Our Unsupportable Empire

Most of you are grudgingly aware that the U.S. government has promised us more than we want to or can easily pay for.  China is no longer willing to fill the gap knowing that we will not be capable of repaying it.  This is on top of the existing national debt from past borrowing to cover the government’s current and past spending in excess of its revenue of $16 trillion, about the same as the United States’ total annual output.  These numbers pale in comparison with the government’s unfunded commitments (those not covered by the revenue expected from existing tax laws and user charges) to future retirees and recipients of medical care (social security, medicare and Medicaid). The present value of the revenue short fall to pay for these future commitments (the government’s unfunded liabilities) is currently around $50 trillion for an astonishing total debt of around $66 trillion, which is larger than the total annual output of the world per year.

Naturally, these promises must be pared back because they can’t be paid for. To some extent a healthy, growing economy will also increase our capacity (lighten the burden) to pay for them but by itself growth will not be enough. This is one, but only one, of the reasons that we also need to reconsider our military promises around the world, while reducing and reorienting our military budget and modestly increasing our diplomatic (State Department) expenditures.

Our promise to provide security to most of the world suffers from the same moral hazard as does an overly generous welfare state.  Incentives matter. When access to welfare is easy and the level of support is generous, more people will choose it over taking a job that doesn’t interest them much.  When President Bill Clinton signed “The Personal Responsibility and Work Opportunity Reconciliation Act of 1996” (PRWORA) on August 22, 1996 (with strong Republican support), he fulfilled his campaign pledge to “end welfare as we have come to know it.” The law ended welfare as an entitlement by introducing tighter conditions for receiving it. Welfare costs dropped following adoption of the law. “A broad consensus now holds that welfare reform was certainly not a disaster–and that it may, in fact, have worked much as its designers had hoped.”[1] While some people remain skeptical, Sweden’s welfare reforms of the last two decades have demonstrated very similar results.[2]

The United States spends more on its military than the next 14 largest military spenders combined (China, Russia, UK, France, Japan, Saudi Arabia, India, Germany, Brazil, Italy, South Korea, Australia, Canada, and Turkey). We are policing/protecting most of the world. This has two negative effects. The first, similar to chronic welfare recipients, is that other nations spend less on their own defense, taking a free ride on the United States’ ability to keep the world safe for everyone else. The second is that by diverting so much of our productive resources into the military, we reduce the resources available for developing and strengthening our economy. It is our powerful economy that underlies our influence in the world as much, if not more, than our military power. Moreover, our military might is made possible by our economic power. So we need to get the balance right. I urge you to read David Ignatius’ recent discussion of this issue in The Washington Post, (“The foreign policy debate we should be having”, Oct 21, 2012, page A15)

But there are more reasons that our military adventurism and spending should be reduced and more resources given to diplomacy. Our national security and the freedoms America was founded to establish and protect will be strengthened as a result.

American hegemony rests largely on our economic and military power, but also on widespread respect for the American way of life (our respect for human freedom and dignity and our prosperity). Our efforts to promote democracy via military interventions have generally not gone well.  The talents and spirit of enterprise that have served us so well at home have not generally contributed to success in building new democratic nations where we have militarily intervened. Books like Joseph Heller’s, Catch 22 (about WWII) and movies like Robert Altman’s Mash (about Viet Nam) entertainingly introduced us to the bureaucratic problems of fighting and/or governing in foreign lands. We have the best trained and most well equipped military history has ever known, but it has failed for the last ten years to win in Afghanistan, which is now the longest war in American history. Our powerful military is not good at nation building, nor should we expect it to be. The military is not the right tool for promoting the values we believe in around the world. That is a job for diplomacy (with our powerful military well in the background).

We have been more successful at promoting our values and our economic interests through our promotion of and participation in international organizations like the International Monetary Fund, the World Bank, and the World Trade Organization and a wide range of international agreements and cooperation that facilitate free trade, and capital movements, and that extend the protection of property and human rights internationally. These organizations and agreements have developed the international legal frameworks for telecommunications, patents, financial and product standards, etc. that underlie the explosion of globalization that has dramatically raised the standard of living for much of the world’s population.

