Congressional Budget Office
Director’s Blog

CBO released the annual summer update to the Budget and Economic Outlook for Fiscal Years 2008 to 2018 today. (Today’s report updates the Budget and Economic Outlook published in January 2008.)

Today’s report makes it challenging to avoid playing the dismal economist, which I generally dislike doing. The budget deficit has risen substantially over the past year. And according to CBO’s updated economic forecast, the economy is likely to experience at least several more months of weakness. (Whether this period will ultimately be designated a recession or not is still uncertain, but the increase in the unemployment rate and the pace of economic growth are similar to conditions during previous periods of mild recession.) Finally, the Treasury and Federal Housing Finance Agency have announced significant steps regarding Fannie Mae and Freddie Mac, which carry important implications for how the operations of those entities should be reflected in the federal budget.  The estimates presented in the report CBO released today do not reflect the specific details of those actions.

Some more details from today’s report include:

Budget projections

• CBO estimates that the deficit for 2008 will be $407 billion, substantially higher than last year’s $161 billion. As a share of the economy, the deficit is projected to rise to 2.9 percent of GDP this year, up from 1.2 percent of GDP in 2007. That 1.7 percentage point increase as a share of GDP is roughly evenly split between a 0.9 percentage point decline in revenue relative to GDP (reflecting the impact of lower corporate tax revenue and the rebates enacted as part of stimulus legislation this year) and a 0.8 percentage point increase in spending relative to GDP.
• Since March, the bottom line in CBO’s baseline over the next ten years has worsened by an average of nearly $260 billion per year. Some of that deterioration is due to the weakened economy, near-term inflation, and other economic variables; those factors increased projected deficits (or decreased projected surpluses) by about $85 billion a year. However, the larger component of the changes results from extrapolating into future years the supplemental appropriations enacted in June (in accordance with the rules governing the baseline).
• Over the longer term, the fiscal outlook continues to depend mostly on the future course of health care costs as well as on the effects of a growing elderly population. CBO estimates that federal spending on Medicare and Medicaid will grow to 6 percent of the GDP in 2018 and 12 percent of the GDP by 2050.

Economic projections

• An unusual amount of turbulence has roiled the U.S. economy this year, weakening the near-term outlook since CBO’s previous forecast.
• Specifically, CBO forecasts that GDP will grow by about 1.5 percent in real terms in calendar year 2008 and 1.1 percent in calendar year 2009.
• Inflation (as measured by change in the CPI-U) is projected to remain high and average 4.7 percent for 2008 but moderate in 2009, falling to an average of 3.1 percent.
• CBO’s projections beyond the two year horizon indicate real growth averaging 2.8 percent and CPI-U inflation averaging 2.2 percent.

Fannie Mae and Freddie Mac

• Significant government actions regarding Fannie Mae and Freddie Mac occured as this report went to press. The actions were taken to reduce the risk of a systemic shock to the financial system and to stabilize the mortgage markets.
• In a letter issued on the topic in July, CBO noted that “a strong argument can be made that if the Treasury used the proposed authority, the GSEs’ operations should be incorporated directly into the federal budget.” CBO concluded that the proposal at that time, especially to the extent it would result in any government acquisition of an equity stake in the GSEs, raised a significant budgetary question. Currently, data on the GSEs are reported along with federal budget information each year, but the activity of those entities is not encompassed within the budget. As CBO noted at the time, “That treatment could change if the federal government’s financial stake or control changes in a significant way.”
• Given the steps announced by the Treasury Department and the Federal Housing Finance Agency on September 7, it is CBO’s view that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget. The GSEs’ revenue would be treated as federal revenue and their expenditures as federal outlays, with appropriate adjustments for the manner in which credit transactions (like a mortgage guarantee) are reflected in the federal budget.

CBO released its Monthly Budget Review today. CBO estimates that the federal budget deficit was $486 billion in the first 11 months of the fiscal year, $212 billion more than the shortfall recorded over the same period last year.  CBO anticipates that the government will realize a surplus in September, stemming from quarterly payments of estimated income taxes. The result will be a deficit in the vicinity of $400 billion for the fiscal year. CBO will release a new estimate of the 2008 deficit and updated baseline projections for fiscal years 2009-2018 on September 9.

