“Can We Afford the Military We Need?” was a seminar held at the American Enterprise Institute on June 26, 2007. This is an unauthorized, unannotated transcript covering the first 82 minutes of the 2 hour AEI event. For background and interpretation, please refer to the Housing Doom post “Can We Afford the War We Want?” (July 30, 2007).
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Kevin Hassett [0:00:00]: If folks could finish grabbing their muffins and take their seats we can begin the program.
This is … we’re gathered here to discuss “Can We Afford the Military We Need.” I’m Kevin Hassett, Director of Economic Policy Studies here at the American Enterprise Institute.
With the wars in Iraq and Afghanistan increasing military spending, and potentially increasing it for a long time, we think that there’s been too little debate about the fiscal demands that will put on the country. And that’s why we have assembled this excellent panel today. [0:00:42]
The first speaker will be Bob Hormats, who’s Vice Chairman of Goldman Sachs International. He joined Goldman Sachs in 1982, became Managing Director in 1998, and has written this really wonderful book “The Price of Liberty: Paying for America’s Wars,” where Bob analyzes the historical approach that our country has taken to war, and compares it to the approach we’ve taken now. [0:01:07]
After Bob’s presentation we’ll have two speakers — and I say speakers rather than discussants because this is more of a conversation than a presentation and discussion — Fred Kagan is a Resident Scholar in Defense and Security Policy Studies at the American Enterprise Institute. He’s the author of “Choosing Victory – a Plan for Success in Iraq,” and is uniquely situated, I think, to help us think about how much money we need to spend on all this and what sort of fiscal demands this will put on the government. [0:01:39]
After Fred speaks, Tom Donnelly, who’s a Resident Fellow in Defense and Security Policy Studies at the American Enterprise Institute will add his remarks on the same topic. [0:01:49]
We’re going to begin with a presentation by Bob of about half an hour, although I’m not going to be really strict about that, and then the discussions will each be about 15 minutes, and then we’ll open up for a general conversation. [0:02:02]
Bob Hormats: … Better now? OK. Again, thanks very much … This is, I think, a very timely subject, and as we’ve discussed earlier, it’s timely and it’s troubling in the sense that there has been in the past, and you can go back to even after World War II, and certainly after the Korean War and after the War in Vietnam, and probably after the Iraq War however it ends. There is likely to be a backlash against military spending. Even after the great victories in World War II there was this notion that somehow you can have this enormous and prolonged peace dividend, and in fact if you read Acheson’s memoirs, there was a [temporary?] to gut the military after World War II, and Acheson puts in that the invasion of the North Koreans in the South saved us. Saved us in the sense that it made people realize that there was a threat there, that there was a communist threat, that the Cold War was the real issue and not just some figment of some planner’s imagination. [0:03:21]
But the basic point of the book — and the title “The Price of Liberty” comes from a quote from Alexander Hamilton — and Hamilton, assessing the financing of the Revolutionary War, where lots of borrowing took place from Americans and from Europeans, particularly the French and the Dutch — Hamilton said, “this debt is the price of liberty.” It has to be repaid, and it has to be repaid and it has to be repaid faithfully for two reasons. One, this was a new country and it had not yet established its creditworthiness in the eyes of its own people and in the eyes of the world, so it had to do that. But there was a very powerful national security argument that was linked to that. And that probably carried the day in favor of Hamilton’s what was called then funding plan. And it was that if … when you fight a war and you borrow a lot of money, as was done during the Revolution, you’d better pay that money back quickly and put the government’s balance sheet in good shape, because there’s surely going to be another war, and almost everybody anticipated there would be one with either Britain or France. You may have to go to the same countries you borrowed from originally to get more money, so if you’re going to borrow for the next war you’d better pay back the debt you incurred during the first one. [0:04:36]
So a strong financial balance sheet was considered by Hamilton to be essential for strong national security — to do 2 things: one, to ensure that you could borrow if you needed to; and second, so that the books of the country, the fiscal situation of the country, was resilient enough to deal with another war, when and if it came along, as I say most people anticipated it would. [0:05:01]
So one theme throughout almost all American history up until the 1960s was that when you fought a war you raised taxes, but you couldn’t raise taxes sufficiently to pay for the war, so you had to do a lot of borrowing, but you’d better repay a lot of that money quickly to strengthen the government’s balance sheet to deal with the next emergency. [0:05:23]
The second point that really permeates the history of this country also was that wartime financing is not just about raising money for the war. It’s about engaging the American people in the war effort. It was about giving them some sense of participation in the war. When your troops are fighting abroad, Americans should be making some sacrifices at home. The great wartime leaders have all recognized this, they never shied away from asking sacrifices of the American people. This was true with Lincoln. Lincoln went around … the Income Tax was established during the Civil War. Primarily by Congress rather than by the Executive Branch — Congress realized that you had to demonstrate equity in the way the war was paid for, and so they imposed an Income Tax. And they began to realize they could raise a lot of money, so they raised it throughout the war. [0:06:16]
But it was also to demonstrate that Americans were doing something more to support the Union Army. And it … they also had a big bond campaign to get people, as Lincoln put it, “all Americans,” as he put it, Northerners at that point, “of modest means should make some commitment to supporting the government,” and that meant buying bonds. And the bonds were denominated at very small levels, so that people could buy them. [0:06:45]
World War I was very much the same thing. It was called “capitalizing patriotism,” which I think is a terrific term, when you think about it. There were these bond drives that were organized by Wilson, and more specifically by his Treasury Secretary, a fellow by the name of William Gibbs MacAdoo, and there were these Liberty Bond drives. Every few months there would be a Liberty Bond drive and they would go out — entertainers would go out to various parts of the country and say, “look, if your husbands or sons, brothers were fighting in the trenches of France, you should be fighting in the financial trenches of the United States by buying war Bonds.” And there were huge rallies in this effort to capitalize patriotism. Wilson goes before the Congress and says, “Look, this is a big war. You’re going to have to pay for it.” There was no attempt at shortish … to downplay the cost or say, “maybe it’s going to be cheap.” The actually asked for more authorization for bond funding than they thought they’d need at the outset, just to explain to Americans this was going to be an expensive war and they had
a responsibility to help to marshal the funds to pay for this war. [0:07:53]
In World War II, very much the same thing — a sense of engagement in the war effort. Even more so. Roosevelt, in his first State of the Union speech after Pearl Harbor, goes before the American people. He doesn’t try to downplay the costs of the war. He goes before the American people and says, “War costs money.” That means taxes and bonds, and bonds and taxes. It means we have to give up luxuries. It means everyone has to give up the things we’re used to – ordinary things. Roosevelt, on his own initiative, cuts back, and in some cases cuts out of the budget the kind of New Deal programs that he had himself had proposed several years earlier. Cut them out of the budget. He said, “I like these programs, these are my programs, but we need to have sacrifice, and that means I have to sacrifice some of the programs that I initiated, everyone’s going to have to do this.” [0:08:45]
And the second thing he did was interesting. He said, “It’s not sufficient for the United States to have a superiority in weaponry. It has to be …” as he put it “… a crushing superiority in weaponry.” Now why did he say this? He was saying it because we’re not trying to do this on the cheap here. This has to be a crushing superiority. Why? Because he wanted to hold down casualties. There was still a lot of isolationism in the country in 1941. We tend to forget that. And Roosevelt was concerned that it wouldn’t all evaporate, even after Pearl Harbor, that if the fighting in Europe didn’t go well there would be people like Lindburgh and others, America Firsters who would say, “the sacrifices are too great. Bring the troops home.” [0:09:31]
