The report by the Iraq Study Group added fuel to the fiery foreign and defense-policy debate last week. But it also focused the attention of budget experts on the past and future costs of the war.

Resident Scholar Kevin A. Hassett

As one pores through the spending numbers, one thing is clear: The costs will be steep no matter what. The open question is, will Congress continue to act as if that doesn't matter?

While opinions differ sharply on the best way to help Iraq make the transition to an acceptable future, there is fairly broad agreement among economists about the numbers. One can project with some precision the different possible budget paths that would occur depending on whether the war goes well or continues to go poorly. Those different paths could have an enormous impact on our fiscal future.

Lee Hamilton, co-chairman of the Iraq Study Group, suggested last week that the costs of the war may rise to more than $1 trillion. While that number may seem sensationalistic, the basic logic behind it is easy to reconstruct. Things could be that bad, but it will depend on how soon the U.S. is able to extricate itself from the situation.

Past Costs

As of fiscal year 2006, Congress had appropriated $437 billion for the wars in Iraq and Afghanistan and for the global war on terror overall. The latest numbers added $70 billion to that total, bringing the amount spent on all three operations to $507 billion.

It is not easy to go from those numbers to a cost for the Iraq war in isolation because the Department of Defense doesn't break out their individual costs. A recent study by the Congressional Research Service attributed about 75 percent ($379 billion) of that total to the Iraq war.

Given those numbers, the research service estimated that Operation Iraqi Freedom cost $6.4 billion a month, a number that has climbed recently to $8 billion a month.

We would have to spend $621 billion more to push the costs of the Iraq war to $1 trillion. Assuming it costs $8 billion a month, then we would have to be at that level for 78 months, almost six and a half years, to spend that much.

62 Months

It seems likely the costs will rise. After all, salaries, equipment and fuel will all become more expensive. If the average cost per month rises to $10 billion, then it would take about 62 months to push the costs to $1 trillion.

While it is impossible to feel a great deal of confidence about what the future may hold, it seems pessimistic to assert that the current level of expenditure would endure for so long.

An alternative path would see the U.S. gradually reducing the level of troops engaged in the war on terror, including forces in Iraq. One recent Congressional Budget Office estimate looked at the possibility of a drawdown from the current level of about 258,000 troops engaged in those conflicts to 74,000 by 2010, staying steady at that level thereafter. In this scenario, the cost of the conflicts would be about $371 billion between 2007 and 2016, lifting the cost of the Iraq war and war on terror operations to about $800 billion.

Flight of Fancy

It may be possible to be more optimistic than that, but prudent budgeting probably shouldn't take that flight of fancy. That means the likely budgetary costs of the Iraq war are enormous going forward, even in the best-case scenario.

A high cost, of course, doesn't imply that the policy isn't working. Given the current state of affairs, it may well be that any alternative path would be less desirable. But it does raise an important fiscal policy issue.

Democrats made a big deal in the last election about introducing Paygo rules that enforce responsible budgeting. But there is a very real risk that almost all the incremental cost of the Iraq war will be excluded from the new rules. As we enter the budget season, it is important to recognize that new rules will accomplish nothing if the debates are about hypothetical budgets that have nothing to do with reality.

Heavy Cost

Keeping a war with enormous costs out of the Paygo process, even when the more optimistic future scenarios have a heavy cost, disguises the fiscal-policy problem. The fact is the Iraq war may well require about half a trillion dollars over the next five years, and an expenditure like that necessitates tough choices.

Making room for that much spending will likely require cuts in other programs or tax increases or both.

When Paygo legislation and budgets are drawn up early next year, Iraq should be part of the picture. Anything else is self deception.

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