Total receipts for the first 11 months of fiscal year 2008 were about 1.4 percent lower than receipts in the same period in fiscal year 2007, CBO estimates. Individual income taxes showed a decline in receipts of 3 percent, primarily due to tax rebates. Social insurance (payroll tax) receipts grew by about 4 percent, and corporate receipts fell by about 15 percent during the period.

CBO released the Monthly Budget Review today. CBO estimates that for the first 10 months of fiscal year 2008, the federal budget deficit was about $371 billion—$213 billion more than the deficit recorded over the same period in 2007. While revenues were about 1 percent lower than in the same period last year, outlays over the same period have grown by almost 9 percent. CBO estimates that the federal budget deficit for fiscal year 2008 will be in the vicinity of $400 billion, close to the amount we projected last March after accounting for proposed supplemental appropriations.

CBO estimates that a deficit of $102 billion was recorded for ythe month of July, about $65 billion more than recorded in July 2007; approximately $14 billion of that increase was due to rebate payments resulting from the Economic Stimulus Act of 2008. Receipts were about $5 billion lower than those in July 2007; without the rebates, receipts would have been up by 2 percent. Outlays in July were $61 billion higher than in the same month last year; about $21 billion of that difference was the result of calendar-related shifts in the timing of certain payments. Another major factor contributing to the increase was the $15 billion disbursed in July 2008 by the Federal Deposit Insurance Corporation (FDIC) to cover insured deposits at failed financial institutions; much of that cost should be recovered in the future as the FDIC liquidates the assets held by those institutions and collects higher insurance premiums.

CBO released its monthly budget review today. During the first nine months of FY 2008, the federal government incurred a deficit of $268 billion according to CBO estimates — $148 billion more than the shortfall recorded during the same period in 2007. About $79 billion of that change is due to the tax rebates enacted in the Economic Stimulus Act of 2008. Compared with their level in 2007, outlays have risen by more than 6 percent, whereas revenues have declined by about 1 percent.

I delivered testimony today before the Senate Finance Committee on CBO’s long-term budget outlook and options for slowing the growth of health care costs. To view the hearing, click here.

Under any plausible scenario, the federal budget is on an unsustainable path—that is, federal debt will grow much faster than the economy over the long run. In particular, in the absence of significant changes in policy, rising costs for health care and the aging of the U.S. population will cause federal spending to grow rapidly. If federal revenues as a share of gross domestic product (GDP) remain at their current level, that rise in spending will eventually cause future budget deficits to become unsustainable.

To prevent deficits from growing to levels that could impose substantial costs on the economy, revenues must rise as a share of GDP, or projected spending must fall—or some combination of the two outcomes must be achieved. Future growth in spending per beneficiary for Medicare and Medicaid—the federal government’s major health care programs—will be the most important determinant of long-term trends in federal spending. Changing those programs in ways that reduce the growth of costs—which will be difficult, in part because of the complexity of health policy choices—is ultimately the nation’s central long-term challenge in setting federal fiscal policy.

Our political system unfortunately does not appear to be particularly effective at addressing gradual long-term problems such as rising health care costs and aging. The problems caused by rising health care costs, though, are not just long-term ones. Indeed, health care costs are already reducing workers’ take-home pay to a degree that is both underappreciated and at least partially unnecessary, consuming roughly a quarter of the federal budget, and putting substantial pressure on state budgets (mostly through the Medicaid program), thereby constraining funding for other governmental priorities. Identifying and addressing inefficiencies in the nation’s health care system can yield significant benefits, even in the short term, and focusing attention on those effects that are already occurring may be helpful in developing the consensus necessary to make the needed changes.

CBO released a new Monthly Budget Review today. During the first eight months of fiscal year 2008, CBO estimates that the federal government incurred a deficit of $317 billion, $168 billion more than the shortfall recorded through May of last year. About $50 billion of that change is due to the distribution of the tax rebates enacted in the Economic Stimulus Act of 2008. That amount is just under half of the total rebates expected for this year–most of the remainder will be disbursed during the next two months.

Federal taxes withheld from paychecks are up by about 4 percent so far this year, though the increases have been smaller in recent months, reflecting slowing growth in wages and salaries. In May, receipts of corporate income taxes declined, relative to those in the same month last year, for the 11th consecutive month. For the first eight months of the fiscal year, corporate receipts have declined by about 16 percent ($33 billion).