He was worried about that. In retrospect it sounds incredible. But he was worried about it. And one indication of how strong the isolationism was, prior to the war, in the early part of 1941, there was a vote on whether to continue the draft. It passed in the House by 1 vote – 203 to 202. And only passed because Roosevelt got people in, and sort of beat them up a little bit and told them they had to vote for it. But it shows you, a lot of people with war raging in Europe, and raging in Asia, draft passes by 1 vote. [0:10:05]
So Roosevelt said, “Look, if we don’t spend a lot of money and give our people the best equipment to hold down casualties …,” even though the casualties were ultimately were of course very high, “… it will strengthen the sort of isolationist forces in the United States.” And moreover … so the better equipped they are the fewer the casualties there’ll be — and moreover we want to equip our allies because if they’re well equipped, they can do some of the fighting, and again, again helps us a) to win the war; and b) to hold down casualties. So he was very clear, you needed to do this. [0:10:35]
During the Korean War, again, Truman … in fact the Marshall income tax is even higher during the Korean War than World War II. Truman goes before the American people — Truman didn’t like borrowing. He was a real fiscal conservative, as was Dwight Eisenhower. And they didn’t like any borrowing, so they wanted to finance as much of the war as they could with taxes. [0:10:56]
And Truman did that, and Eisenhower was a very strong fiscal conservative. He did not like budget deficits. He insisted that when you spend money for national security, domestic programs have to be restrained. And after the threat was over and he did something called “the New Republicanism,” which essentially was to start doing things like the highway program, which he justified as being for national security. He did a number of other things, but Eisenhower’s genius — and he comes out in this book extremely well — when I was starting the book David McCullough said to me, one thing I’ll always remember, he said, “when you start this book you will find that the events and the people you think will be the least interesting will turn out to be the most interesting.” And it was true. He gave me the example — when he wrote this book, he wrote a book on John Adams — it started out to be Adams and Jefferson. People told him, “Oh why are you writing on Adams? Jefferson’s far the more interesting of the two.” Turned out that he concluded Adams was the more interesting of the two because we didn’t know that much about Adams before he wrote that. And the same is true with Eisenhower. [0:12:07]
Eisenhower was one of the great heroes of the book because he understood the need to pay for a strong military, but not to give into pressures for such a huge military budget that it would, as he put it, bankrupt the country, or cause a lot of inflation. [0:12:27] Ironically, and I wasn’t aware of this when I started writing the book, in the early part of the Cold War, during the 50s, the early part of the 50s, there was a feeling that the Soviet objective was not so much to have a Third World War with the United States, although there were some after the Korean War who thought that was going to happen, but the main concern was that it would create the impression in the United States that it wanted a Third World War and cause the United States to spend huge amounts of money on what was called then “preparedness.” And that would cause a lot of inflation, that would cause big budget deficits, the economy would weaken, and that we would be back in a depression, or at least the kind of downturn we had right after World War I, and that Americans would lose interest in the Cold War, and would, in effect, decide, “We want to return to normalcy, if the Soviets want to take Greece and Turkey, let ‘em have it.” [0:13:25]
There were a number of people who thought that. In fact General Bradley, who was Chairman of the Joint Chiefs, was concerned about that, the conservative Chairman of the House Appropriations Committee Mayhon thought this — there were a number of people who believed this. And Truman and Eisenhower believed it. So their view was, we need enough to make sure we have national security at a high enough level, but if you overdo it, you will get a weakened economy and a backlash against a robust American position in the Cold War. [0:13:58]
So Eisenhower said we need to budget for the long haul, not get out of control budgets for any given year, but a steady increase in national security spending that was sufficient to deter the Soviets, but not so large that it would undermine the economy. [0:14:12] Well the irony is, in the very end of the Cold War it was not the US that went bankrupt, but essentially it was the Soviet Union, for the same thing. Because they spent too much on the military, relative to the strength of their economy, and for a variety of reasons they couldn’t keep it up. And Reagan understood this. Reagan understood this point. And what’s interesting is that one of the most interesting little vignettes about this comes from the commanding general of the Red Army in Afghanistan, who was quoted as saying that the people in the Kremlin have played right into the American’s hands by trying to spend too much money. And the economy simply couldn’t sustain that. [0:14:49]
Well I’ll skip over a number of the other issues and go to the current issue that we’re going to be discussing, and that is this war, and the wars – and the Iraq War and the Afghanistan War and then the longer term War on Terrorism, which is going to last a lot longer than these two individual wars. And that is that … the question is what can we pay for this national security, the military strength that we need. [0:15:20]
And the answer is we are capable of paying for it. The national security budget today is, as a portion of GDP, very small compared to historic levels — as a portion of GDP. For instance, World War II, depending on how you calculate it, at its height about 35 percent of GDP give or take. Korean War, between 10 and 15. And the Vi
etnam War roughly 10 percent. One can argue with these numbers depending on how you calculate them, but they’re rough orders of magnitude. [0:15:53]
And this war is, depending on how you calculate it, when you add the two up and national security in general, maybe one, one and a half, maybe the highest two percent of GDP. So as a portion of GDP it’s relatively small. But it’s still, by the end of this year, going to be the second most expensive war in American history, and the reason it’s as small proportion of GDP is because the economy has grown so dramatically over the last 60 years or so since World War II. So we can afford, as a portion of GDP, this war. [0:16:25]
However, the problem comes because, as a portion of discretionary spending, the military takes roughly 50 percent of discretionary spending — again give or take, you can calculate it in different ways, but that’s the rough order of magnitude. So the problem is going to come, I think, because Americans have been led to believe that you can finance national security on the cheap. It’s been financed large — the Americans were really not told, they were led to believe at the outset of the Iraq War that it would be short and cheap and it would be paid for by oil. Well, it’s been long and expensive and it’s not going to be paid for by oil. [0:17:02]
Second, Americans never were engaged in this war. After 9/11 there would have been a great opportunity to engage Americans in the war and say, “Look, we’re at war here.” I wasn’t then and I wouldn’t now advocate that we should have had a tax increase then, the economy was weak, but we should have, and could have had some request for response by the American people to engage them. Either a call for a much bolder energy policy, given the situation in the Middle East, and where the terrorists came from. We could have had a call to put a cap or cut back on various kinds of earmarkings — earmarkings in fact went up dramatically after 9/11. They should have been curtailed, it would have been a perfect opportunity. Or even a little checklist on your taxes — I’m not talking about a tax increase — a little checklist to say, “I want to make sure that a portion of my taxes, or an additional $50, goes into some kind of national security function. Just a little signal of engagement by Americans. [0:18:11]
And much the same thing after the beginning of the Iraq War, which at that point, the beginning, was a popular war. We tend to forget that now, but it was — it got substantial votes in the Congress. Again, that would have been an opportunity for bolder energy policy, or cutbacks in non-essential domestic spending as occurred during World War II and the Korean War, and even the Vietnam War. The Vietnam War, after Johnson was confronted by Wilbur Mills he had to cut domestic programs also. [0:18:42]
So past wars have seen these cuts in domestic programs, again as a measure that … demonstrating some measure of sacrifice by Americans. Something … it’s not business as usual, it’s not ordinary kinds of spending going up, its ordinary kinds of spending going down to make room in the budget to pay for the war. However sizable it is or was, but this never happened. And the problem is with Americans not being engaged in the process, it’s going to make it a little harder, in fact perhaps a lot harder, to come up with the money we need for our national security. And let’s just very quickly tick off the backlog of needs. [0:19:25]
