At the 5th anniversary of the war in Iraq, estimates of its long-run cost range from $1.2-$1.7 trillion by my former colleague Peter Orszag, now Director of the Congressional Budget Office, to $2 - 3 trillion by my current colleague Linda Bilmes with another former colleague Joe Stiglitz (in a book that is appropriately getting lots of attention, including for example from John Cusack). The important point is that the costs far exceed the $50-$60 billion that the White House predicted ahead of time.
A story in today’s New York Times proclaims “Estimates of Iraqi War Cost Were Not Close to Ballpark.” It turns out that the pre-war estimates they are talking about are those that came from the Bush Administration. At the very end, the article finally mentions “Only one economist, William D. Nordhaus of Yale, seems to have come close. In a paper in December 2002, he offered a worst-case scenario of $1.9 trillion, ‘if the war drags on, occupation is lengthy, nation building is costly.’” You might not guess from the NYT story that Bill Nordhaus’s study was the only thorough independent professional attempt to estimate the cost of invading Iraq ahead of time. (At least it is the only one that I was aware of.)
The question is why the media did not give more attention to the Nordhaus estimates, and less attention to the Administration’s crazily over-optimistic forecasts, while there was still time for the nation to make an intelligent policy choice. The media’s omission was all the more conspicuous in that by December 2002 the White House’s crazily over-optimistic forecasts of the federal budget overall had already become apparent. And they are all still at it.
Isn’t your reasoning re real rates and commodity prices possibly somewhat circular? Surely…if, for example, commodity prices quintupled in general (as oil has in particular) would not one would expect this development to result in a significant increase in the CPI…which then (by definition) results in lower real rates…unless and until nominal interest rates adjust upward to restore the original real yield? If so.. then commodity prices increases and real rate decreases are, in fact two “aspects” of the same event.. at least for a time. Moreover…isn’t the notion of real commodity prices a bit tricky….when the index used to discount them (CPI of some sort) is at times very likely to reflect principally movements in the commodity prices themselves?
Thank you for any help clarification or insight you can offer on these questions.
This comment of course applies to my earlier post on commodity prices.
The question is reasonable. But the answer is, no, there is nothing circular about the reasoning. It’s true that real interest rates and real commodity prices, and also nominal interest rates and nominal commodity prices, are all determined simultaneously. Causality flows in every direction. But that is what we have algebra for. (It’s nice that all that math in economic theories is good for something.) We solve simultaneous equations to get the equilibrium price. The outcome is that when there is an exogenous easing of monetary policy, real interest rates and real commodity prices both go down. The relevant math is in the paper I cited, from the American Journal of Agricultural Economics.
I hope that helps.