Net of refunds, federal receipts this year are about the same as they were at the same point last year. In contrast, spending so far this year is up by about 8 percent (after adjusting for shifts in the timing of certain payments).

Under current law, rising costs for health care and the aging of the population will cause federal spending on Medicare, Medicaid, and Social Security to rise substantially as a share of the economy. At the request of the Ranking Member of the House Budget Committee, CBO released a letter examining the potential economic effects of (1) allowing federal debt to climb as projected under the alternative fiscal scenario presented in CBO’s December 2007 Long-Term Budget Outlook; (2) slowing the growth of deficits and then eliminating them over the next several decades; and (3) using higher income tax rates alone to finance the increases in spending projected under that scenario.

How Would Rising Budget Deficits Affect the Economy? Sustained and rising budget deficits would affect the economy by absorbing funds from the nation’s pool of savings and reducing investment in the domestic capital stock and in foreign assets. As capital investment dwindled, the growth of workers’ productivity and of real (inflation-adjusted) wages would gradually slow and begin to stagnate. As capital became scarce relative to labor, real interest rates would rise. In the near term, foreign investors would probably increase their financing of investment in the United States, but such borrowing would involve costs over time, as foreign investors would claim larger and larger shares of the nation’s output and fewer resources would be available for domestic consumption.

How much would the deficits projected under the alternative fiscal scenario presented in the December 2007 Long Term Budget Outlook affect the economy? For its analysis, CBO used a textbook growth model that can assess how persistent deficits might affect the economy over the long term. According to CBO’s simulations using that model, the rising federal budget deficits under this scenario would cause real gross national product (GNP) per person to stop growing and then to begin to contract in the late 2040s. By 2060, real GNP per person would be about 17 percent below its peak in the late 2040s and would be declining at a rapid pace. Beyond 2060, projected deficits would become so large and unsustainable that the model cannot calculate their effects. Despite the substantial economic costs generated by deficits under this model, such estimates greatly understate the potential loss to economic growth because the effects of rapidly growing debt would probably be much more disorderly and could occur well before the time frame indicated in the scenario.

How Would the Slowing the Growth of Deficits Affect the Economy? The minority staff of the House Budget Committee provided CBO with a target path slows the growth of budget deficits. In evaluating the economic effects of the target path, CBO did not examine how specific policies to achieve that path would affect the economy; instead, CBO limited its attention solely to examining how the deficits produced by the target would affect the economy, assuming that such effects would play out as they have in the past. (CBO has not evaluated either the political feasibility or the economic effects of reducing spending sufficiently to accomplish this path for the deficit. Furthermore, the spending and revenue targets provided by the Committee staff are not the only way to achieve a sustainable budget path. Alternative policies will have different effects on the economy, and changes in taxes and spending can exert influences on the economy other than the effects of reducing budget deficits.)

Under the target path, federal outlays excluding interest (that is, primary spending) would rise from 18 percent of GDP in 2007 to 20 percent in 2030 and then decline to 19 percent in 2050 and 13 percent in 2082. For almost all years, revenues would remain at 18.5 percent of GDP. Under those assumptions, the budget deficit would gradually increase to about 6 percent of GDP in 2040 but then would decline to almost zero in 2075. By 2082, the target path would generate a budget surplus of about 2 percent of GDP. Under this path, real GNP per person would continue to grow over the entire projection period, rising from about $45,000 in 2007 to about $165,000 in 2082 in inflation-adjusted dollars. By 2060 (the last year for which it is possible to simulate the effects of the alternative fiscal policy using the textbook growth model), real GNP per person would be about 85 percent higher under the target path than under the alternative fiscal scenario.

How Would Increasing Income Tax Rates to Finance the Projected Rise in Spending Affect the Economy? How would the economy be affected if the projected rise in primary spending under CBO’s alternative fiscal scenario (from about 18 percent of GDP in 2007 to about 35 percent in 2082) was financed entirely by a proportional across-the-board increase in individual and corporate income tax rates? Answering that question is difficult because the economic models that economists have developed so far would have to be pushed well outside the range for which they were initially developed.

