The Economics of and Fallout from the Afghan War

• 21-Aug-21
• admin

Kabul has fallen.  

 

It took mere weeks for the Taliban to win; and just one or two days after reaching the country’s capital to conquer it.  Literally without a fight.   An army of “300,000”, supposedly well-armed with American hardware and trained on its military doctrines, “with an airforce” (quoting President Biden) lost to a ragtag guerrilla force of 75,000 in a few weeks, many of whom were evidently (from TV images) not even born when the American invasion started in 2001.   Washington thought that the military situation was tenuous but that the Afghan government and army would hold long enough for the remaining American forces to bail out safely.  And proudly. 

 

That did not happen.   It turned out to be another disastrous Saigon moment. 

 

As a result of that miscalculation of its non-existent capabilities, Afghanistan was “lost”.  At an alarming speed.     President Biden’s press conference just five weeks ago when he essentially said that all’s well, is probably the most absurdly incorrect outcome of any geopolitical or military assessment by an American president in history.   Geez, what a clusterf..k.

 

At least in the former South Vietnam, the American trained army (ARVN) lasted two years after most US troops pulled out.     In Afghanistan, the collapse came in all of five weeks.   Five weeks!   And no bloodshed that we know of (not a bad thing really…)    The Afghan army, built at an astronomical cost of US$83 billion, vanished into thin air at the first sign of the Taliban approaching.   I mean, it would have cost less to put 300,000 Afghan soldiers onto the Virgin Atlantic spacecraft at US$250,000 a pop and let them disappear into space.   Everything indicates that there was absolutely no fighting.   This was a “war” only in the imagination of Washington planners.   Probably the only good thing coming out of the debacle is that nobody died. 

 

If you think about it, this is almost the ideal scenario for war mongers.   Spend a whole bunch of money extracted painlessly and without resistance over a long time from American tax payers, with human tragedy considerably lower than in most other wars in spite of its length.  All profit, no pain.    It was 20 years of “production” of military activity bringing huge profits to the military industrial complex.     Like many things in America these days (such as education and health care), even wars have been privatized.  

 

What do I mean by that last sentence?  

 

Consider who lost and gained from this costly conflict.   Brown University, an Ivy League American institution, estimated that the US spent US$300million PER DAY for 20 years, with the running bill at US$2.62 trillion.   If this was not shocking enough, here are some more interesting statistics.

 

Cost of War in Afghanistan

US$800 billion              Direct War Expenses

US$269 billion              Care for American Veterans who fought in Afghanistan

US$85 billion                Training of Afghan Military

US$5 billion per year    Afghanistan Aid

US$750 million             Afghan soldiers’ payroll

TOTAL : $2.62 Trillion

(Source: Brown University Cost of War Project)

 

Given that this is $2.62 Trillion down the drain, since the Taliban is back to exactly where it was from before the war started 20 long years ago, there is no other way to describe this than as a complete washout.

 

The above is still a running bill.  The tab isn’t closed yet.   The bill for the care of veterans will run on and on, until these veterans don’t need them (ie at death).   That will run up bills for another generation.   And now that part of the US$85 billion of high quality American military inventory captured by the Taliban may end up in terrorist hands, there will have to be a huge and costly effort to monitor whether these weapons will end up hurting US interests around the world, if not on home ground as well.   This is likely to be another huge bill on surveillance, terrorism prevention and homeland protection.    Since we also know that much of the Afghan aid and soldiers’ payroll have ended up in corrupt hands, there will also be more money to be spent to prevent the perpetrators trying to launder their money.

 

Who knows what the final bill will be?   It certainly won’t be stopping at US$2.62 Trillion.

 

In this expenditure, it is obvious that American tax payers lost big time since all of that was federal spending financed by taxes.   Since the war (plus the bigger one in Iraq) created massive deficits in the US federal budget, the cost has further economic fallout.   For one thing, the budget deficit is financed by borrowing, and this will contribute to a long-term burden for future generations in America.   The borrowing has increased by part of that $2.62 Trillion, and with the larger amount from the Iraqi War, leads to a permanent increase in the national debt that will take decades, if not most of the next century, to pay down.   It is pertinent to note that the UK took nearly 100 years to pay down its war debt from the 1914-1918 Great War, and Germany finished paying on reparations from that war to Britain and France after 92 years, ending that only around 2010.  

