Posted on 12/08/2003 4:43:28 AM PST by Cincinatus' Wife
GUNS or butter: this is the choice historians conventionally say that governments face. Either they can build up their military capabilities to wield power abroad, or they can aim to increase their citizens' living standards.
In "The Rise and Fall of the Great Powers," the Yale historian Paul M. Kennedy developed this zero-sum model into a sophisticated theory of how empires work. In essence, you need wealth to be able to fight your rivals, but if you devote too much money to war, your wealth tends to stagnate. That's because (according to the theory) investment in the arms industry is less conducive to long-term economic growth than investment in sectors that ultimately satisfy some kind of consumer demand.
A simpler version of this idea suggests a trade-off between military spending and personal consumption. "Guns" are paid for by raising taxes, and this leaves people with less money to spend on "butter."
The Bush administration is currently engaged in an audacious - some would say reckless - experiment to disprove this theory. To judge by his actions, President Bush's response to the question "Guns or butter?" is: "Thanks, I'll take both." This, in short, is the guns and butter presidency.
It's generally a safe assumption that, in politics as in life, you can't have it both ways. But there are exceptions - provided you get the timing right. Today's economic circumstances mean that, in the short run, the administration can actually afford to spend billions simultaneously on conquest and on consumption.
In the long run, this double or nothing strategy has dangers - but, as Keynes remarked, in the long run we are all dead. All Mr. Bush needs to stand a good chance of re-election is 12 more months of guns and butter. In short, President Bush's second term depends on his being President Both.
Many a government has been impaled on the horns of the guns and butter issue. In the runup to Thanksgiving, however, two measures symbolized the Bush administration's conviction that it can grab those horns and take a ride. The first was approval of a $401 billion military appropriations package for next year, the biggest ever. The second was Congress's approval of a Medicare overhaul that increases the spiraling costs of the system by adding a drug prescription benefit.
But these are only two parts of a wider guns and butter policy. Consider the administration's commitment to spend $87 billion on the reconstruction of Iraq and Afghanistan. That comes on top of the initial military costs of "regime change" in both countries. Plainly, some costs of Iraq's recovery will be borne by other foreign donors and by sales of Iraq's oil. Nonetheless, no one seriously believes these other sources will cover the entire costs of "nation building."
Moreover, these costs are coinciding with increasing American donations to helpful countries. Aid to Jordan, for example, has soared from an annual average of $225 million over the past five years to $1.5 billion this year. After decades of decline in relation to gross domestic product, the combined economic and military budget looks set to rise in relative terms under President Bush. Yet this is the same president who pushed through three big tax cuts.
To critics of the White House, the rapid shift of the federal budget from surplus to deficit is a sign of profligacy - part of what they would call the Enronization of public finance. It is true that there are real constraints on how much the administration can have of both guns and butter. Yet these constraints may prove to be weaker (or, to be precise, further away in time) than Mr. Bush's critics anticipate.
First, recall that the United States has broken the guns or butter rule before. Under President Ronald Reagan, substantial increases in military spending coincided with comparable increases, relative to gross domestic product, in personal consumption - that proportion of G.D.P. that the public, as opposed to the government, spends.
From 1979 to 1986, military spending leaped from 4.6 percent of G.D.P. to 6.2 percent, while personal consumption rose from 62 percent to 65 percent. Nor was this unprecedented. From 1965 to 1968, Lyndon B. Johnson managed to combine the guns needed to fight the Vietnam War with the butter of the Great Society - not to mention the ballooning consumer society.
The crucial point, of course, is that in the short term at least, fiscal policy is not a zero-sum game: a government can easily increase military spending without reducing consumer demand if it finances the higher spending by borrowing rather than taxation (and provided taxpayers do not view borrowing as future taxation and reduce consumption in anticipation).
The downside is that such debt-financed fiscal policies led to inflation in the past . In the late 1960's and in the late 1980's, deficits were partly financed by printing dollars, which ultimately led to higher prices.
The good news for Mr. Bush is that this is unlikely to happen now. After all, he inherited an economy on the brink of a deflationary crisis. The bursting of the market bubble of the late 1990's posed a threat to the American economy comparable to the crash of 1929 and - with the wrong policies - the bust might have been as big.
Unlike Herbert Hoover, however, Mr. Bush did not respond to the crisis with spending cuts and tax increases - quite the reverse. The tax cuts of his presidency may not have been especially well aimed to lift consumption, but they have had at least some countercyclical impact. Plainly, the lessons of the Great Depression have been learned not just in the Federal Reserve (which responded with swift cuts in interest rates). They were also learned in the Oval Office. That's why the downturn of 2001 was so shallow and short.