Nonetheless, tax rates would have to be raised by substantial amounts to finance the level of spending projected for 2082 under CBO’s alternative fiscal scenario. Before any economic feedbacks are taken into account, and assuming that raising marginal tax rates was the only mechanism used to balance the budget, tax rates would have to more than double. Such tax rates would significantly reduce economic activity and would create serious problems with tax avoidance and tax evasion. The letter provides more details about possible scenarios. (Raising revenue in ways other than increasing tax rates would have a less marked effect on economic activity.)

Conclusion. The United States faces serious long-run budgetary challenges. If action is not taken to curb the projected growth of budget deficits in coming decades, the economy will eventually suffer serious damage. The issue facing policymakers is not whether to address rising deficits, but when and how to address them. At some point, policymakers will have to increase taxes, reduce spending, or both.

Much of the pressure on the budget stems from the fast growth of federal costs on health care. So constraining that growth seems a key component of reducing deficits over the next several decades. A variety of evidence suggests that opportunities exist to constrain health care costs both in the public programs and in the health care system overall without adverse health consequences, although capturing those opportunities involves many challenges.

CBO released a new monthly budget review today. During the first seven months of fiscal year 2008, CBO estimates that the federal government ran a deficit of $151 billion — $70 billion more than during the same period in 2007.  Outlays are roughly 7 percent higher than last year, whereas revenue is up by only about 3 percent.  (Corporate income tax revenue is down by more than 13 percent.)

Receipts from tax returns filed by the April 15 deadline were about 6 percent higher than such receipts last year, about what CBO anticipated when it prepared its most recent budget projections in March. 

CBO has released an updated report on the cyclically adjusted and standardized budget. The new report is a companion to the baseline budget projections published in CBO’s March 2008 Analysis of the President’s Budget.

The purpose of the companion report is to examine the budget balance after temporary factors, such as the effects of the business cycle or onetime shifts in the timing of federal tax receipts and spending, are removed. (For example, during recessions, the budget deficit tends to increase because of the automatic stabilizers built into the budget: tax revenue tends to decline and certain forms of government spending, such as outlays for food stamps and unemployment benefits, tend to increase.)

The report presents estimates of two adjusted budget measures: the cyclically adjusted deficit or surplus (which attempts to filter out the effects of the business cycle) and the standardized- budget deficit or surplus (which removes the effects of other factors in addition to those of the business cycle).

Under CBO’s baseline budget assumptions (which assume continuation of current laws and policies), the cyclically adjusted budget deficit–the total baseline budget deficit after adjusting for the effects of the business cycle–will rise from 0.9 percent of potential GDP in 2007 to 2 percent in 2008, in large part because of the intended effect of the Economic Stimulus Act, and then decrease in 2009 to 0.6 percent, in part from the removal of the effects of the stimulus legislation and also from an increase in revenue from the Alternative Minimum Tax (which would occur under current law). The standardized-budget deficit will increase by somewhat more, climbing from 1.1 percent of potential GDP in 2007 to 2.5 percent in 2008 (after which it declines to 0.9 percent in 2009).

The U.S. military invaded Iraq in March 2003, and the conflict there has continued for the ensuing five years. In September 2002, CBO published its first projection of the costs associated with a U.S. invasion of Iraq. CBO has subsequently provided the Congress with numerous updates of funding provided to date for that conflict, as well as projections of future costs under several alternative scenarios. Indeed, in part because the Defense Department has never published its own long-range timetable for future U.S. troop levels in the region, the “CBO troop scenarios” have been used as a basis for cost estimates and other discourse by many other organizations and individual researchers.

A new book about the cost of the war, “The Three Trillion Dollar War: The True Cost of the Iraq Conflict,” by Nobel-prize winning economist Joseph Stiglitz of Columbia University and his colleague Linda Bilmes of Harvard University’s Kennedy School of Government, has received significant attention. (To disclose any potential conflict, I am a friend and coauthor of Stiglitz.)  In contrast to the cost figure in the title of the Stiglitz-Bilmes book, CBO’s most recent testimony suggests that cumulative budgetary costs for the combined conflicts in Iraq and Afghanistan might total between $1.2 trillion and $1.7 trillion through 2017.

A natural question (and one that several people have indeed asked me) is why such a large disparity exists between CBO’s projections and those of Stiglitz and Bilmes.