First of all, a lot of weaponry was destroyed, and has to be replenished, a lot of it has been worn out, a lot of this weaponry was designed for the Folder Gap, not for desert fighting, a lot of maintenance is required. A lot of this weaponry is just obsolete — after the war can’t be used. So you’re going to have to replenish to bring the military back to where it was. Second, a number of systems simply have not been funded adequately during the war, because more money is going into the war effort. Understandable, but nonetheless there is going to be a backlog of unmet needs with what the military calls recapitalizing the military, and everyone you talk to, the Chiefs, and I did writing this book, they’ll all tell you what their lists are — it doesn’t mean they should get everything they want, but some of them need certain things to bring the military up to a modern capability. [0:20:10]
Third and particularly to fight the War On Terrorism with much more sophisticated weaponry. Third, the wounded veterans. This is going to be expensive, and it’s going to be long term. They’re going to need more money, and they have to be funded. That’s part of the budget. Fourth, and it will have to be a part of the budget for quite some time. [0:20:29]
And then you have a lot of the 9/11 Commission recommendations, many of which, indeed the majority of which, have simply not been properly or adequately funded. And when you talk to Hamilton and other members of the group — Tom Kane, they will tell you that there is this unmet need for strengthening our capabilities at home. Again they don’t need to get everything, shouldn’t get everything, but a lot of it they do need and should get — communications capabilities, first-responders, public health services — a lot of these things haven’t been adequately funded. Some of it, as I say, is not essential, but some is. [0:21:06]
And the … but challenge, the challenging environment comes because entitlements are going to rise very dramatically in the next decade. Now even if the military budget were zero, even if you had no defense spending, these entitlement programs become unsustainable fiscally at the end of the next decade. They will absorb virtually all the revenues in the budget if they are allowed to continue as they are. [0:21:33]
So what happens then? They squeeze discretionary programs, and defense is half of all discretionary spending, so there is likely to be a big squeeze on Defense. Now you can avoid this to a degree by raising taxes to meet the additional requirements for domestic programs and for national security programs and for entitlements, but there’s only a certain amount you can raise taxes without a very serious impact on the economy. Or you can borrow more money and bloat the debt of the United States, and that’s an option too, but again, that probably pushes interest rates up. It certainly makes us — and this will be the last point — makes us more dependent on foreign capital. [0:22:18]
And this is another issue that’s different from the past. If you say: What’s different about this from the past? it’s … a) this is the first war we’ve funded without a tax increase. Now I’m not arguing for one, but I think it’s historically correct that that’s the case. The economy was weak and perhaps it was inappropriate, but nonetheless it’s true. Second, it’s the first war we’ve funded without cutting domestic programs — non-military domestic programs, and third it’s the first war where we’ve funded essentially where the borrowing has come substantially from lenders abroad. If you look at a large portion of the federal debt, the new federal debt is being bought by foreigners. In any given month it’s not necessarily the majority, but it’s substantially. In every other war there’s been virtually no foreign financing of the war. Except the Revolution. But the War of 1812 was with Britain, Britain was not financing us. The Civil War — Britain was almost prepared to support the Confederacy, so it wasn’t a big financier of the Union Army [laughs]. World War II, uh World War I we were lending money to the Europeans, World War II we were lending money to the Europeans. The Korean War Europe had not yet come back to good health and they certainly weren’t giving us money during the Vietnam War. Most Europeans didn’t support it anyway. [0:23:37]
So this is the first time we’ve done this. Now the First Gulf War, we didn’t borrow money, but we did get a lot of the oil producers to defray the costs of the United States. But the b
orrowing has been very heavily supported by bonds that are bought by foreigners. And this is all well and good for the time being. It’s very nice to have this money. As opposed to Vietnam where we had to finance it all ourselves, and it pushed interest rates up. [0:24:04]
One of the reasons this war has been able to be financed relatively easily without a big increase in interest rates is … 1) the Fed has been lowering rates, or up until a little while ago, and b) foreign money has come in to help. Well, what happens if, in the next decade we have bloated budget deficits because of these entitlements and other spending programs, and are the foreigners going to continue to finance merrily along this rather large and growing imbalance — that’s an issue. And the second is, heaven forbid, but suppose there were an act of terrorism. [0:24:40]
We forget that at 9/11 we had four years of budget surpluses. We were working our debt down. If the debt continues to rise in the next decade because of these mandatory programs, and most people anticipate it will, we may not look quite as good in the eyes of foreign lenders. And second, if there were to be an act of terrorism, and it were on infrastructure as opposed 9/11, which really didn’t affect huge infrastructure. Buildings, yes, but … picture a dirty bomb in the center of a large city or an anthrax attack on a large airplane or airport or a train station or subway system. These will have a much more serious and prolonged impact on the economy, and it may not look as good an investment as it does today. And a lot of that foreign capital on which we are relying very heavily may simply not be there. Or if it is there, the foreigners will demand a higher risk premium and that will take an already weakened economy, weakened by whatever kind of attack occurred, and cause it to be weaker. [0:25:46]
So we’re, our military financing … funding the military in the next decade, I think is going to be very challenging particularly if, as I said at the outset, people are soured on the military because they are sour on the War in Iraq and they want a big peace dividend after the war. [0:26:06]
So these are going to be very challenging circumstances for people who believe, as I do and as I think many of you do, that we’re still engaged in a very — even after Iraq and Afghanistan are over — we’re still engaged in a long and potentially very lethal War On Terrorism. And some people say it’s not the right term, War on Terrorism — whatever it is there are people around who are trying to acquire nuclear weapons and weapons of mass destruction. And if they can acquire them they will try to deploy them and they will try to deploy them in a big American city like Washington or New York or Los Angeles or somewhere else, and, and, or on some port facility like the Port of New York or the Port of Long Beach. [0:26:48]
But their aim is to do enormous damage and we have to demonstrate, by the way we manage our finances, that we’re resilient. And we can come back. Because as with the military, weakness invites aggression. If they believe that they can — there are already people out to get us — if they believe that they can wreak a lot of harm, in addition to the normal harm they’re going to try to do, because our fiscal system is simply not in good shape, so you’d get a cascading impact of whatever happened by disrupting our financial system. That’s just an added incentive for them to go at us. Not that they need much more incentive already, but it would be. [0:27:32]
So these are the kind of risks that I foresee, and the kind of challenges that I think are before us, and one would hope, just to sum up, that if you look back in history, the key to addressing these kinds of issues is to a) be very candid with the American people about the threat they face; b) be very candid with the American people about how much it’s going to cost; and c) be very candid, and develop a strategy for paying for it — have a multi-year strategy that you present to the American people and say, “these are the threats, this is what we’re going to have to do to make sure we are prepared to meet those threats and our economy is resilient enough to deal with any emergency that might occur over the course of the next decade or two.” [0:28:20]
So this is sort of a very quick summary of a book, but I think it … I hope it gives a sort of … the key elements, and most importantly opens a debate and we can talk about how to address some of these issues — and there may be some people with a differences of opinion, and that’s fine too, because I think — the key is the country needs a debate — an open debate — on these issues now, while we are on a campaign season, because if you wait too long, people are not aware of these kinds of issues, and then whoever gets into office in two years is not going to have the understanding of the American people for addressing them. Thank you. [0:29:00]
Kevin Hassett: So Bob, if you were President and dictator, so that you didn’t have to deal with a reluctant Congress, specifically what would you do?
