Underestimated economic costs of war

Lincoln's Secretary of the Treasury estimated that the direct cost of the American Civil War to the North would be $240 million, which amounted to about 7 per cent of annual GDP at that time. The actual cost to the North turned out to be $3,200 million, or about 13 times the original estimated cost. The cost to the South was much greater, for most of its capital stock was destroyed and output per worker was depressed for nearly a century. The most prophetic economic analysis of war and peace of all time, Keynes's Economic Consequences of the Peace, did not foresee the great German inflation that was virtually at hand, nor did it contain any hints of the coming Great Depressions in Britain of the 1920s or of the world of the 1930s.

The costs of the Vietnam War were grossly underestimated even as the buildup occurred. The original budget projection in early 1966 underestimated the cost for the subsequent fiscal year by US $10 billion, or about 1.5 per cent of GDP. In assuming that the war would end by June 1967, the Pentagon underestimated the total cost of the war by around 90 per cent. The war, in fact, dragged on until 1973, and the total direct cost was in the range of $110 billion to $150 billion. The indirect costs were more difficult to gauge but comprised inflation and economic instability, civil unrest, and, some have argued, a growing disenchantment with authority and government in the USA.

Since 1979, Iraq has experienced one of the most catastrophic economic declines in modern history as a result of war, translating into a decline in living standards of around 90 per cent during the term of office of Saddam Hussein. The first phase of the economic decline came during the Iran-Iraq war (1980-88), and second during the first Persian Gulf War and under the subsequent UN sanctions. The Iran-Iraq war destroyed a large part of Iraq's capital stock, reduced oil production and exports, and depleted much of its foreign assets and foreign exchange reserves, all in all estimated at US $450 billion (in 2003 dollars), which amounts to about eight years of Iraq's GDP at that time. The First Persian Gulf War destroyed a further $230 billion of infrastructure. The UN sanctions in place since 1991 have probably reduced Iraq's oil revenues by approximately six years' GDP, and the total cost to the Iraqi economy was probably even larger than that. Overall, the wars and sanctions during the Saddam regime probably cost Iraq in the order of two decades of GDP in lost output, capital, and financial resources. There are no parallels in modern history to economic devastation on that scale.