Most importantly, CBO restricts its estimates to Federal budgetary costs, whereas Stiglitz and Bilmes include many other types of costs borne by veterans, their families, and U.S. taxpayers. The CBO testimony notes that the Congress had provided total funding of $604 billion through October 2007 (in “then-year” or “nominal” dollars without making any adjustment for inflation), not only for military operations but also for indigenous security forces, diplomatic operations and foreign aid, and medical care and disability compensation for veterans of the conflicts in Iraq and Afghanistan. Stiglitz and Bilmes report a comparable total of $646 billion when inflated to 2007 dollars.  So there’s not that big a difference when the two sets of estimates are put on a comparable basis.

Below, I go into more detail about all this.

Military costs (not including veterans benefits)

CBO’s analysis suggested that, depending on the rates at which U.S. troops are withdrawn from the region under two illustrative scenarios, costs of future military operations (including costs such as combat pay for deployed troops, fuel and transportation, and contractor support in the wartime theater, but excluding costs on medical care and disability benefits provided by the Department of Veterans’ Affairs, which were tallied separately) through 2017 could total between $485 billion and $966 billion. Using essentially the same “CBO scenarios,” Stiglitz and Bilmes project future costs of between $521 billion and $913 billion. The similarity of these figures is somewhat misleading, since we are measuring costs in different units. Again, CBO sums up “then-year” or “nominal” dollars without making any adjustment for inflation or the time value of money. Stiglitz and Bilmes instead use a present-value approach, in which they effectively discount the flow of future costs at a nominal interest rate of 4.5 percent to reflect the time value of money. Most economists prefer present-value figures, which is why Stiglitz and Bilmes undertook their analysis that way; the Federal budget process, however, is based on nominal dollars, which is why CBO undertook our analysis in the manner we did.

Notwithstanding those differences, the estimates of past and future costs of military operations that CBO has published are in rough agreement with Stiglitz and Bilmes’ estimates, which account for about half of their $3 trillion estimate of the total cost of the war.

Other costs

Beyond the costs of military operations, the remaining types of costs that Stiglitz and Bilmes consider can be classified into three broad categories: other government spending that could be attributed to the military operations; interest payments made by the Treasury to finance war-related debt; and costs outside the federal budget, which are borne by military veterans who served in Iraq or Afghanistan, their family members or, in the case of reservists, their employers, or U.S. citizens more broadly. Stiglitz and Bilmes track the costs of military operations through 2017, but track veterans’ disability and medical costs through 2046.

1. Other non-interest government spending

Within the category of other government spending, perhaps the most notable differences between CBO’s estimates and those from Stiglitz and Bilmes involve the cost of medical care and disability compensation provided by the Department of Veterans’ Affairs (VA).

For example, Stiglitz and Bilmes estimate that monthly compensation paid by the VA to disabled veterans of the conflicts in Iraq and Afghanistan could total between $277 billion and $388 billion over the next 40 years. (CBO truncates its corresponding estimates after 2017, but I will use the 40-year horizon throughout this discussion to maintain consistency with Stiglitz and Bilmes’ basic framework.)

• Stiglitz and Bilmes base their estimate on the experience of veterans from the first Gulf War, about 40 percent of whom applied for VA disability compensation since that war ended in 1991 and had their applications approved — that is, they were “rated.”  One-quarter of those veterans, however, were rated for conditions that are zero-percent disabling; Stiglitz and Bilmes assign those veterans the average benefit level even though they are not currently drawing any benefits. (VA sometimes uses a zero-percent disability rating as a placeholder to acknowledge that a disability first manifested during a period of active military service, although the disability does not yet adversely affect the veteran’s earning potential.)

• Furthermore, it is unclear whether Stiglitz and Bilmes adjusted for the number of veterans of the current conflict who might have become disabled as a result of their military service even if they had never deployed to the war zone; those veterans should be subtracted out when estimating the incremental cost of the war.  Their footnote 48 (p. 259) outlines a method for making that adjustment, though they begin that discussion by stating, “We have not adjusted for incremental cost — that is, the number of veterans who may have claimed disability even during peacetime.” Even if they did make the indicated adjustment, their method would not allocate enough of the disabilities to the peacetime baseline, and would instead attribute too many disabilities to the war.

• In summary, we estimate that the incremental number of veterans who are or will draw disability benefits may be only half of what Stiglitz and Bilmes estimate, in which case their costs would be too high by between about $150 billion and $200 billion.

