Iraq: Follow the Money, If You Can, July 7, 2004

Iraq: Follow the Money, If You Can

July 7, 2004

Comment: # 514

Discussion Threads - Iraq Related Comment #s: 513 and associated references

Attached References:

[Ref.1] Hannah K. Strange, "Report: The 'real' costs of the Iraq war," UPI, July 1, 2004

[Ref 2] Rajiv Chandrasekaran, "U.S. Funds for Iraq Are Largely Unspent," Washington Post, July 4, 2004; Page A01
http://www.washingtonpost.com/wp-dyn/articles/A26310-2004Jul3.html

Has the exploding Iraq budget bomb returned the heady days of the early 1980s
to the gamesters in Versailles on the Potomac?

Excess Appropriations & Slush Funds -- a Quaint Trip into the Past

When Ronald Reagan entered office in 1981, inflation had been raging for several years. President Carter's Pentagon was accused of deliberately underestimating future inflation in its five-year plans to hold down future defense budgets. This was an important, if somewhat arcane budget issue to the courtiers of Versailles, because some defense appropriations (especially those for major weapons systems) are, in effect, bank accounts that authorize the expenditure of monies over a multi-year time horizon. Annual appropriations for new aircraft carriers, for example, projected expenditures for as long as seven years, monies for new fighter aircraft would take three to four years to spend out, under the policy of full funding. So money had to be added to the appropriations to compensate for the predicted loss of purchasing power caused by inflation predicted in each of the future years. Predictions inside predictions would make a soviet central planner feel right at home.

Each year in the late 1970s, the Pentagon asked Congress for supplemental appropriations to make up for the appropriations shortfalls caused by past inflation estimates, which the Pentagon said underestimated the real inflation it had to contend with. Congress usually honored these supplemental requests and, on occasion, even added more money than requested.

One of the so-call management reforms instituted immediately by the incoming managers of Reagan's Pentagon was to budget for "realistic inflation" in all its appropriations. Moreover, in addition to these more "realistic" estimates, the new management team contended major weapons, like fighters, ships, and tanks, were subjected to a 30% higher inflation rate the economy or the defense department at large. So, it instituted a second management reform to increase the "realistic inflation" rate by almost a third for major weapons—this became known as the 30% kicker. Congress happily went along with the gig and enthusiastically began increasing defense budgets to cover the new "realistic" inflation estimates (including the 30% kicker) in the five year plans, no questions asked.

But while Congress was busily shoveling the money to the Pentagon in the 1980s to cover higher paper inflation, the real rate of inflation was collapsing. Most supporters of Ronald Reagan contend he broke the back of this debilitating condition, although ironically much of credit goes to chairman of the Federal Reserve, Paul Volker (sp), a Carter holdover, who took the steam out of the economy by jacking up interest rates to double digit levels, thereby putting the screws to the economy, and dropping the country into the worst the recession since the great depression.

With inflation collapsing, Congress, in effect, had appropriated money to cover future inflation that never occurred, in effect giving the Pentagon a windfall profit of over $40 billion, according to separate estimates made by the Military Reform Caucus and the General Accounting Office. Even Secretary of Defense Casper Weinberger owned up to $29 billion in excess appropriations in a congressional hearing.

But a funny thing happened on the way to the Pentagon's bank, the windfall—whether $29B or over $40 billion—was never returned to the Congress and the American people. In fact, the money simply disappeared because no one could (or would) account for it, and after a short while, the press predictably lost interest in it. When the press lost interest, Congress lost interest, and the entire episode was forgotten and swept into the dustbin of history.

Many, including myself, believe a good part of the great inflation windfall ended up in two slush funds, known as the "M Account" and the "Merged Surplus Account," where it lost its identity, and could not be rescinded by expiration, and could be spent on anything, including black operations. But there is no proof of this ... the money simply vanished into the maw of the people's republican bank of Versailles. [Both accounts were shut down in the late 1980s and early 1990s (at least temporarily), thanks to the heroic solo efforts of Senator Charles Grassley, but to the best of my knowledge, the windfall was never recovered.]

Now this history of excess appropriations and slush funds in the 1980s may seem like an ancient boondoggle, a curiosity, irrelevant in a time of low inflation and unending war of the 21st century. But, if the attached analysis by my good friend Werther is correct, a similar albeit mutated form of this history may be now be repeating itself with respect to appropriations covering some of our adventures in Iraq.

Given the culture of non-accountability in Versailles on the Potomac stage is always set for more abuse and high jinks, and the opportunities are multiplying rapidly, because the bill for Iraq is rising rapidly—it is already up to $1600 per household and a 3-year occupation will increase that number to over $3400 , according to one estimate [see Ref 1 below]

So, read Werther's attached analysis carefully and follow the money, if you can—but wear your rubber boots, because the slush is deeper and soggier that it looks—after all, $18 billion is but a small part of a continuing saga, for the Pentagon still produces a mountain of unauditable budget books to "manage" a budget of $440 billion [see Threads 1-4].