 

War is an extremely economically-devastating undertaking, and the burden of it is carried by future generations of that society.   As there is no economically beneficial production for the spending, it is money wiped off the surface of the planet, gone, poof forever.  

 

The usual result is inflation in the long term, since the only way to pay off war debt is to inflate it to some low affordable number.   Inflation in the American economy (and hence global economy) will become endemic, caused by these post 9-11 wars.   This is entirely foreseeable, unlike the final collapse in Kabul.   
 

Then there are the non-pecuniary costs.

 

The Brown University Cost of War project also details the following intangible costs:

• At least 801,000 people have died due to direct war violence, including armed forces on all sides of the conflicts, contractors, civilians, journalists, and humanitarian workers.  
• Many times more have died indirectly in these wars, due to ripple effects like malnutrition, damaged infrastructure, and environmental degradation.
• Over 335,000 civilians have been killed in direct violence by all parties to these conflicts.
• Over 7,000 US soldiers have died in the wars (Iraq and Afghanistan).
• We do not know the full extent of how many US service members returning from these wars became injured or ill while deployed.
• Many deaths and injuries among US contractors have not been reported as required by law, but it is likely that approximately 8,000 have been killed. 
• 37 million people have been displaced by the post-9/11 wars in Afghanstan, Pakistan, Iraq, Syria, Libya, Yemen, Somalia and the Philippines.
• The US government is conducting counterterror activities in 85 countries, vastly expanding this war across the globe.
• The post-9/11 wars have contributed significantly to climate change. The Defense Department is one of the world’s top greenhouse gas emitters.
• The wars have been accompanied by erosions in civil liberties and human rights at home and abroad.
• The human and economic costs of these wars will continue for decades with some costs, such as the financial costs of US veterans’ care, not peaking until mid-century.
• Most US government funding of reconstruction effortsin Iraq and Afghanistan has gone towards arming security forces in both couAccntries. Much of the money allocated to humanitarian relief and rebuilding civil society has been lost to fraud, waste, and abuse.
• The cost of the post-9/11 wars in Iraq, Afghanistan, Pakistan, Syria, and elsewhere totals about $6.4 trillion. This does not include future interest costs on borrowing for the wars, which will add an estimated $6.5 trillion by 2050.
• The ripple effects on the US economy have also been significant, including job loss and interest rate increases.
• Compelling alternatives to war were scarcely considered in the aftermath of 9/11 or in the discussion about war against Iraq. Some of those alternatives are still available to the US

 

(Source: Brown University Cost of War Project)

Accepting the Brown University estimates to be correct, all that is productive capacity having been obliterated.   As such, “cost of war” is far more than the financial bill.  A lot of human capital has been wiped out.   That is irreplaceable.

 

Then, even the financial bill is still rising.    The cost of the Afghan war so far, at 2.62 Trillion is only a fraction of the total cost of war in the post 9-11 period of more than 13 Trillion, at least half of which is yet to be incurred.

 

This is all money that will go poof!  War pulverizes productive assets; and the expenditure of these vast amounts will never be recoverable, because there is no value created by bombs blowing things up.  It is not like building infrastructure.

 

History tells us that the British Empire incurred a similar debt burden (adjusted for inflation) from WW1 and that ended both Empire and its superlative mastery of the seas.    It seems inevitable that history will repeat itself, and the financial burden of its wars will crush the American empire in its time.   

 

But for the moment, not all Americans suffered financially from the war.   Not the top 1 percent anyway.     The industrial military complex and their shareholders, lobbyists and other consultants made a lot money from it.   RT America, the Russian international television network, has estimated that five companies belonging to the group of companies that are clustered into the so-called industrial military complex benefitted immensely while the war in Afghanistan was being waged.

 

These are:

Northrop Grumman;

General Dynamics;

Lockheed Martin;

Raytheon; and

Boeing.