Differences also arise between CBO’s and Stiglitz and Bilmes’ estimates of VA medical costs (as opposed to disability benefits) to treat veterans of the conflicts in Iraq and Afghanistan.

• In their higher case, Stiglitz and Bilmes apply to veterans of those recent conflicts the $5,765 average amount that VA spent in 2006 to treat veterans of all eras, including the aging Vietnam-era population. Stiglitz and Bilmes then increase the larger amount in subsequent years at a medical-specific inflation rate equal to twice the rate of general inflation. The VA, though, estimates that it spent less than half that initial amount — an average of $2,610 in 2006 — to treat veterans returning from Iraq and Afghanistan. It may appear surprising to some readers, but veterans of the recent conflicts on average require less medical care from VA than veterans of earlier conflicts such as the Vietnam War do today. (By contrast to recent veterans, many Vietnam-era veterans are now age 60 years or older and are being treated for age-related chronic conditions that demand more resources, on average, from the VA.)

• It is difficult to project how rapidly VA’s medical costs for recent veterans will grow in the future. The growth in costs will depend on how many veterans enter or remain in the VA medical system, as opposed to going elsewhere for their care, and on the change in the average annual cost for veterans who continue to use the system. Some veterans may migrate to other sources of medical coverage, such as employer-sponsored health insurance, for some or all of their care when they assimilate back in to civilian society. Others may find that their medical conditions are resolved satisfactorily with the care that they received at the VA and the passage of time; while they remain reliant on the VA, their demand for medical services will decline. Indeed, some data that we have obtained from the VA indicate that utilization of a variety of medical services tends to decline after a veteran’s first 3 to 6 months in the VA system (though a few medical services, such as residential rehabilitation for post-traumatic stress disorder or PTSD, show an increasing trend as discussed below). On the other hand, the medical costs for veterans who remain in the VA system or who enroll later will continue to grow as those veterans age, as has been the case for Vietnam-era veterans. It is uncertain how much of the long-run growth in cost should be attributed to the recent veterans’ service in Iraq or Afghanistan as opposed to aging.

• Because we believe that the short-term average annual cost ($5,765) in Stiglitz and Bilmes’ “high” case is about twice the appropriate value, and in light of the uncertainty in projecting both the average cost and number of veterans of the current conflicts who will utilize VA medical care in the future, Stiglitz and Bilmes’ projection of up to $285 billion for VA medical costs may be overestimated by at least $100 billion.

Before leaving the topic of VA medical care, I need to touch upon the incidence of PTSD among recent veterans.

• It is not clear how many veterans suffer from PTSD. DoD has collected data on the incidence of PTSD from the post-deployment health assessment (PDHA) and post-deployment health reassessment (PDHRA) surveys it administers to troops immediately upon return from deployment and again about 6 months later. A series of studies by Army Colonel Charles Hoge, M.D. and his colleagues have used data from those surveys to study the effects of deployments on the incidence of PTSD. Those studies are reporting positive screens for PTSD among 17 percent of active Army soldiers and 25 percent of Army National Guard and Army Reserve personnel. (One of the studies found higher PTSD screening rates for soldiers who had deployed more than once. The rates just cited include some such soldiers: CBO estimates that 27 percent of current active Army soldiers have deployed more than once and 7 percent more than twice. Some 9 percent of current Army reservists have deployed more than once and 2 percent more than twice).

• Two points should be noted when interpreting the screening rates for PTSD. First, those rates are particular to the Army; while we might expect similar screening results for Marines, we would not for Air Force or Navy personnel who do not participate in direct combat to the same degree as soldiers and Marines. As a lower bound, if all soldiers and Marines (the majority of the deployed forces) experienced the rates quoted above but the rates were zero for Air Force and Navy personnel, the overall screening rate among military personnel who have deployed would be about 10 percent. Second, a positive screen for PTSD on the PDHA or the PDHRA survey does not necessarily imply a diagnosis of PTSD; treatment is largely optional and not all soldiers who screen positive either seek or receive any treatment. Psychiatrists at DoD and VA have advised us that survey responses do not constitute a diagnosis — PTSD is not definitive until it is confirmed at two consecutive medical visits.