Bob Hormats: Well I think there are a number of things that need to be done. One, as I say, is have a very clear idea, focusing first on the national security element, have a very clear idea of what the kinds of threats we face are, and explain them to the American people. Second have a strategy for paying for it, for meeting those threats and for paying for it, and not try to do it on the cheap or through back door things like supplementals, and explain like Roosevelt and Wilson and others and Lincoln did, Truman, the kinds of money requirements that are going to be … that are to be required by … to meet these needs. And third, I think you’ve got to, we have to at some point — and sooner rather than later — enter into a dialog on reform of entitlements because, as I say — even if the military budget were zero that has to be done — but it’s not zero, so it has to be done for domestic reasons, simply because these aren’t sustainable, and they’ll squeeze out other programs — military, education, agriculture, whatever it is, they’re going to get squeezed if we don’t have more sustainable entitlement spending that’s more closely correlated with the inflows of money into those programs. [0:30:31]
They don’t need to be in balance, but they can’t get so far out of kilter as they now will if some changes are not to take place. And I think we need something on the energy side — not just on the conservation side, but also on the production side. And I think we’ve got a lot of potential for developing our own domestic sources of energy, both conventional and non-conventional. I think we’ve got to do a lot more along those lines. [0:30:58]
Again, I think it’s a national security issue as well as a national economic issue. Those are the sort of broad outlines, and we can go into detail, but unless there is a good dialog in the current environment, and during the campaign, whoever wins won’t have a mandate to do something, any of these things. And the public understanding of the need to them won’t be there. That’s my worry, that none of these are easy, and I don’t have or pretend to have answers to all these things or even most of them. But what I do know from the past is that unless there is a recognition that tough choices are facing us, and unless there is a recognition that the government’s going to have to take some actions that are going to be unpopular with certain people in order to deal with these longer term issues I think we will be in trouble. [0:31:47]
One of the things if you go back in American history — the Founding Fathers, and up through the Eisenhower period, they were very much concerned that they were not simply representing current constituencies, the current generation. They talked about the Founding Fathers, their posterity. They were quite conscious of the need to make decisions, not so much decisions that affected, or
were popular in the current environment, but that created a stronger country and a more viable financial system for coming generations. They all talked about it — Washington talked about it, Jefferson talked about it, Lincoln talked about it, Eisenhower, if you read his farewell address talked about this — not leaving the next generation with a huge amount of debt, not leaving the next generation with unmet national security requirements — Eisenhower’s farewell address, if you look at that it tells you exactly how to deal with some of these issues. He had this great sense of vision. [0:32:51]
I asked Andr- … General Goodpaster once, I said, “where did he come up with this stuff?” and Goodpaster, who was his national security advisor for a while said, “He wrote it himself.” Sherman Adams and others helped him, but these were his ideas. So there are … there have been people in the past that have had a considerable amount of vision and who were not afraid to go to the American people and ask them to make tough choices — ask them to make sacrifices in the interests of the country, and I think we’re going to need that today. [0:33:22]
And obviously the devil’s always in the details for sure, but you’re not going to get to the details unless the leader of the country is willing to engage the American people in a very tough debate over the need for change, and then the details can be worked out once Americans buy into the fact that important changes are required. [0:33:44]
Kevin Hassett: OK, thanks very much. Now I’ll turn it over to Fred and Fred, could you and Tom switch name plates, I noticed that you sat down behind the wrong one. [laughter]
Frank Kagan: Tom takes full responsibility for everything I am going to say. Thank-you for that presentation and for writing this very important, very interesting book. And it is a pleasure to be able to comment on it. [0:34:12]
What I’d like to do is to offer a little, slightly broader, historical perspective, because I was a historian before I became caught up in the ongoing history that’s being made in Iraq. And I think that’s it’s worth understanding that America is never as unique as we think we are. And what did this sort of process that Mr. Hormats described is not unusual — in fact it’s the norm in modern warfare. And you can make the argument that modern warfare consists of the continual search and discovery of new ways to pay for war when all had been thought to have been lost on the fiscal front. And this goes back for a long time. [0:35:01]
What I’d like to talk about for a moment is the Napoleonic period, where this, which is in a certain sense, the most apposite, because it’s where the notion of funding wars through heavy borrowing really becomes established as a standard practice. And it’s established, of course, by the British, who do it. [0:35:23]
The point, just to set the scene very briefly, is to say that before the wars against Napoleon that started in 1805, the Continental Powers had spent 10 years fighting the French Revolution and were exhausted. The Austrians thought that they were on the verge of bankruptcy, the Russians thought that they couldn’t possibly spend any more money fighting wars, and really didn’t want to, the British were very upset about the borrowing that they had to do during the Revolutionary Wars, and didn’t want to do that anymore, and there was a general sense that they had reached the limits of what they could reasonably spend on defense — Or what they didn’t call it defense then, they called it war. [0:36:00]
And so there was a real sort of pacifism on the Continent after the Revolutionary Wars in 1801 and 1802, driven by this sense that the nations, or the states of the West outside of France had really run to the end of their resources and couldn’t afford to pay for war anymore. [0:36:20]
And it turned out that they could. They raised taxes, they borrowed very heavily, they did a variety of things that were very heavily against the fiscal orthodoxy of the time, that they thought would have been impossible. [0:36:35]
Now there was no equivalent of the sort of entitlement spending, of course, that we now have, but there was an equivalent in the political sense, that especially in states like Austria, and even Russia, it was felt that the regime was very weak, there was a revolutionary movement abroad in Europe. Monarchies were under attack, aristocracies were under attack, literally in many cases. There was revolution within Austria that had to be suppressed at various points. And the fear was that if they raised taxes, or did a variety of things that were unpopular, monarchies might fall. [0:37:09]
And so that it was impossible politically to do this sort of thing, tremendously dangerous politically to do this sort of thing. In many respects more dangerous than attacking entitlement programs today because after all, the Congressman who gets that wrong just gets unelected. In the days of the guillotine a leader who got it wrong risked rather more than that. [0:37:29]
So there was a real sense that they’d reached a hard limit. They’d reached a point where there was no moving beyond. And of course, that’s a view that you can hold as long as you think that the war is a luxury, and that it’s something that you can engage in or not as you please. And that you can restrict your engagement depending on how much you feel like spending. [0:37:51]
And that brings us to one of the most interesting bits of, sort of etymology that I find — that’s not quite the right word [he wanted "semantics"] — in the current discussion. The notion that defense spending is discretionary spending. Well from a technical point it is discretionary spending. There’s no mandate in law, other than the Congress’ constitutional obligation to maintain the Navy. There’s no mandate in law even to have an Army. If Congress decided tomorrow not to have an Army there’s no Constitutional requirement for Congress to fund the Army. And so in that sense it is entirely discretionary. [0:38:26]
But in the sense of nations surviving in a world of threats, defense spending of course is not at all discretionary. And yet that’s the context in which we discuss it, compared to entitlements, where Congress — where do entitlements come in? — Congress has passed laws that state that people are entitled to certain benefits and so forth. Which is also not constitutionally mandated, but they are laws that Congress has passed, and obligations it has undertaken so they are seen as mandatory. [0:38:53]
So that’s non-negotiable, but spending money on defense is discretionary. That’s … as I’ve said, that’s not actually a new view. The States of the pre-Napoleonic period also thought that defense spending was discretionary in a certain sense. Right up to the moment when they realized that the alternative was annihilation of one form or another. [0:39:15]