Iraq: Follow the Money

By Werther

Werther is the pen name of a Northern Virginia-based defense analyst

One of the unremitting leitmotifs of one-hundred-percent Americanos is the complaint that "the media just won't print positive stories about Iraq." Apparently all the canons of journalism dictate that our dailies should be filled with edifying tales about Tikriti tykes receiving soccer balls and canned asparagus, or a Venetian blind factory opening in Irbil. Yet somehow, the media conspiracy prevents the public from reading "fair and balanced" accounts that might be stenographically reproduced from the [now defunct] CPA's press releases. Or perhaps the good news just gets lost amid the blizzard of media stories about airliners that landed safely, neighbors who didn't get murdered, and laborers who remained employed.

Imagine the surprise, then, at reading the Office of Management and Budget's chaste announcement that only 2 percent has been spent from the $18.4 billion in Iraq reconstruction funds approved last October. This was no mere data point indifferently churned out by the faceless automatons at OMB; no, the White House was grudgingly releasing something it would prefer to hide. The only information the government releases on a Friday afternoon before a three-day weekend is bad news; when it is hoped that the Beltway nomenclature, streaming over the Bay Bridge to the Delmarva fleshpots, will be distracted. You can be sure the White House wasn't ballyhooing what a good steward of the taxpayers’ money it was by sitting on the money. What, then, is the explanation?

There are two plausible hypotheses, which are not mutually exclusive:

First, the military situation in Iraq is so disastrous that projects simply cannot be undertaken. The Washington Post's story [1, contained in Reference 2 below] on the reconstruction aid suggests this reason, and quotes administration spokesmen to that effect. But this hypothesis, while likely to be at least partially true, itself raises a host of questions:

If it is too dangerous to do widespread reconstruction, doesn't that suggest a reason for the absence of good news stories from Babylon that is more fundamental than the mere ill nature of a bunch of pack journalists (34 of whom have been killed in Iraq thus far, contrary to Deputy Secretary of Defense Wolfowitz's public impugning of journalistic élan)? And overwhelming anecdotal evidence suggests there is little real reconstruction going on; the CPA administrators, the would-be heirs of Lucius Clay (fabled in the reconstruction of post-war Germany) huddle instead in the Emerald Palace did little more than churn out press releases, befitting their origins as Capitol Hill press hacks.

Too dangerous it may be to let contracts with the vast bulk of the appropriated reconstruction money; why, then, has the administration encountered no such difficulty obligating money in one particular instance: reimbursing Halliburton for fuel delivery? Just another coincidence, surely.

According to the same Washington Post story, the CPA likewise had no difficulty in earmarking or disbursing nearly $20 billion of Iraq's own funds in various ways (ways that cannot be verified, because there is no independent audit—more on this below). Given the supposedly ephemeral nature of L. Paul Bremer's recent viceroyalty, does the rapid disposition of Iraqi assets before the establishment of a native-run administration have the suspicious smell of a looting operation? That is the conclusion of the British charity Christian Aid, which says that at least $20 billion in oil revenues and other Iraqi funds intended to rebuild the country have disappeared from banks administered by the CPA [2]. And before an independent audit could take place, the CPA liquidated itself and Bremer departed Baghdad in the manner of Baby Doc or Ferdinand Marcos— unseemly haste for so regal a personage.

Regardless of whether Iraq was more unstable and dangerous than foreseen in October 2003, the second hypothesis argues that the administration never intended to spend the vast bulk of the money on Iraq reconstruction in any case. Quite apart from the fact that this intention would have violated article I, section 9 of our late Constitution, there are other curious features as well.

The White House repeatedly emphasized how vitally important it was for Congress to pass the Iraq reconstruction package quickly. Why the haste, if the first year disbursement rate is so minuscule? Two possibilities:

Even if the administration had no intention of spending the money, it wanted a signed bill before the Madrid donor's conference in order to induce third countries into donating money and/or cannon fodder to the Great Crusade. In other words, sucker Congress and the taxpayers into putting up the bait to sucker the Europeans.

The WMD argument having fallen flat (David Kay released his report in September), the administration needed a fresh argument to justify to the public its military invasion of Iraq. Hence the need to swathe harsh realities with the bogus argument that the occupation was really and truly an undertaking of the most noble and altruistic character. At the time of the debate over the reconstruction aid, the rebuilding of Germany was the false historical analogy du jour; if we can rebuild the Brutal Hun’s industrial machine and thereby pacify him, so the tale went, why can’t we demonstrate our transcendent virtue to the people of the Middle East and incur their lasting gratitude? There was just enough plausibility in this snake oil that some Americans downed a whole jug of it.

The next step, as in the solution to any complex crime, is to follow the money. Will Congress, on learning of the shaky pretenses behind the appropriation of $18 billion, schedule hearings on the matter? Anything is possible, but by no means certain. The partisan impulses of the majority party in an election year are the most obvious reasons for stonewalling, but there are more personal reasons as well: too many reputations have been staked on the reconstruction vote. Many would doubtless write off $18 billion rather than admit error.