Rajiv Chandrasekaran, has written an excellent exposition of our military efforts in Afghanistan, which I urge you to read “Afghan security forces rapid expansion comes at a cost as readiness lags” (The Washington Post, Oct 21, 2012, page 1). Every few years America’s military strategy has changed: from counter terrorism, to counter insurgency, to building and training (and equipping) an Afghan National Army and Afghan National Police. As each approach fails, the Joint Chief’s extract the lessons learned and try a new one until it fails. In recent years, our military commanders have correctly emphasized the fact that “success” cannot be achieved by the military alone (it amazes me that anyone could have thought so – no wonder they are so eager to start wars).

But those are far from the only reasons for reducing our military footprint and budget. I believe in keeping government relatively small and encumbered with the organizational and political checks and balances meant to replace the role of competition in the private sector in bending self-interest to the public good. People are influenced by their self-interest whether they are in government or the private sector. However, in the private sector success comes from serving the needs of others in the market. This exerts a strong incentive on individual behavior. (Dishonesty can exist in either sector and can only be addressed by embracing appropriate moral standards and consistent punishment of breaches of those standards) In place of market discipline (acceptance or rejection), government must rely more on checks and balances to ensure that government officials behave as intended and they can only go so far to keep government honest and impartial in serving the public. The power of the government to coerce, and the expenditure of large sums of money by the government create enormous temptations for personal gain by those in positions of power in the government. The bigger government gets the more difficult it is to prevent some in government from yielding to the temptations to direct its power and money to their own good rather than the general good.

The firms in our large and important military support industry (Lockheed Martin, Boeing, Northrup Grumman, General Dynamics, Raytheon, Halliburton, United Technologies, Computer Sciences, BAE Systems, General Electric, Bechtel, and Honeywell International, to name a few), do not have a disinterested view about the most appropriate and cost-effective military technology the defense budget should provide for. The millions of dollars they spend attempting to influence the choices of the services and congress are, in a sense, “honest” efforts to promote their self-interested view of what best serves our national security. The growing behemoth of the industrial military complex of which Eisenhower warned us over fifty years ago now both defends and threatens our liberties. See my earlier comments on Ike’s famous farewell address: http://dailycaller.com/2011/01/17/ikes-farewell-address-fifty-years-on/

The risks of the misallocation of our resources and waste are directly related to the size of our military (and government more generally). The boundary between honest differences of opinion over the best military equipment and systems and simple cronyism is fuzzy.  Consider, for example, the recent award of a large contract to build 100,000 homes in war-torn Iraq to HillStone International, a newcomer in the business of home building. When its president David Richter was asked how the newcomer swung such a big deal, he replied that it really helps to have “the brother of the vice president as a partner” (James Biden).[3] It would not be fair to disqualify bidders because they are friends or relatives of high government officials (As Afghan President Karzai’s brother Mahmoud said to us with regard to the shares of Kabul Bank given to him by its founders. The Bank is now in receivership as the result of the bank lending 95% of its deposits to its shareholders), but how can you tell what is merit and what is cronyism?

My point is that the defense budget needs to be on the table when our elected officials finally confront the cuts that must be made to the government’s expenditures to save the country. Defense spending needs to be cut not just because we can’t afford it, but also because our oversized military is weakening our economic base on which both our military and our political power in the world rest. And perhaps most important of all, over reliance on military power to the exclusion of diplomacy has actually weakened our security and standing in the world.


[1] The New Republic, editorial September 4, 2006, page 7.

[2] The Economist, “Sweden: The New Model” October 13, 2012.

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About wcoats

Dr. Warren L. Coats specializes in advising central banks on monetary policy, and in the development of their capacity to formulate and implement monetary policy. He is retired from the International Monetary Fund, where, as Assistant Director of the Monetary and Financial Systems Department, he led missions to over twenty countries. Before then, he served as Visiting Economist to the Board of Governors of the Federal Reserve System, and to the World Bank, and was Assistant Prof of Economics at the Univ. of Virginia from 1970-75. Most recently he was Senior Monetary Policy Advisor to the Central Bank of Iraq; an IMF consultant to the central banks of Afghanistan, Kenya and Zimbabwe; and a Deloitte/USAID advisor to the Government of South Sudan. He is currently a member of the Editorial Board of the Cayman Financial Review and until the end of 2013 was a member of the IMF program team for Afghanistan. His most recent book is entitled "One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina."
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2 Responses to Our Unsupportable Empire

  1. Pingback: How is military spending like welfare spending? | Coalition to Reduce Spending

  2. JSR says:

    Very good and informative. Thanks, Warren.
    JSR

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