And then all of a sudden defense spending isn’t discretionary. Defense spending is what you have to do in order to survive. And then you figure out how to make it work. And then you figure out what social programs, or what political stability you’re willing to sacrifice in order to survive in a world of threats. [0:39:30]
I would submit that a very large part of the problem that we have today stems from the fact that we continue to regard defense spending as very much discretionary. We continue to regard the wars we are engaged in as luxuries from which we can withdraw without penalty if we so choose. [0:39:48]
And we continue to believe that we will be able to choose in the future any wars that we might fight, and define their scope and nature in accord with what we feel like spending on them, and either in terms of money or in terms of lives or in terms of resources or of any other sort. That we see ourselves continuing to act freely and be able to choose freely in a world that will force nothing upon us. An
d I don’t really think that that’s the way that the world actually is now. I think that that was a mindset that has grown up very strongly in the 1990s when we convinced ourselves that we were in a strategic pause and we faced no enemies, we faced no imminent threats, and we could have countless peace dividends which we distributed almost annually for several years in the 1990s. And that — this was the mindset that, you know, there may be a war sometime, but we’ll worry about that when we get there. And probably, maybe it won’t even happen. [0:40:44]
And it should be apparent, whatever you think about the War in Iraq, whatever you think about the War in Afghanistan, whatever you think about the War on Terror and all the complexities involved in that … it should be apparent that there are enough threats out there that are challenging American interests one way and another, that we cannot be confident that we will be able to control entirely our participation in world affairs in the future. That people may do things, that people may take actions, that are not caused by anything that we do, that are caused by their own design, which threaten us in ways that require us to respond if we’re not willing to sacrifice core interests and suffer very serious harm. [0:41:24]
And when that happens, we’re going to discover that defense spending isn’t discretionary at all. We’re also going to discover, as Mr. Hormats mentioned quite rightly, that the treating of defense spending as discretionary before then will have created a tremendous backlog that we will then have to rush to overcome, which has been another characteristic feature of American wars. [0:41:44]
With the exception of Vietnam and the Gulf War; well, after the war since Vietnam, we lost the first battle of every war that we fought. Vietnam you can regard the Ia Drang Valley as a victory although it’s stretching it a little bit. Now we’ve gotten into a different mode where we win the first battle of the war and then we tend to lose the campaigns that come after that, also through lack of preparedness. Now we’re just prepared in different ways. [0:42:12]
And you pay a very high price for unpreparedness is the problem, especially in military affairs. And if you behave as though you think war is a luxury and you’ll be able to choose you moment, you also then tend to tell yourself that you will be able to prepare for the war before you fight it, and this actually became the mantra in the early 1990s, and you had even smart people like Sam Nunn talking about how we would be able to turn inside any of our enemies, we would recognize a threat arising before it became necessary to take action, and then we would rearm very rapidly, because America is very good at that. [0:42:43]
The problem is that the gap between recognizing when sensible strategists would recognize that there’s a threat that’s there, against which you need to prepare, and the moment when you can actually convince Congressmen to cut mandatory programs in order to pay for discretionary spending that you would need to do in order to do that, is a long gap. And it tends to push you very close to the opening of hostilities, and it tends to leave you totally, more or less totally unprepared for this shape and size of a war that you don’t necessarily determine. [0:43:11]
But I think this is a fundamental problem, and it is very closely connected to the fundamental problem that America has, our tendency to be unprepared for every conflict as it comes to us. People are now hammering the Bush administration for its unpreparedness for the Gulf War, I’m one of those people who’s been happy to hammer it on those grounds. But the truth of the matter is to treat it as some historical outlier in that regard is absolutely unfair. [0:43:35]
With the exception of the First Gulf War we were unprepared for every war we’ve ever fought. Now the question is: how long can we continue to keep getting away with this? Maybe forever. We’ve done it for a long time. But I think you can argue that the situation has changed somewhat, and that the price we’re likely to pay at the beginning of a war for which we’re unprepared is likely to be higher in future conflicts, given the enemies we’re facing, their objectives and the weapons that are potentially at their disposal. I’m not as comfortable as I ever was betting on this notion that we will simply get ourselves ready when it’s time to do that. [0:48:08]
I’d like to make just a couple of other brief points before I turn it over to Tom, who can address the details of the current situation much better that I. One is I do have to take issue with the presentation of Eisenhower as being the guy who really gets this. He certainly did get the notion that we could spend ourselves into bankruptcy in the course of trying to fight the Cold War, and of course the Soviets ultimately did. That also was in accordance with a long Russian tradition. The Soviets did that, by the way, by insisting on being prepared to fight and defeat every single threat that they might face all at the same time, which is a great way for making sure your country goes bankrupt pretty quickly. But there is a way not to do that, but also to be actually prepared for likely threats and likely contingencies, which likely was not a word that popped up in the Russian vocabulary very much in this context. [0:45:00]
But the problem was that Eisenhower was actually looking for cheap ways to be strong. And the cheap way to be strong that he found was nuclear weapons. And he cut the conventional forces significantly, relying on the nuclear deterrent to see us through all manner of problems. And he was one of the first guys to try to outsource ground forces, because ground forces are terrifically expensive. And his notion was we’ll use everyone else’s ground forces and we’ll provide the nuclear deterrent. [0:45:28]
Which got him into occasionally very weird situations like threatening the Chinese with nuclear attack when they massed forces opposite two little islands off their coast, Quemoy and Matsu, for those of you who follow Eisenhower history rather closely. Which was a bizarre position for an American position [meant "President"] to put himself in. But it was a logical consequence of what he was doing. [0:45:48]
I think history supports the notion that trying to be a cheap hawk is very problematic. At a minimum, it entails taking an awful lot of risk in the military realm. And Eisenhower was willing to do that, he got away with it. But it’s not a model I would necessarily recommend. [0:46:06]
And lastly on the subject of debt, the British funded the Napoleonic Wars by floating a lot of money — floating a lot of loans, a lot of foreign loans. And they got the money for a variety of reasons. They had a very strong economy, they had a strong credit history, they had a strong tradition of paying back loans that they had borrowed. And also because they were seen to be doing a public good in the world, because Napoleon was seen as a threat and the British were opposing him, and the people who agreed with them were pretty happy to float those loans. [0:46:37]
Napoleon was confident every year that Britain was on the verge of collapse. He was a mercantilist, he did not believe in state borrowing at all, he didn’t let France borrow money until very late, which is one of the reasons that he ran out of cash. [0:46:50]
And it turned out that the British model of financing war in this way was very successful. The point I want to make is not that we should necessarily borrow a lot of money, we’ve already done that. But that it is easy when you look at unconventional ways of funding war — the first thing that happens is all the people who are used to the conventional ways say, “Well you’re going to collapse, this isn’t going to work, this is never going to happen.” But if you’ve actually selected your mode right, and if you actually understand what you’re doing, then it often turns out that there ar
e lots of unconventional ways to fund wars that other people haven’t thought of that are very effective and can give you tremendous advantage and that can take by surprise enemies who can only think conventionally about this. And this was in fact one of the major reasons for British victory in the Napoleonic Wars. [0:47:36]
And it’s something else that I think we can throw into this mix is we ask the question, “How do we think outside the box here?” Not being an economist, I’m not the guy who can answer that question, but at least I can ask it. [0:47:47]
Kevin Hassett: Thank you very much Fred. Tom?
