JOHN THYS/AFP/Getty Images

Foreign Policy: What does $3 trillion mean for the average U.S. taxpayer?

Joseph Stiglitz: If you divide it by the [number of] U.S. households, it comes out to around $25,000 [per household]. It’s a lot of money. But we actually talk about a range of total costs, between $3 trillion and $5 trillion.

It’s basic arithmetic, but you break the costs down into the various categories. Once you start doing that, it’s very hard to come up with a number under $3 trillion. We view our estimate as very conservative. Some of it is pretty straightforward and totally noncontroversial: the amount that the U.S. government admits is going into Iraq. But almost everything beyond that requires some forecasting, like troop deployment. And there are also numbers that we have not included that are hard to get out of the government. For instance, the government provides insurance for contractors [working in Iraq]. Nobody will insure them, so the government winds up paying the premium. And then the insurance policies have an exclusion for hostile action. Most of the contractors who die, die in hostile action, so the government winds up paying not just the premiums, but also the benefits. That’s an example where the government’s accounting makes it very hard to tease out.

Two big costs are having to pay more for recruiting, and replacing our materiel that is wearing out. The big items going forward on the budgetary side are the costs of replenishing the armed forces—that’s called reset—and disability for returning veterans. We know that the number of disabled soldiers coming home is much larger, and we know that cases of [post-traumatic stress disorder] increase with longer and repeat deployments.

FP: You mentioned reset and veterans care. Are there any other large costs that are frequently overlooked or not included when we talk about the cost of Iraq and Afghanistan?

JS: Part of the overlooked budgetary costs is interest, because we are going to have to pay interest on what we’ve borrowed [to pay for the war]. And there is also Social Security disability pay. That’s something that normally would be left out. One of the things that we don’t include but should be included is Medicaid. Because many of the disabled soldiers returning home have low incomes, they are eligible for Medicaid. We also argue that the war has had an adverse effect on the economy. If there is a negative effect on the economy, then that is going to decrease tax revenues.

On the nonbudgetary side are the costs that are borne by families. One in 5 families has someone who is seriously disabled, and someone has to take care of them. There is also the fact that the National Guard has been pulled out of their homes and away from jobs. They face an enormous disruption and are not being fully compensated.

FP: How does war spending exacerbate the economic downturn in the United States?

JS: To the extent that the war caused the price of oil to go up, and the fact that the war expenditures don’t stimulate the economy as much as domestic expenditures would have, the economy is weaker. The Fed has let forth more liquidity, which allows consumption to go up and savings to go closer to zero or negative. So, we have more of a mountain of debt in order to offset the negative effects of war spending, and that mountain of debt is now the problem we’re dealing with. There is a clear connection between the two. We’re spending money abroad that we could have spent at home.

FP: What’s your take on the Bear Stearns and Northern Rock bailouts? Would you have opposed them?

JS: No, but I’d make two points. One, given where we are, monetary policy is not going to reignite the economy. The only way monetary policy will reignite the economy is to reignite the housing bubble, and nobody wants that. So, we have to just admit that monetary policy is disengaged and all it’s doing now is preventing a further meltdown.

The Fed had no choice, in a sense. They did, however, have a choice of how they did it. And they did not do what they should have done, which is to minimize moral hazard. The shareholders of Bear Stearns walk off with $1.2 billion, and American taxpayers are now at risk. I think that’s unconscionable.

FP: What should be done to prevent a continuing crisis of confidence across global markets?

JS: What we need is more effective fiscal stimulus. You want to maximize bang for the buck, and you want to begin to address the long-term needs as you address the short-term problems. The long-run problem is underinvestment in infrastructure. The administration’s stimulus package is too little, too late, and not well designed. We’re talking about $150 billion. The mortgage equity withdrawals have been about $900 billion a year. The increase in oil prices has been several hundred billion dollars a year. So, it’s just different by many orders of magnitude. And it’s too late. It takes six to nine months for any of these policies to have an effect. And [President Bush] says, “Let’s wait.” That’s an invitation for a longer, more protracted downturn. The problem with America is consuming too much, not too little. It’s what’s exacerbating the fundamental discrepancies and imbalances in the economy.

FP: Should there be regulation of sovereign wealth funds? What about a code of conduct?

JS: Who could be against a code of conduct that says people ought to act well? But the issue is transparency. There is an enormous amount of nontransparency associated with hedge funds. Any policy that affects sovereign wealth funds and not hedge funds would be inconsistent, incoherent, and ineffective. We don’t know who owns the hedge funds today, so if the sovereign wealth funds put their money into hedge funds, no one knows. If we say, “ownership matters,” then we have to know who owns everything. Otherwise, it’s going to be ineffective and discriminatory, and it will generate resentment—and larger fees for hedge funds. You have to wonder, is there an agenda here? To generate money to go through the hedge funds?

FP: You’re a former chief economist at the World Bank. What do you think about [World Bank President] Robert Zoellick’s tenure so far?

JS: The Bank was so demoralized by his predecessor [Paul Wolfowitz] that it had nowhere to go but up. The direction that the Bank is moving in is, for the most part, widely supported: more focused on global public goods, on climate change, and a continued focus on Africa. That is welcome. But the two controversial elements are trade and the Middle East. The problem with trade is that, from the perspective of many developing countries, what the United States and the European Union are pushing as a development round is not a development round. And I think that it’s very difficult for a former U.S. trade negotiator [like Zoellick] to change hats and say, “Now I’m going to be on the side of the developing world and point out the very many ways in which the United States is wrong.” The issue with the Middle East is similar. Zoellick comes from the Bush administration, whose Middle East policy has undermined security and stability there. There are fraught relationships. He may be able to navigate it, but it certainly is an area where it’s fraught.

Joseph Stiglitz, who won the Nobel Prize in economics in 2001, is professor of economics at Columbia University and author, with Linda J. Bilmes, of The Three Trillion Dollar War: The True Cost of the Iraq Conflict (New York: W.W. Norton, 2008).