Collective-security agreements like NATO can foster efficient use of resources for national defense. However, member nations of such organizations may be tempted to free-ride on the expenditures of others.
President Jimmy Carter struggled with this problem 27 years ago, and President Bush faced it this week in his trip to Europe. Like Carter, Bush cajoled other NATO nations to increase their defense spending.
Whether he will be any more successful than Carter remains to be seen. Nearly two decades after the fall of the Berlin Wall, the status of NATO is ambiguous. It no longer has the clear purpose that it once did. Nevertheless, its members find it politically and economically useful even as many are lukewarm in terms of military spending.
Knowing history is important. The outbreak of World War I in August 1914 ended a century of relative peace for Europe. The new war was unprecedented in its human and economic devastation. The United States entered the war very late, with President Woodrow Wilson terming it the “war to end all wars.”
After the German surrender in November 1918, the victors organized the Paris Peace Conference with that objective in mind. They wanted to restructure the world so that such a terrible war never again would occur. (The restructuring included unifying three separate Ottoman Empire provinces — Mosul, Baghdad and Basra — into a new nation called Iraq.) The conference established the League of Nations to deal with any country that threatened peace.
Congress refused to ratify U.S. participation in the organization. And when a rearmed Germany under Adolf Hitler sought control of Austria and then Czechoslovakia, the Western democracies acquiesced. With the German invasion of Poland in September 1939, Europe was once again at war.
Two years later, after the Japanese bombed Pearl Harbor, the United States joined the conflict. At the end of the war in 1945, the victorious Allies saw the need for more effective mechanisms to maintain peace. The United Nations was established at the San Francisco Conference that year.
But a grim confrontation soon emerged between the Soviet Union and its one-time allies in the West. The Western democracies saw a need to combat Soviet expansion. In 1949 they formed the North Atlantic Treaty Organization.
In the memorable phrase of its first secretary-general, British Gen. Hastings Ismay, the purpose of NATO was “to keep the Americans in, the Russians out and the Germans down.”
Remembering how Hitler had conquered a series of nations piecemeal — Poland, Belgium, the Netherlands, France, Denmark, Norway, Yugoslavia and Greece — NATO members agreed on a strong collective defense.
But years without war dulled any urgency initially felt by some European members. By 1979, their defense spending had fallen sharply. Carter, who had sharply cut the U.S. military budget when first inaugurated as U.S. president, reversed course and called for the United States and other NATO members to increase defense spending by at least 3 percent a year for five years.
President Bush’s pleas this week eerily echo those made by Carter 27 years ago.
When Carter was beating the drums, U.S. defense spending was about 5 percent of total U.S. output, or gross domestic product, down from more than 10 percent at the height of the Cold War. It is now about 3.8 percent. As in the late 1970s, this U.S. proportion is twice that of many European NATO members.
Where is the economics in this? NATO had a political purpose — forging the collective political will that had been lacking when wavering democracies faced Hitler in 1938. But it also reflected the belief that the 12 initial members could get much more defense for the dollar if they coordinated their military spending and forces. A collective defense could achieve economies of scale and avoid overlap or duplication.
That certainly seemed true for the first 25 years. Unfortunately, in any international organization, whether NATO or OPEC, there always is an incentive for individual nations to free-ride on the efforts of others. An OPEC member that does not limit its own production still benefits from the higher prices caused by the cartel’s production cuts. A NATO nation that cuts defense spending well below 2 percent still benefits from the collective security provided by the organization.
Both Carter and Bush saw European nations as free-riding on U.S. spending. The nearly $500 billion U.S. defense budget is more than 70 percent of the total spending by all 26 NATO member countries. But the United States has no tool other than jawboning to induce other nations to increase their outlays.
Many Europeans would retort that the Soviet threat no longer exists and that the U.S. overspends to bolster its own status as the world’s sole superpower. Moreover, they would say, U.S. involvement in Afghanistan and Iraq stems from U.S. policies over which European nations have no control.
The United States could bear the burden of our defense alone. In the 1960s, we were devoting twice as high a share of output to defense as now, and per capita incomes were less than half of current levels. But there still are efficiencies in resource use that can stem from collective-security arrangements. We benefited from such efficiencies for decades. The question is whether in our increasing isolation we can continue to reap such benefits.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.