It is true, as former Treasury Secretary Robert E. Rubin and others like to point out, that President Bush has been greatly helped by the surpluses he inherited from the Clinton administration. From 1995 to 2000 the gross federal debt declined as proportion of gross domestic product, from 66 percent to 57 percent - a manageable burden compared with those of countries like Italy, Belgium or Japan, all of which have total national debts in excess of 100 percent of G.D.P. Those who panicked about the debt under President Reagan failed to see how manageable it was. It's even more manageable today.
Even more important, falling interest rates have drastically lowered the cost of servicing the federal debt. Back in 1995, interest accounted for $232 billion a year - more than 3 percent of G.D.P. Last year the figure was down to $178 billion, just 1.7 percent of G.D.P.
All this means that the Bush administration has considerable fiscal room for maneuver. The deficit (the excess of this year's spending over taxation) may have gone up. But the Congressional Budget Office forecasts that the federal debt (all the government's accumulated borrowings) will actually decline relative to G.D.P. in the years 2005 to 2013.
The catch is that these and other official projections omit the federal government's implicit liabilities - not its official debt, financed by selling bonds, but the gap between the anticipated costs and the anticipated revenues of Medicare, Medicaid and Social Security. One recent estimate put this fiscal imbalance as high as $45 trillion - seven times the size of the official debt. The most important effect of the Medicare overhaul is to make that mind-altering number even bigger.
An interesting question is why this fiscal black hole is not causing more alarm for financial markets, because history suggests that a government with debts on this scale sooner or later either defaults or resorts to printing money, thus re-igniting inflation.
Long-term interest rates have indeed ticked up slightly since their nadir last spring, in anticipation of higher inflation. But this will not be the kind of inflation experienced in the 1970's and 1980's. So powerful are the deflationary forces today (notably in the second and third biggest economies, Japan and Germany) that Washington can splurge on its military and social services with only a modest impact on expectations of inflation.
It helps that the United States has a unique advantage over all other sovereign borrowers: central banks and other institutions around the world need to hold dollars as the currency most frequently used in international transactions. While this is true, America can count on selling large amounts of dollar assets, like 10-year Treasury bonds, to foreigners - very large amounts. In the last three years, the share of federal debt in foreign hands has risen from just over a third to almost a half. In particular, China has invested heavily in the dollar. Since 2001 Chinese international reserves have roughly doubled, from $200 billion to $400 billion.
The only imminent danger is that the dollar could slide sharply against Asian currencies, as it has against the euro. But the chief losers then would be the Asians.
Part of President Bush's appeal to many Americans is that he combines a moral certainty about ends with a ruthlessness about means. To achieve these ends, the president has no compunction about exploiting the nation's fiscal and monetary strengths - to the max.
No question, the policy of having both guns and butter postpones difficult decisions about the future of the welfare system, principally Medicare and Social Security. But it also ensures the continuation of the nation's "full spectrum dominance" in warfare.
Yes, all that military spending may not be enough to stabilize Iraq or prevent terrorism. All those tax cuts may not generate a sustained recovery. Still, if President Bush had turned out to be President Bust, his chances of re-election would have been much lower than they currently are as President Both.
Niall Ferguson is a professor of financial history at the Stern School of Business at New York University. His new book, "Colossus: The Price of American Empire," will be published next spring.
Well, it worked out OK with the US. We won the Cold War, and started a record-breaking economic expansion. So, at least in part, Kennedy's theories were disproven shortly after he published. But the NYT presents this as George W. Bush trying to swim against the tide and do something no one else in history has ever accomplished.
Just watch.
Translation:
Accumulating debt is not a tax on us. It is a tax on our children and grandchildren therefore it is OK.
Regards
J.R.
Yeah right....dude, if you don't invest in guns, you'll be speaking arabic and your wife and daughter will be forced to wear burkas. Then how much butter will you have?
Our taxes are dropping and the economic engine is picking up. Increased revenues are coming in and the defecit will shrink. Sounds like a plan to me.
He looks down his nose (Part of President Bush's appeal to many Americans is that he combines a moral certainty about ends with a ruthlessness about means.), gets in his shots (The Bush administration is currently engaged in an audacious - some would say reckless - experiment to disprove this theory.) and ultimately... tells us nothing.
This is obvious. There are many taking shots at Bush, because his success irks them.
Of course, our Grandchildren may spit on our graves as they groan under their tax burden.
Say you cut taxes for 100 workers and thus get revenues of $200. SS for that yr is $200 as well so you're covered. Fast forward to 2020. Instead of having 100 workers you now only have 50. In addition the numbers of dependants has increased making the yrly cost $400. Cutting taxes will not solve this problem.
An oldie, from nearly three years ago, but worth a retrospective.
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