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A Foreign Policy Worth Paying For

From the August 18, 2003 issue: But the Bush administration doesn't have a plan for doing so.

Aug 18, 2003, Vol. 8, No. 46 • By IRWIN M. STELZER
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WHEN GEORGE BUSH unfurled his banner of "compassionate conservatism," most critics predicted it would not be long before the conservatism overwhelmed the compassion. They were wrong. Instead, the compassion has overwhelmed the conservatism.

President Bush's compassion now impels him to give tax refunds to people who pay no taxes; free prescription drugs to Bill Gates and Warren Buffet, whose children will no longer be burdened with inheritance taxes; subsidies to already-rich farmers to produce outrageously expensive ethanol to add to gasoline; free insurance protection to utilities that own nuclear plants; tariff protection to inefficient steel companies; and subsidies to auto and coal companies to do research they would otherwise have to pay for out of their sales receipts. It almost--but not quite--makes one pine for the days of that cheapskate, Bill Clinton.

But fear not. In the Micawberesque world of Bushonomics, these are all free lunches: Taxpayers will simultaneously get these and other benefits, and tax refunds, and tax reductions to boot. Never mind that the due date on untold billions in unfunded liabilities lurks just around the corner.

Better still, we are on the verge of getting a restructured Middle East consisting of vibrant, prosperous democracies, and on the cheap. How is this latest feat of economic legerdemain to be financed? Why, with Iraqi oil, of course.

Both Deputy Defense Secretary Paul Wolfowitz and Office of Management and Budget director Josh Bolten managed straight faces when they told a congressional committee that it is impossible to estimate the cost of our nation-building adventure in Iraq.

Of course, if one believes that there is no price too high to pay for a peaceful Middle East--a perfectly credible position--then one need not bother with anything so trivial as estimating the cost of attaining that objective. But, at least so far, the administration has declined to take such a position. Indeed, when former White House economist Larry Lindsey suggested that achieving an enduring peace in the Middle East might be worth the expenditure of 1 percent of our GDP, or about $100 billion, he ran into a firestorm of criticism from White House pols who believe the American people will back any war so long as it is costless.

It turns out that Lindsey may have been a wild-eyed optimist. The administration reckons that the postwar effort to restore security (read: pay our troops) and provide some semblance of public services to Iraq is costing nearly $5 billion every month--and due to rise. And that includes virtually nothing for major rebuilding of the Saddam-shattered infrastructure. When civil administrator Paul Bremer came to Washington to explain to the White House and Congress that a muscular foreign policy isn't to be had on the cheap, and that merely repairing the infrastructure would cost "maybe $100 billion; it's a lot of money," he was sent back to Baghdad with his begging bowl empty. Just get all that Iraqi oil onto the market, he was told, and our foreign policy would be self-financing.

Enter Philip Carroll, our man assigned to Iraq's oil ministry (rumored to have resigned last week). He is guessing that by investing about $2 billion, Iraq can get its exports up to 2.5 million barrels of oil a day by the end of 2004, after satisfying domestic demand, which is estimated to be about 500,000 barrels daily. (All of these figures are estimates: Some say domestic consumption is only 350,000 barrels a day.) That target is about in line with what Iraq claims its prewar output was, but many experts consider it optimistic, given the inability of coalition forces to prevent the looting of computers, the hijacking of the cars and buses that oil field workers need to get to work, and the sabotaging of electric power supplies.

But let's be wildly optimistic and assume that Carroll hits his target, and that profits from Iraqi oil sales come to $20 a barrel. A bit of arithmetic shows that those sales would yield well under $20 billion a year, about enough to cover current outlays on our troops for four months, or to provide funds needed for only one of the many reconstruction tasks, the construction of adequate water-treatment facilities. But certainly not enough to cover reconstruction needs and the $30-$40 billion Iraq needs "to rehabilitate active wells and develop new fields," according to a study prepared for the Council on Foreign Relations and the James A. Baker III Institute for Public Policy at Rice University.

In short: Revenue from the sale of Iraq's oil cannot begin to finance the reconstruction of the country. Bremer, in what may be his ticket out of Baghdad and into the private sector with Lindsey, knows this: "We are going to have to spend a lot more money than we are going to get revenue, even once we get oil production back to prewar levels." Which means that Wolfowitz is either innumerate (unlikely), or is being economical with the truth when he says, "We're dealing with a country that can really finance its own reconstruction, and relatively soon."