• VA, too, collects data on the incidence of PTSD. Their data through October 2007 indicate nearly 50,000 initial diagnoses of PTSD among the 264,000 veterans of Iraq and Afghanistan who have been treated at VA medical facilities — an apparent incidence rate of 18 percent. However, their report notes that, “up to one-third of coded diagnoses may not be confirmed when initially coded because the diagnosis is ‘rule-out’ or provisional, pending further evaluation.” Removing up to one-third of provisional diagnoses yields an adjusted PTSD incidence rate perhaps as low as 12 percent, roughly consistent with the DoD figures cited in the previous paragraph. VA estimates that it spent $35 million in 2007 to treat PTSD (including provisional cases) among veterans of Iraq and Afghanistan (an average of $700 per patient). That sum represents one-half of one percent of total VA medical costs for veterans of those conflicts.

Debt service costs

Another category of budgetary costs that Stiglitz and Bilmes examine is the cost of debt service.  In part to separate the costs of government activities from the financing mechanism (issuing debt versus raising taxes versus crowding-out other programs), CBO does not typically include debt service in its cost analyses. However, at the specific request of the House Budget Committee, CBO calculated the debt-service costs of the war on terrorism under the assumption that all spending for those operations, both past and present, was financed with federal borrowing. Under that assumption, CBO estimates that interest payments on spending thus far would total $415 billion over the 2001–2017 period. The path of spending generated by CBO’s first scenario would contribute an additional $175 billion in interest payments from 2008 through 2017. Under the second scenario, interest outlays would increase by a total of $290 billion over that 10-year period. CBO’s range of $590 billion to $705 billion (in undiscounted dollars) over the entire period contrasts with Stiglitz and Bilmes estimate of $613 billion to $816 billion (over the same time period but expressed in discounted present-value dollars — their undiscounted totals would be higher).

Other costs beyond the Federal budget

As noted at the beginning of this post, Stiglitz and Bilmes do not limit themselves to federal budgetary costs — and that explains a substantial amount of the difference between their estimates of the cost of the war and CBO’s.

For example, in an attempt to measure the costs of deaths or injuries not compensated by any government agency, Stiglitz and Bilmes apply the economic construct of “value of statistical life” (VSL). Although the VSL calculation is a legitimate attempt to monetize one type of cost, none of the estimates that CBO has published or on which CBO has testified have included the VSL. The reason is that CBO’s charter generally restricts our cost estimates of legislative provisions to the Federal budgetary costs (except that, in accordance with the Unfunded Mandates Reform Act of 1995, we also estimate any mandates that legislation reported from a Congressional committee would impose on state, local, or tribal governments or on the private sector).

Stiglitz and Bilmes assign a VSL of $7.2 million (in 2007 dollars) to each death of a U.S. service member, and a prorated fraction of that amount to each serious injury. Although CBO does not promulgate or endorse any particular value for the VSL, I would note that the Stiglitz and Bilmes’ estimate is based on guidance that the Environmental Protection Agency promulgated in 2000. However, the EPA selected that value from a survey of 26 studies that estimated VSLs ranging from $0.7 million to $21 million in 2007 dollars; the bulk of those estimates fell within the narrower range of about $4 million to $8 million.

Finally, Stiglitz and Bilmes estimate macro-economic costs such as the effects on the U.S. economy of increased oil prices (to the extent those are a result of the war). The addition of those costs in their most-inclusive accounting, with all of their other assumptions set to “high,” leads to their estimate of $5 trillion for the total cost of the war. One could debate at length the causality between the war in Iraq and oil prices on the world market; Stiglitz and Bilmes attribute between $5 per barrel and $10 per barrel of the price increase to the war. They translate those price increases into total oil-related macro-economic costs to the U.S. economy of $187 billion and $800 billion, respectively.  CBO does not include these types of macro-economic effects in any of our formal cost estimates.

Summary

The bottom line, as it were, is that the war in Iraq and Afghanistan has clearly involved significant costs for the federal budget, as well as for soldiers and their families.  (The potential benefits are for others to debate.)  The Stiglitz-Bilmes estimates of the budgetary costs are likely at least somewhat high, but the biggest difference between our estimates and theirs is that they go beyond the cost to the federal government.

Much of CBO’s work in this area has been undertaken by outstanding analysts in our National Security Division (including Matthew Goldberg, the deputy director of that division, and Heidi Golding) and the national security team within our Budget Analysis Division (including Sarah Jennings, who runs that unit, and David Newman).