Finance December 2005

Disasters and the Deficit

This year's hurricane disasters, coupled with extremely high military spending in Iraq and Afghanistan, are likely to prolong and worsen U.S. budget deficits for the next twenty years. The bill for Katrina reconstruction will reach $250 billion if legislation introduced by Louisiana's two senators is enacted. Expect it to go higher as we undertake the complex work of cleaning up environmental hazards, building new housing, rebuilding oil infrastructure, and repairing ports, bridges, tunnels, roads, and thousands of water and sewer systems. The actual costs of disasters have a way of creeping well beyond initial estimates.

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That has certainly been the case in Iraq. So far the United States has spent $275 billion on military operations in Iraq and Afghanistan. But this is just the tip of a very large iceberg. The costs of continuing operations run at $100 billion a year. When one adds in the long-term costs, including interest payments on war debt and disability benefits that we will owe to veterans for decades, the total cost of the war will exceed $1.3 trillion.

With the federal government already running a deficit close to $400 billion, we will be forced to borrow to pay most of these costs, saddling our economy with nearly $1 trillion in extra debt, owed primarily to Asian central banks. Under conservative scenarios federal spending on Iraq and hurricane reconstruction would total more than $12,000 per household; over twenty years interest payments alone will come to nearly $5,000 per household.

Linda Bilmes, an assistant secretary at the Department of Commerce from 1999 to 2001, teaches budgeting and public finance at Harvard's Kennedy School of Government.
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