Two new studies by respected economists carefully examine the economic costs of the Iraq war, and find them to be significantly higher than previously advertised. These reports will no doubt receive much attention on editorial pages in coming weeks. What should we make of them?

The war costs covered extensively in the media to date have been analyses of the actual spending on Iraq-related activity. The latest figure from the Pentagon places the cost of the war at about $173 billion.

An economist wouldn't consider this estimate complete. There are a lot more things to factor in. When reservists are called away from their normal job and sent to Iraq, we lose the product of their labor at home. An injured soldier may require costly and extended medical attention, hurting his ability to work.

And while nobody likes to place a dollar value on an individual life, economists have a well-established method for statistically accounting for fatalities. Studies pioneered by Kip Viscusi of Harvard University have attempted to establish a figure that society should place on lives lost.

Valuing a Life

The approach uses the implicit values that individuals themselves place on their lives when they take riskier occupations for higher wages. When a lumberjack accepts a bigger chance of dying on the job in exchange for more money, he in effect has placed a monetary value on his life. Looking at these choices, economists have determined that the value of an individual life in the U.S. is about $6.5 million.

This may seem a callous calculation, yet policy makers make decisions all the time that affect mortality probabilities. Having a ballpark number for the value of a life allows them to think rationally about the merits of government actions affecting everything from guardrails to pollution controls.

Putting all these and other costs together, my American Enterprise Institute colleagues Scott Wallsten and Katrina Kosec conclude that the cost of the Iraq war will be about $1 trillion. An alternative analysis by Harvard's Linda Bilmes and Joseph Stiglitz, Columbia University's Nobel Prize winner, comes up with an estimate as high as $2 trillion.

Incomplete Picture

These numbers dwarf the widely publicized $200 billion estimate given at the outset of the war by White House economic adviser Larry Lindsey, a figure ridiculed as too high by other administration officials at the time.

The funny thing is, most of the inputs used in the two new studies rely upon assumptions fairly consistent with prewar expectations. The costs aren't so much higher because of the unexpected insurgency.

They're higher because an incomplete picture of the true economic costs was presented to the public at the start of the war. Economists as a whole did a poor job of wiring the true figures into the discussion.

High costs don't mean the war was a bad decision. For example, using similar methods, I estimate (on the back of an envelope) that World War II cost about $350 trillion in today's dollars. The number is so much higher because approximately 50 million people lost their lives.

Thwarting Terrorists

We'll never know how many would have lost their lives under Nazi rule, but I doubt anyone would dispute that the war was for a good cause. The war on terror has stakes that may be just as high.

Uncertainty over what will be accomplished even if the action ends up being a success makes the reckoning quite difficult, however. For example, Stephen Hayes of the Weekly Standard reported last week that a treasure trove of new information reveals that Saddam Hussein was running three large terrorist training camps prior to the war. About 2,000 terrorists a year were trained, and many had links to groups associated with al-Qaeda, according to Hayes.

If the war ultimately succeeds, there will be many fewer of these trained terrorists. Given that U.S. gross domestic product tops $12 trillion, it's fairly easy to conceive of bad things that terrorists could do that would, if thwarted, save us trillions of dollars in damage.

For example, if action is taken to stop a terrorist attack that would otherwise kill 150,000 people, then, given the value of life used in the Wallsten-Kosec study, the war will have paid for itself.

We can never know if terrorists would have learned to be so much more destructive than they were on Sept. 11, or whether this war will reduce or increase the number of terrorists.

Perhaps that's why economists generally stay out of foreign policy debates. When we thought the costs of the Iraq war were $200 billion, we conceded that we couldn't tell whether the war would pass a cost-benefit test because we couldn't estimate the benefits. Now that the costs are five to 10 times higher, we must concede the same thing.

Kevin A. Hassett is a resident scholar and the director of economic policy studies at AEI.