Guns, Butter, and a Bag of Chips

Matthew Yglesias and Kevin Drum take issue with Fareed Zakaria on foreign policy. They take issue with this passage:

The greatest threat to America’s primacy in the world comes not from its overseas commitments, explains the historian Niall Ferguson in his smart forthcoming book “Colossus”: “It is the result of America’s chronically unbalanced domestic finances.” The mounting federal budget deficits that now stretch out as far as the eye can see will mean—if history is any guide—sharp cutbacks in American military and foreign-affairs spending. We will see a forced retreat of America’s foreign policy similar to the years after the Vietnam War—only the cuts this time are likely to be much, much deeper and the resulting chaos far greater.

My initial thought was there was no way Zakaria would say something that insipid and that he was going to refute Ferguson later on. He does not. Indeed, he compounds it concluding,

At some point denial will stop working, the markets will react, interest rates will rise and the budget will be under severe pressure. Then Congress will begin searching for cuts, and spending on foreign affairs, even military spending, will get the ax. And America’s grand new engagement in the world will turn out to be short-lived indeed.

Matt’s chief quibble is to note that we had balanced budgets during part of the Clinton administration which, while true, was a function chiefly of the .com bubble and had, so far as I can tell, zero impact on our defense budget. Kevin calls Zakaria’s comments “nonsensical” and notes, correctly,

[T]he fact is that America has never cut back on defense because of domestic spending. We cut back after World War II because the war was over. We cut back after Vietnam because the war was over. We cut back after the Cold War because the war was over. Domestic spending had nothing to do with it.

Right.

Back in the days when conservative Republicans were balanced budget hawks, Ronald Reagan would say that government, like a family, must live within its means and balance its budget. It sounded reasonable to me then. But I was 14 years old. All that’s asked of families is that they pay the bills when they come in. It’s not smart to buy perishable luxuries on credit–it would be inadvisable to take the family on vacation using a high interest credit card–but families routinely go into debt to buy a house, a car, and other big ticket items that they need. If an emergency comes up–mom needs an operation, the pipes burst, the transmission dies–then most families just go into debt and figure out how to make ends meet after the crisis is over.

By the same token, government quite reasonably takes on debt to pay for long-term investments in infrastructure, security, and to even out the effects of the business cycle. Ronald Reagan spent us into then-record deficits–which none of us thought we’d see paid off in our lifetimes–in order to defeat the Soviets. In hindsight, it’s possible that we spent more than we needed to. But the fact remains that the mission got accomplished and the benefits are accruing to generations to come; it’s not unreasonable that they are asked to pay some of the costs.

We’re currently fighting a global war on terrorists that most of us think is worth fighting. We’re also fighting back an insurgency in Iraq in a noble if incredibly controversial effort to create something like democratic government in what was once the world’s most brutal tyranny. Unfortunately, these events came right in the middle of mild recession followed by a slower-than-anticipated recovery. That’s a bad combination and going into debt was necessary. Some–including Kevin and Matt–argue that cutting taxes during such a time was unwise; I’d argue that stimulating the economy was was necessary. But we’d be undertaking massive debt regardless.

The United States has now, and will have as far as the eye can see, easily the largest economy on the planet. And that hegemony seems much more likely to increase rather than to recede. So, if we achieve a consensus that foreign policy on a grand scale is what we need, that’s what we’ll have. If we have to go further into debt to pay for it, then we’ll do just that. We can afford to make the payments on the loans.

FILED UNDER: World Politics
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Scott Harris says:

    I’m a little bit of a contrarian on Trade deficit issues. My take is that a Trade deficit indicates other nations subsidizing the US economy. For example, if a product is subsidized by a foreign government to make it more competitive to American consumers, the the net result is that the citizens of the country subsidizing the product are effectively being taxed to support the American lifestyle.

    Similarly, trade barriers to American products in the form of tariffs are effectively taxes on the populations of those countries, not the US corporations. Like your comment on Business Taxes in Virginia, the taxes are not really on business, but on the customers of those businesses.

    The United States has experienced a trade deficit for 20 years. Not coincidentally, our economy has exploded in that time frame. We exchange paper money for higher quantities of consumable products, and are able to live the high-consuming lifestyles we enjoy precisely because of the trade deficits we maintain with other countries.

    So in my estimation, any talk of deficit spending by the government has to be offset by the size of the trade deficit. Only when the deficit in government spending exceeds the trade deficit will our economy suffer.

    Conversely, if we were to run a trade surplus, then we would need to overtax our citizens to offset the trade surplus. I realize that this concept runs counter to the mercantilist attitudes of some economists, but I think experience has shown this to be true.

    From 1985 to 2003, the Trade deficit has been $4.3 Trillion. In that same period of time, the National Debt has risen from $1 Trillion to $5.5 Trillion, a net change of $4.5 Trillion. That is only a net $200 Billion Deficit over 18 years. This means that other countries are either taxing their citizens or underpaying their citizens to subsidize our standard of living in the USA.

    And how do we recover those dollars? The dollar drops against other currencies, and those foreigners holding American dollars lose money by selling low to American investors. We experience a mild recession and and then reorganize our society to take advantage of higher productivity and new technologies. The dollar rises, and foreign investors rush in to buy the dollar at high prices.

    As long as we can continue to convince foreign investors to continue this game of Buy High, Sell low on American assets, we can play this game indefinitely.

    And from a demographic point of view, America is in a very good position. Unlike other developed nations, American population is expected to grow to 358 Million people by 2025, while other industrialized nations experience declines in population. Currently, foreigners and Baby Boomer Americans are driving up the value of stock prices.

    But when these societies age, then the amount of money chasing a increasing number of stocks will be dramatically reversed. When the number of stocks start exceeding the available cash, and when the labor forces of these societies are not able to support the number of companies that exist, we will see a flurry of mergers, acquisitions, and outright business failures combined with a severe depreciation in the value of stocks. Retirees will be desparate to trade their stock certificates for real money to be used on real services and products.

    Once again, the phenomenon will be Ageing countries buying high, and selling low. Now is the exact right moment to be selling. When the economics of retiring and ageing populations kick in is when we should start buying back those assets at a discount.

  2. RicK DeMent says:

    But the 20,000 pound gorilla in the living room is energy costs. Higher efficiency in production, food yields, manufacturing, and well everything are energy intensive and oil is currently one of our most heavily subsidized commodities. With countries like China experiencing 33% increasing in demand for oil and a definable ceiling on bandwidth on petroleum production, and the price increases could throw a major curve into our growth for decades.