a cost of the war seems more dubious since
it happened long before the war began, and only brought prices back
to levels seen in 2000 and 2001.
!Confidence. Consumer confidence fell slightly during the war and
shot up after it had ended. The fall during the war was too small to
have a significant economic impact. There were no signs that the war
was causing an increase in risk aversion in financial markets. Some
would argue that the large decline in confidence in the year before the
war should be counted as a cost of the war, but there are many
unrelated factors that could have been causing confidence to fall in the
last year.
Since none of these three factors were significant (at least while the conflict was
taking place), the economic effects of the war in Iraq were probably fairly small