And don't look to private foreign investors for money. The major oil companies have announced that they will not venture into the country until security is assured, which suits the state-owned monopoly oil company just fine. Iraq's State Oil Marketing Organization has announced that it has no interest in foreign investment at this time, and will not be interested until entirely new fields are opened for exploration. No surprise: State-run monopolies are notorious for freezing out private-sector players.

Faced with this grim arithmetic, Bremer floated the idea of securitizing future oil revenues by selling bonds with the future revenues to go to the lenders. This appealed mightily to the investment bankers eager for the fees that would result from the sale of these IOUs, and to hawks such as Caspar Weinberger, who announced in Forbes that we need not worry about whether we have the right to assume debts on behalf of the Iraqi people because "defeated countries that have had their regimes changed have no sovereignty."

Analysts at the Pentagon disagreed, pointing out that the securitization plan smacked of "stealing Iraqi oil." So it was shelved, leaving Bremer to rely on a "donors' conference," scheduled to be held in New York in October, and to include many of the countries that have reneged on their pledges to make funds available to Afghanistan.

Meanwhile, any plans to reorganize the Iraqi oil industry to end the state monopoly are on hold. One Pentagon source says the problem of security is absorbing all the energy the administration can muster. So we are likely to be left with the situation that has stunted the economic and political development of other oil-producing nations: Revenues will flow to the state, for use by its bureaucracy, rather than to the Iraqi people. If you want to know how well that works, you need only look to Saudi Arabia and Iran.

So there you have it: a foreign policy that promises enormous long-run benefits, but requires enormous short-term outlays, for most of which the administration has refused to budget.

Those conservatives who are willing to face this problem fall into two classes. Some opt for a U.N. resolution legitimizing the occupation of Iraq, in the hope that France, India, and other countries would then supply troops and funds in support of the nation-building effort. Indeed, the Financial Times reports that our increasingly war-weary and financially stretched British allies are "for the first time talking openly about backing a new United Nations Security Council resolution."

Others view such an appeal to the Security Council as an ignominious surrender to France and the egregious Kofi Annan. The result, they plausibly fear, would be a victory for Annan's massive bureaucracy, and the death of any dreams of a market-oriented, prosperous, democratic Iraq. To this crowd, go it alone is the route to success.

But if we are to call the tune, we have to pay the piper. The buck that stops in Baghdad will have to come from Washington. That's where the administration's foreign policy collides with its domestic policy. To retain control over the course of events in Iraq without sharing authority, the administration must trust that the American people can be persuaded that the costs of our foreign policy are worth bearing, given the likely benefits. It must then proceed to adopt a short-term program to pay for that policy, and a longer-term plan to finance that policy and its domestic initiatives.

Suppose, for example, that the president were to propose a $5 per barrel tax on imported oil, which might raise gasoline prices by about a dime per gallon. Along with a tax that captured the revenue from the inevitable increase in the price of domestically produced oil, such a tax would yield almost $40 billion a year. Not enough to rebuild Iraq, but a good start. Then, sell bonds with the revenues from this tax as backing, and we might just be able to support the rhetoric of the new nation-building policy with some real resources.

Would such a tax hurt the economy? Perhaps, but not certainly. For one thing, if we really believe that a pacific Middle East is in our interest--among other things we would no longer have to police the Gulf and be prepared to defend oil-rich monarchies from takeover by anti-American Islamic fanatics--the long-run benefits should vastly exceed the short-run costs.

For another, if the OPEC cartel believes that the current price of $30 per barrel maximizes its profits, and that a higher price will curtail demand for its oil, a $5 tax might force it to lower its target price by an equivalent amount. After all, OPEC routinely complains that the high gasoline taxes levied in Europe reduce the demand for its oil--which is another way of saying that the consumer nations' taxes reduce the producer nations' ability to raise prices.

That done, the administration can address the financial problems created by the triumph of compassion over conservatism. For starters, whatever happened to tax reform? A truly innovative tax program--one that taxes consumption rather than work, pollution rather than output, windfalls rather than rewards for risk-taking--might indeed yield more tax revenues to finance foreign and domestic programs without adversely affecting the economy's growth rate. But if even a fundamental change cannot pay for all that the administration would like to do, it would then have to face the hard job of confronting the American people with the necessity of making choices, allowing us to decide whether we love our new entitlements enough to pay for them.

Removing one's head from the sand can initially be blindingly painful, but a few blinks in the new sunlight, and one's vision clears. I'm told it works for ostriches; surely it would work for the Bush team.

Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).