Tom Donnelly: Thank-you. I think it is my task to bring the discussion from the Stratosphere to at least near-Earth orbit, or something like that. [laughter] At least I’m going to try to, and talk a bit more specifically about the particular financial and also strategic challenges that we face today, and try to convince you that this is actually a problem that could be solved relatively easily if it were solved now, but if you wait, your ability to solve the problem really has compound effects that start to make it nearly unsolvable. [0:48:42]
And I would say just is a general proposition, and to paraphrase Secretary Rumsfeld, we went to war with the Army that we had, and still unfortunately have the Army too much like what we had back then — but we also went to war with the budget and fiscal policies that we had at the time, and they’re not much changed, either. So we’re fighting a war not only with the wrong force, and fighting it initially in the wrong way but, looking on the way we financed the war, incorrectly as well. [0:49:17]
But the lucky answer is that the dollar gap, the cost of building a force that would be necessary to succeed and be sustained through The Long War over the course of the next generation or so, or however long you want to set your horizon, isn’t that great a challenge. Fred and I contributed to a book that AEI put out earlier this year, “The Military We Need,” and we’re about to put out a subsequent volume looking more directly at the requirements for US land forces, which is really the white hot center of the nature of the military reforms that we need. [0:50:10]
And as expansive as we are — AEI at least below the 11th floor is known as the Army Expansion Institute — it’s really hard to get to the kind of numbers that look like they would really bankrupt the United States, or disrupt the economy. And just to kind of put really crude terms on it, if you tried to build what we think is the requirement for a million man active duty force, a combination of Army and Marines, which essentially gets you back to the force that we had at the end of the Cold War. I think the highest price tag that you can come up with for that is spending a little bit more than an additional 1 percent of Gross Domestic Product over the course of time in order to build it. [0:51:02]
And given that as a slice of our total wealth, defense spending remains at, certainly post-World War II, historical lows. It remains at less than two-thirds the Cold War average. This seems to me to be a goal that’s well within sight. [0:50:27]
Now it seems to me that there are a couple of ways that you might accomplish that, or pay for building that force, and a lot of them have been discussed today. In fact we could continue to, I think, to finance or borrow, as Fred just rightly said, this is not only a public good in an American context, but it’s a public good in an international context as well. The fight against Islamic extremism, the subsidiary missions the US military has, other military missions that the Pentagon has, such as hedging against Chinese military adventurism, are all things than not only narrowly benefit the United States, but broadly benefit the international community. [0:52:20]
Vitally crucial to maintaining the peace in Europe. Obviously essential for creating conditions in the Middle East we can live with. Vitally important for bringing India, for example, more fully into the international economy and the international society in a way that would not only be a stabilizing factor, but would push India towards more rapid economic development, and you can continue around the horizon and see why, despite all the rhetoric and sort of anti-American — what can I say about it? — a venting that one gets in the world, what we really see is surprisingly little investment in balancing armed forces. The only people who could fit the profile of a potential balancer to the United States are the People’s Republic of China, and possibly late Putin Russia. And even those are pretty far stretches. [0:50:40]
So given that the — actually that the federal debt, which is about 40 percent of GDP, it did go down a bit during the 1990s and it’s ticked up a bit since then, but again if you look back across the 40 year average or so, it’s at a very low level and certainly sustainable level. It’s at a much lower level than the debt of other major industrialized countries. I don’t think this is a good thing in and of itself, it doesn’t mean that I would recommend that this is the policy option I would choose, but there’s certainly plenty of head room in terms of the credit of the United States to pay for the military that it needs. [0:54:29]
And as Fred just suggested, it’s been historically the case that foreign capital is more than willing to spend itself in the support of military power that’s exercised not only for the national good, but is seen to be exercised for broader international good. [0:54:50]
So I really don’t — I mean again it’s not … you can’t make straight line projections — but there’s a good reason to believe that the Chinese and other foreigners, unless they have … there might be a strategic agenda there that is inscrutable and nefarious … but by the same token they have a strong incentive to continue to invest in many elements of American power. [0:55:22]
You could also tax. According to OECD, the tax rate in the United States is quite lower than major European countries. That would be the 2005 figures, it’s the best that I could come up with on short notice — and I want to prove my economic deficiencies in front of my betters — says that the US tax rate, that includes federal and state and all-in-all-in is about 26.8 percent. The same year Germany is about 35 percent, Great Britain’s a little over 37 percent, France — almost 45 percent. [0:56:07]
I’m not suggesting that we follow the tax policies, tax examples, of those countries, because certainly one effect of those high taxation rates has been to debilitate its military, and to … unfortunately they spend much more … I mean they accompany high tax rates with miniscule military spending rates, and consequently they are no longer Great Powers. [0:56:35]
So we don’t want to go down that road, but it does suggest that you can at least … that there might be some head room there if we just simply wanted to follow a conservative policy and raise taxes to achieve that. And as others have suggested, and I think probably would be my preferred solution is to impose more fiscal discipline on the federal government — not by looking for the Waste, Fraud, and Abuse account at the Pentagon, which despite decades of hunting has never actually been seen, or discovered … it’s the Sasquatch of the E-ring in the Pentagon. But it really is the case that our entitlement programs are skyrocketing, or going up at a record rate. I’m just going to dump a small bucketload of figures on you by way of comparison with defense spending. [0:57:36]
CBO estimates that in 2006, defense spending was about $520 billion. The total for the big three entitlement programs was $1.1 trillion. So we’re already spending twice as much on social entitlements as we are on national defense, and indeed Social Security spending is greater than national security. Social Security spending alone is about $25 bill
ion higher than national security spending. [0:58:15]
Because of the inherent trend lines, the aging of the American population, Congress’ desire to throw additional Medicaid and prescription drug benefits at the problem, in about 6 years from now we’re going to be in a situation where the rate of social entitlements to military spending, unless changed, will be three times as much. Entitlements will consume about $1.7 trillion of the American economy, and defense spending according to Bush administration projections will still be below $600 billion. [0:59:05]
To do that kind of math in terms of GDP, again the ratio of social entitlements to national security spending holds roughly firm, except that’s it’s the case that by 2013, both Social Security and Medicare, each one, will be individually larger than The Pentagon’s budget. Now that expresses the political will of people in the United States. And to return to the beginning, one of the ways that one could capture patriotism, or express patriotism, would be strongly in the move to try to reform entitlements. To argue that the government’s business, the first business of the federal government is to provide for national defense. And then in choosing priorities, national defense, which benefits all Americans equally, is a higher priority, or should be a higher priority, let along the fact that we are in an extended period of threat and of war … ought to cause us to reconsider the transfer payments to a portion of society that’s over 65. [1:00:38]
So I’m not running on anybody’s ticket with that kind of a platform, but I’m available as a campaign advisor for anybody who [laughter] who whats to … any … like … who wants a former naval pilot who wants to fly his campaign into the ground. So, all I have to conclude my remarks with that. [1:00:58]
Kevin Hassett: It’s clear to me — this begins as a question to Fred and Tom, that the Bush administration has done a poor job of motivating the populous to pay for a war. In fact, if you go back to the beginning, there was the famous episode of our colleague Larry Lindsey saying it might cost a hundred billion, and then I don’t know if that’s why he left the White House, but at least that’s the way it was covered. [1:01:22]
Tom Donnelly: That’s why … and NPR thinks about that …
Kevin Hassett: That’s right, but in any case, a hundred billion is clearly a low-ball estimate. Do you feel like the Bush administration felt the political pressure to fight this war on the cheap, and do you think that fighting the war on the cheap has had an impact on the success of the military. [1:01:45]
Tom Donnelly: Well, it is certainly yes to the latter.
