Karl Marx noted that “history repeats itself, the first time as tragedy, the second as farce.” The Bush administration’s war-funding practices are a variation of this, blending elements of both tragedy and farce. But they certainly exemplify history repeating itself.
The tragedy in current policy is that despite spending hundreds of billions of dollars over the last six years, the national-security position of our country has deteriorated rather than improved.
Farce is evidenced in the annual ritual of the administration refusing to include funds for Middle East military operations in its annual budget forecast. The costs of these needs are entirely unpredictable, it piously asserts. Then, a few months later, it returns to request a supplemental appropriation exceeding $100 billion, about what Congress and everyone else expected. But this then minimizes official estimates of federal budget deficits.
Regardless of the disingenuousness of the administration, it isn’t doing anything unprecedented. Donald Rumsfeld’s dissembling before a Republican Congress mimicked almost word-for-word Robert McNamara’s lies to a Democratic-majority Congress when McNamara was defense secretary four decades ago.
Nor is Congress’ cutting funds to end an unpopular war anything new. New England Federalists opposed to the War of 1812 did this from the very outset.
The historic repetitions in defense financing are one lesson in Robert Hormats’ valuable new book, “The Price of Liberty.”
Hormats, a managing director at investment bank Goldman Sachs, has impeccable credentials. After getting a master’s and Ph.D. in international economics, he served as a National Security Council staffer for eight years in the Nixon and Ford administrations. He held senior positions in the State Department under Presidents Carter and Reagan before moving to Wall Street.
While his book focuses on how the United States financed the military during both peace and war, it serves as a readable history of U.S. taxing and spending in general. As such, it rightly begins with Alexander Hamilton.
Hamilton, who had served as an aide to George Washington during the Revolutionary War, created economic institutions and policies that persist to the present. Before serving as Washington’s Treasury secretary, he authored many of the Federalist Papers that laid out principles for the new constitutional government.
Hamilton argued that for the United States to be strong and secure, it needed sound government finances. That required an efficient system of taxation and the ability to borrow large sums in case of emergency. The two were related, Hamilton argued. Without a credible system of taxes to generate funds needed to service government debt, private markets would not lend the funds needed in time of war.
Moreover, a reputation for fiscal integrity was crucial. If a government did not fully pay principal and interest on existing debt, it would not be able to borrow more money when the nation’s survival depended on it.
Hamilton’s argument, that strong defense depended on strong government finances, has been a bedrock of U.S. policy ever since. But some presidents and Congresses have been more responsible than others in implementing this approach.
Even as the Revolutionary War was brewing, economist Adam Smith described the quandary governments face during war. They are unwilling to “increase their revenues in proportion to their expense … for fear of offending their people, who by … an increase of taxes, would be disgusted with the war.”
Hormats describes how we funded wars from 1812 through Vietnam with a combination of increased taxes and borrowing. The proportion borrowed was great for major wars like the Civil War or World War II and small for minor wars with Mexico and Spain.
In all prior cases, however, governments found it prudent to increase taxes and cut low-priority domestic spending during wartime. The Bush administration has chosen instead to cut taxes and sharply increase domestic spending. This, Hormats argues, is irresponsible and a serious and unprecedented error. I think a majority of economists would agree.
The Bush administration is rapidly becoming irrelevant however. In a year and a half a new president will be inaugurated. One would think that accepted principles of prudent government financing – from Washington and Hamilton through Truman and Eisenhower – would be a major issue in 2008 campaigns, but they are not. If more people read Hormats’ useful book, as they should, this may change.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.