Will Congress rescind or transfer the appropriation? Again, that is doubtful. Meanwhile, the spending authority is sitting there, a no-year (i.e., unexpiring) slush fund in the hands of people who learned accounting from their campaign benefactors at Enron and Halliburton. Connoisseurs of the Congressional Record will recall that at the administration’s insistence the House and Senate leadership killed a certain provision in the appropriations legislation when it was in conference committee. This provision had been previously approved by a recorded vote, and would have subjected the Iraq reconstruction contracts to audit. Why would (just to pick a random example) the Office of the Vice President not want independent auditors poking around its philanthropic enterprises in Iraq?

Readers who are aficionados of black budgeting will appreciate the issues that arise. What can a government do with no-year money it doesn’t feel compelled to account for? One is certain there are any number of warlords, dope-peddling "intelligence sources," and other deserving gentry eager to be reconstructed with good-will payments from Uncle Sam. Or, if you like, your government could pre-fund its next installment of the adventures in neo-conservative military strategy, much as it pre-funded the invasion of Iraq with $700 million that was supposed to fund the take-down of Al Qaeda. Or, suitably fumigated, it could fund an ad campaign in several battleground states.

That is admittedly speculation, conditioned, one is compelled to admit, by a somewhat less than charitable view of the political class as it exercises its fiduciary responsibility over the public fisc. But without public accountability, how will we ever know for sure?

[1] "U.S. Funds for Iraq are Largely Unspent," The Washington Post, 4 July 2004. [See Ref 2 below]

[2] "Fuelling suspicion: the coalition and Iraq's oil billions," Christian Aid press release, 28 June 2004, http://www.christian-aid.org.uk/news/media/pressrel/040627.htm

Reference 1

Report: The 'real' costs of the Iraq war

By Hannah K. Strange
UPI Correspondent

Washington, DC, Jul.y1 (UPI) — The average U.S. household has already spent almost $1600 on the war in Iraq, according to a report presented in Washington Wednesday. The final bill will be an estimated $3,415, based on the U.S. military's prediction of a three-year military occupation, says the report, citing calculations by economist Doug Henwood.

...

In the run-up to the Iraq war, administration officials gave the impression, co-author Phyllis Bennys points out, that the cost of reconstruction would be largely covered by Iraqi oil revenues.

...

"There's a lot of money to pay for this that doesn't have to be U.S. taxpayer money, and it starts with the assets of the Iraqi people," said Deputy Defense Secretary Paul Wolfowitz at a House of Representatives appropriations hearing the same day.

...

The administration's budget request for 2005 proposes "deep cuts in critical domestic programs," the report details, "(and) virtually freezes funding for domestic discretionary programs other than homeland security." The White House is seeking the elimination of programs including grants for firefighters' assistance, low-income schools, family literacy, rural housing and economic development. As written, the proposal would keep such cuts in place until 2009.

A White House memo, leaked in May to the Washington Post, outlined further cuts in 2006, including funding for education, Head Start, home ownership, job training, medical research and homeland security.

"The Bush vow to 'leave no child left behind'" the report adds, "remains underfunded by at least $14.1 billion, with the new budget threatening to reduce funding by an additional $9.4 billion."

...

Reference 2

U.S. Funds for Iraq Are Largely Unspent

By Rajiv Chandrasekaran
Washington Post
July 4, 2004; Page A01
http://www.washingtonpost.com/wp-dyn/articles/A26310-2004Jul3.html

BAGHDAD, July 3 —

...

Only $366 million of the $18.4 billion U.S. aid package had been spent as of June 22, the White House budget office told Congress in a report that offers the first detailed accounting of the massive reconstruction package.

Thus far, according to the report, nothing from the package has been spent on construction, health care, sanitation and water projects. More money has been spent on administration than all projects related to education, human rights, democracy and governance.

Of $3.2 billion earmarked for security and law enforcement, a key U.S. goal in Iraq, only $194 million has been spent. Another central objective of the aid program was to reduce the 30 percent unemployment rate, but money has been spent to hire only about 15,000 Iraqis, despite U.S. promises that 250,000 jobs would be created by now, U.S. officials familiar with the aid program said.

...

Spending patterns have been different with the Iraqi money. The Coalition Provisional Authority, the now-dissolved U.S.-led occupation administration, spent or locked in for future programs more than $19 billion from the $20 billion Development Fund for Iraq, which was established by the U.N. Security Council to manage Iraq's oil revenue, said Joseph A. Christoff, director of international affairs and trade at the General Accounting Office, the watchdog arm of Congress.

...

The CPA appears to have earmarked more than $6 billion of the Iraqi funds over the past two months alone, as it prepared to hand over political authority—and control over the development fund—to the interim Iraqi government. As of May 6, the CPA had earmarked only $13 billion from the fund, according to a GAO report released this week.

...

One of the principal beneficiaries of the development fund money was Halliburton Co., which was paid hundreds of millions of dollars to truck gasoline and other fuels into Iraq -- a country with the world's second-largest oil reserves -- because of problems with Iraq's refineries.

...

Chuck Spinney

"A popular government without popular information, or the means of acquiring it, is but a prologue to a farce or a tragedy, or perhaps both. Knowledge will forever govern ignorance, and a people who mean to be their own governors must arm themselves with the power which knowledge gives." - James Madison, from a letter to W. T. Barry, August 4, 1822

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