Kevin Hassett: Give some examples …
Tom Donnelly: … well, gee whiz, all you have to do is pick up the paper any day. There were structural problems based on the so-called transformation project that began in the late Clinton years but that was the catnip for the Rumsfeld Pentagon and for the Bush administration for far too long. We made a false analogy between business and war, thinking that we could rebalance our portfolio and disinvest in allegedly non-productive enterprises such as land war. It turns out that for all the Shock and Awe, of the fireworks over Baghdad, or the really great success in projecting air power over Afghanistan, that was the price of admission, not the price of victory. [1:02:51]
So there were problems. … Rummy was right in some ways — you have to go to war with the army you’ve got, but 5 years later we still have essentially the army that we had back there … the land forces that we had back then. [1:03:07]
We also made every mistake possible. We pursued a ludicrous strategy. Once we understood that there was going to be more to the case than just bumping off Saddam and his sons and his henchmen and so on and so forth. And that we were facing, particularly an al-Qaeda led insurgency in Iraq. We did not respond. we did not respond adequately and again, we probably knew this in the summer of 2003, and we again took no serious steps to begin to grow the force to try to maintain our uncontested edge on the battlefield. [1:04:04]
When I was there in the summer of 2003, nobody … it was safe for American soldiers to walk around, because nobody wanted to take on, no matter how much they hated them, or thought of them as occupiers, there was a suicidal prospect. So I mean, I don’t want to go on at length about this, and I’ll save some time for Fred, but I would say one final thing about the Bush administration. It is not simply a committing of dollars, although dollars get’s you a long way. It’s the rallying of the people, that to create a sense of national obligation, patriotism, extends into the minds of the citizens as well, and particularly, in a full employment economy, and in a manpower intensive war, you’re fighting an uphill battle. So rallying people to buy war bonds is part of the equation also. Rallying families — mothers and fathers to urge their sons to serve their country in uniform is also possibly even more delicate, but it’s part of the equation. [1:05:25]
Fred Kagan: I agree with everything Tom said, he’s absolutely right, and I think the biggest problem that we had in the wars in Afghanistan and Iraq was a misunderstanding of the nature of war in any period, and particularly in this period, and I think that that guided most of the mistakes. Frankly, I think that if this President, especially knowing this President as we’ve come to know him, if this President believed in 2001 or 2003 that it was necessary to raise taxes to spend more money to build the bigger army then he would have tried to do that, whatever he thought the political consequences of that would be. Because I think the one thing that Bush has demonstrated is a willingness to do what he thinks is the right thing, however phenomenally unpopular it might prove to be, and to hold to it. So I think it’s unlikely that the initial motivation for not doing that was because he didn’t feel like taking the political heat for it. [1:06:20]
I’d like to just offer an alternative explanation in addition to the one that Tom laid out, which I think is the main one which is, look, the September 11th attack was not an attack on the United States military. And it was not an attack on the military of any of our allies. It was an attack, a direct attack on the United States’ economy. And that’s what it was meant to be. [1:06:43]
And I think that in the context where we did have a weak economy, and that we did feel ourselves very much to have a weak economy, and then there was this attack directly on the economy, there was a certain natural knee-jerk reaction to talk, to think about defending the economy, which entails not doing all of the things that we should have done, like either raising taxes or borrowing more heavily on … you know, spending a lot more on defense. And it also helps explain one of the most astounding things that Bush ever did, which is to tell everyone that the best way to respond to the attack was to go out and spend. [1:07:14]
This was an amazing thing to do, which makes sense, I think, only if you understand the sense that 9/11 was a direct attack on the United States economy, and at a moment of its weakness, and that the President thought that that’s what he needed to defend. [1:07:28]
Now I think that was a very short-sighted view. I think that it was a misunderstanding of the problem, and it was an unreflective response to a situation that had been burgeoning for some time, because of course 9/11 was not the first time we’d seen al-Qaeda, and it wasn’t the first time we had reason to understand what they were trying to do, and it … we’d spent 20 years missing the development of this particular threat, and then when we focused on the economy we continued to miss the real significance of this and what we were r
eally going to have to do. [1:07:58]
But I think that it does raise the question that Mr. Hormats pointed to, which is if we were attacked again in a moment of economic weakness, what is … and if we are attacked especially in a way like a dirty bomb in New York, or a destruction of some critical economic hub, we may once again get into this knee-jerk reaction, which is “oh my God, we have to protect the economy.” [1:08:18]
And I guess one lesson that we have we need to take away from all of this is to recognize that while that is important, that’s first of all an entirely defensive reaction that’s not going to win any war. All that’s … it’s just a response to a hit. But it also can end up positioning us very badly for military conflict, which is likely to be necessary to proceed. And so I think it’s something we need to keep in mind. We need to balance the need to protect the economy with the need to maintain military forces adequate to continue to do what you need to do, and the balancing is sometimes leads to less than optimal solutions. [1:08:56]
In both cases we’ve tended to optimize, in this administration, the economic component of this at the expense of the defense component, and I think we’ve seen — we’ve paid a very high price for that. And I think that we’re going to need to rebalance in the future, sort of share the pain a little bit more between the military and the non-military sectors is we’re serious about winning the wars that are not in fact optional. [1:09:23]
Kevin Hassett: Before we open it up for questions I have a couple more questions. Bob, you mentioned that we need to not spend too much on the military, or that it’s possible to spend too much on the military. And I understand that that will be a different analysis depending on if we’re in a hot war with the Soviet Union — the former Soviet Union, or a little war with Grenada or something. But in sort of general peace time, what have you learned from the historical experience about what the approach has been to thinking about how much military you need. Just sort of you have the option value to protect yourself if guys come after you. [1:09:55]
Bob Hormats: Well my view is that we should spend whatever it takes to ensure that we are secure. And that means, in some cases, setting new priorities for the military that are different than those that were set during the Cold War period, and … but I think we would all agree that national security is our top priority, to protect ourselves and protect our liberty, to use the title of the book, against potential threats. But also, you need an economy that’s resilient enough, in the face of some kind of attack of the kind that’s been discussed, to come back. So you need look at … you need to balance the two things. I think balance is the right word. To make sure that there is enough money in the budget for national security, but also feeling … making sure the economy was resilient. And I think that’s largely a function not so much of curtailing military spending as making sure that entitlements are placed on a more sustainable basis. Because they will suck out large amounts of money from the rest of the budget and create a vulnerability if they’re allowed to go on their current trajectory, which will suck up virtually all the money, all tax money by the year 2020 will go to entitlements, if in fact there is not either a tax increase or some curtailment of the entitlements program to bring it into a more sustainable trajectory. [1:11:30]
So I’m all for whatever we need to do for our national security. Doing it, but doing it in a very candid way so that we’re not trying to do it through the back door, but through a very up-front kind of technique. [1:11:42]
I just have one more thought, that … the question that was raised about the ability to borrow from abroad and raise taxes. I think — I agree with both, that we should be able to … if we need to increase our military spending we should go to the American people and say, “we have a threat, and we should pay higher taxes to counter that threat.” I think that’s the essence of leadership — wartime leadership or any leadership. [1:12:11]
Borrowing from abroad is, … in the current environment is a little different than Britain during the Napoleonic Wars, and even the United States in the past. We really never, we as a country have never really been a large borrower abroad for national security purposes, even though I quite agree what we’re performing … an important global role, which no one else seems willing to perform. But to do that you need to make sure that others accept the fact that you’re doing something in your interests, and in the aftermath of the Iraq War that’s going to be a formidable task to convince them that that’s the case. [1:12:49]