 

The share values of these five companies went up by many multiples of their starting values before the war started.    Northrop Grumman rose by 12.96 times; General Dynamics by 7.25 times; Lockheed Martin by 13.36 times; Raytheon by 4.31 times; and Boeing by 10.76 times.  Since all their revenues essentially derived from the US government, it is evident that the post 9-11 wars made their fabulous earnings all possible. 

 

And needless to say, another economic effect of these wars would be the usual “rich got richer” outcome arising from the bloated values of defence industry stocks.   At the other end of the economic spectrum, ordinary Joes got sent to war, with many ending up in VA hospitals or suffering some form of PTSD upon returning home.   This is part of the inequality of income that exists in American capitalism.   Part of this may be justifiably attributable to Afghanistan.

 

So we have it, the above have been the economics of the Afghan war.   When war gets profitable, we see more of it.  

 

But it has bankrupted the US.  Coupled with the devastating domestic economic crises in 2008 and now Covid, we can quite confidently describe America as a bankrupt country.   Yes, of course, it can climb out of bankruptcy, but if any corporation has that kind of debt relative to income, it is certainly in financial straits.   There is no other way to describe this kindly.

 

Worse still, it might have benefitted America’s competitors.   In particular Russia and China.  Both are making overtures to befriend the new Taliban regime.    The Russians may eventually get what they wanted from forty years ago - influence over a neighbouring country (it had common borders with Afghanistan in the 1990’s as the former Soviet Union) which the CIA denied them by funding and arming the Taliban.   Now they get it without risking another soldier’s life.

 

China is even more creative.   Its top foreign ministry officials have already met a delegation from the Taliban in Tianjin last month, even before it met Wendy Sherman, the American State Department representative who tried to update progress on the bilateral trade impasse, without as warm a reception as the Chinese gave the Taliban.   It should not come as a surprise to anyone if China moves to formally recognize the Taliban government diplomatically in the coming days.   In a phone call between the two foreign ministers, Antony Blinken and Wang Yi, both cordially agreed to ensure that they will work together to avoid instability in Afghanistan as the Taliban becomes the government, but what that means is yet to be seen.  

 

There is also expectation that China will push forward with the BRI into Afghanistan, with whom they share a short common border.   If one were to remember the geography of the land, there is a critical route through the formidable Hindu Kush mountains – the legendary Khyber Pass – and if there is a deal between China and Afghanistan to deploy BRI roads and rail through that, the cost of linking to its western neighbours through the Pass will save China a huge amount of money.

 

Finally, there is the geopolitical aspect to the Afghanistan debacle.  Nobody in the world expected the Americans to stay for another 20 years; but the fact that they pulled out so frantically without regard to its allies in Afghanistan is a huge setback to its credibility and commitment.  Almost immediately, China warned Taiwan of how precarious it is to rely on American willingness to fight a war in the East China Sea on its behalf.   That is not just a Chinese observation; nobody in his right mind would expect that Americans would support another civil war type engagement or an internecine conflict on the far side of the Pacific Ocean.   In mainland or even maritime Asia.   

 

Maybe the US would be tempted to win a quick victory over somebody to overcome the crushing humiliation of the Vietnam moment in Kabul, but that is highly unlikely nor politically acceptable to a nation shocked by the failure of its intelligence or the disconnect between people on the ground and the suits in Washington, to take on a country that is at home base, on a continent in which the US military would have tenuous supply lines. 

 

All said, the real fear of another miscalculation is likely to reduce the rhetoric over the South China Sea.   For sure, Taiwan nor any of the potential American allies will step too far forward when asked to commit to a China-containment policy.   Certainly for the rest of this decade.    If something good were to emerge from the chaos at the Kabul airport, it would be that fake news spouting and jingoistic chest beating will give way to a more reasoned assessment of why wars are unwinnable in the oceans of the Indo-Pacific.   More so than they were in the mountains of Afghanistan.

 

 

Wai Cheong

Investment Committee

The writer has been in financial services for more than forty years. He graduated with First Class Honours in Economics and Statistics, winning a prize in 1976 for being top student for the whole university in his year. He also holds an MBA with Honors from the University of Chicago. He is a Chartered Financial Analyst.