The other thing is that most of our borrowing today is borrowing, to the extent it’s from central banks, it’s governments, it’s from central banks and the central banks are borrowing and are intervening in currency markets to try to keep the dollar from going down, so that they, their countries can export more. And a lot of the a lot of the money, other than the central bank money, is private sector money, and the private sector money goes in the treasury’s largest, it thinks it’s going to get a reasonable risk-adjusted rate of return. [1:13:22]
So I’m not sure we can get that kind of buy-in internationally to help finance our imbalances because we’re performing this global security role, as noble as I think that is. And I do worry that if there were to be an emergency that, first of all, a lot of foreign investors would be very troubled by the fact that we, our economy had been damaged by some act of catastrophic terrorism against infrastructure. I think, as Fred pointed out, that the last attack was an attack on our economy, and the next attack is almost certain to be, likely to be one, and maybe a much more catastrophic one. This was an attack that was bad enough, on two buildings in New York and the Pentagon — they were obviously trying to do damage somewhere else in Washington — but if it were an attack on physical infrastructure such as transportation or communication, it could have a much more profound and disruptive impact. [1:14:22]
And then the problem that Fred has underscored would be even more complicated to address. And I think that was, I think that was Bush’s problem at the beginning. He said that, this is an attack on the economy, the goal is to get our economy back up and running. But in so doing, he downplayed the military element of this. He downplayed … there was no call for the kind of sacrifice, involvement, commitment by the American people to win the War on Terror, come back against Islamic extremists and say, everyone has a stake in this, you should go about doing your normal business on one hand, but you should also make some commitment to making sure that our national security is robust, and that we’re dealing with these people on the other. And it’s up to you. You know as Roosevelt said, you’re going to have to … you have a national interest, we all have a national interest, a secure interest, it can’t be … it can’t be business as usual going out and doing whatever you were going to do, shop and not go into caves. [1:15:20]
On the other hand, you should cough up something for the broader national security objectives of the country. He didn’t do the latter, he did the former, and I think that was his big mistake. And unfortunately, I think, we’ll be paying for that mistake not just in economic terms, but in the psychology of Americans believing that you don’t really have to make sacrifices for our national security in the future, when I think we do. [1:15:45]
Kevin Hassett: That’s actually the one point I want to fuss you up before going to questions, that you addressed a little bit, Fred, but for me I don’t really buy that argument because … OK if we said, OK American
s, we have to sacrifice, and we raised their taxes or cut their popular programs, then today we’d be in this place where, assuming that they had pursued the same military strategy, that we had this disaster in Iraq and everybody’s upset about it. Then we raised their taxes to do it. So they’re even more upset. [1:16:13] And so the question is, is there this counterfactual where they would have raised the taxes back then, and then pursued the strategy that might have worked. Right? But if they didn’t do that, then all’s we would have done is made them more angry. [1:16:27]
Bob Hormats: I totally agree. Under any circum- … look the same thing happened in the Korean War when there was a sacrifice. Americans did sacrifice in the Korean War, taxes were raised, and the war went badly, there was a stalemate and Americans in fact withdrew their support for the war. That was certainly true in Vietnam. Taxes were raised, people went through this before. It is definitely not a panacea. I quite agree with that. [1:16:51] On the other hand, I think it demonstrates, when your troops are fighting abroad for Americans to sit home and do nothing to me is a very lopsided way of paying for the war, even though as I say it’s not a panacea, and it probably — Americans probably would have been disenchanted with this war even if they had bought in. So on that argument I’m simply saying that in an environment where there is a national security threat, for Americans to believe that they don’t have to do anything and come up with any response to counter it I think undermines the long term notion that national security costs money and Americans need to provide some support for that effort. [1:17:36]
Tom Donnelly: I think your counterfactual is somewhat static, in that you assume that the outcome then would have been the same if you just simply taxed people to pay for it. If you raised that revenue, invested it in — I think it would also have been rather easy to increase the size of the American military in those initial years, you know, 2002, 2003, say — if you’d said, we’re in a long war for the future of the Islamic world and to defeat al-Qaeda, wherever possible say that, I think it would have been easy to convince people to pay the money for it, to encourage their sons and daughters to serve in the war. It would have been the clearer direction to the military than they’ve gotten, and the direction they’ve always gotten is, let’s get out of here absolutely as fast as we possibly can. Why aren’t you out of here? You said you would be out of here last Tuesday. [1:18:40]
And so I think it’s so reasonable to presume that … and also it’s just an unfortunate reading that seems to have taken root amongst the Washington elite that the war is lost now anyway, so would we feel differently about where we are now if we’d taken prudent and more farsighted steps that [than] we did? What now, 4 years ago? I mean, that’s a long time. I think it’s reasonable to argue that different inputs would have produced not the same output, but a significantly different output. [1:19:22]
Kevin Hassett: Do you want to add anything, Fred? [laughter] You guys have to disagree at least once …
Fred Kagan: No we don’t. [laughter] No, I think that that’s absolutely right, and I would only add one thing, which is, this is the first protracted conflict that we have fought with an all volunteer force. And that may … has generated some interesting complexities. It has saved us from the Vietnam era scenario of having the public turn against the military because since the military is not drafting anybody and forcing anybody to go to war, you don’t have this sense that the military is the man putting his arm on you and sending you to the triple canopy jungle where bad people want to kill you. [1:20:01]
On the other hand, it does mean that the American people, most American people are not directly connected to this war in the way that most Americans were directly connected to most previous major wars that we’ve fought. And this administration has done virtually nothing to connect the American people to their soldiers fighting in this conflict. [1:20:22]
How many of you have heard of the America Supports You program? … Right. It’s very prominently advertised on Defense Link dot Mil. How many of you have ever gone to that site? … Right. This is the sort of thing that blows your mind about how the administration has totally failed to go about getting the American people connected with their soldiers at all. [1:20:42]
Now that actually would have had a very prominent effect in the way, because if you talked to American soldiers, lots of American soldiers will tell you that they want to win the war. And many American soldiers will tell you that they don’t think the war is lost, and that they do think that it is being misreported and a variety of other things. Now some soldiers will tell you that, you know, you can get soldiers to tell you all kinds of things. [1:21:00]
But an avenue of access to this war to understanding what’s actually going on to the ground, which was available in previous conflicts because people were directly connected to the soldiers, is not available in this war, I mean the administration has done nothing about it. [1:21:12]
If the President had gotten up, you know, taxes, no war is made popular because Presidents raise taxes. I mean that’s … I don’t think that’s what the argument is that we’re making. The point is that the President has never gotten up and said you should join the military, and you should go fight for your country, this is an important thing to do — and I think that was a mistake. And the administration has done nothing whatever in general to make this war real to the American people by having them, by fixing this connection. [1:21:37]
We’re likely to fight future wars, barring catastrophe, with volunteer forces. Because it’s far and away the best way to fight a war if you can do it. We have to address this issue. Because it is a real issue and the gap that has developed between the military and the American people, I think, is something that’s very real, not in the sense of civilian / military relations gap that people were talking about in the 90s, but simply the sense that the American people don’t get it. They don’t, they don’t know what is going on with their soldiers, and that’s something that I think could have been addressed early on if the President made it a priority to do that. And instead we’ve moved in the opposite direction. [1:22:07]
Kevin Hassett: Interesting, well we can now turn to questions. … [the Q&A session went on for a further 36 minutes]
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