The national security shell game
In American public discourse, national security is the first refuge of scoundrels. For six decades good and dreadful ideas alike have been buttressed by claims that they will help make us secure. President Eisenhower used the claim to promote spending on highways and education. President George W. Bush used it to justify wiretapping and torture.
Now deficit hysterics have started trilling the national security song to justify a coming attack on Social Security and Medicare.
In late May, the Obama administration released its National Security Strategy, a wide-ranging and broadly sensible 60-page document articulating a full menu of economic, human rights and environmental foundations of a strong security policy. A few lines make passing reference to “medium-term deficit reduction.”
But when Secretary of State Hillary Rodham Clinton appeared at the Washington-based Brookings Institution to discuss the National Security Strategy, three of the six questions she was asked harped on the deficit issue, with one questioner calling it “potentially, if not actually, the biggest single national security threat to the United States.”
Clinton agreed, declaring that it is time to “make the national security case about reducing the deficit and getting the debt under control.” She went on to explain: “We cannot sustain this level of deficit financing and debt without losing our influence, without being constrained in the tough decisions we have to make.”
On this, she and the Brookings deficit hawks are wrong.
Was World War II, for example, won with balanced budgets? No. Deficits ran about 25% of GDP every year of the war, and the national debt had reached 121% of GDP by 1946. Was the United States weakened by this? Hardly. America had never been stronger than it was in 1946. And afterward, the economy didn’t implode. The debt-to-GDP ratio merely declined, year after year, until it reached a low of about 33% of GDP in 1980.
Was America stronger in 1980 than in 1946? No again. That year we elected Ronald Reagan, who campaigned on a promise to restore the United States to a position of strength. To that end, he promptly cut taxes and boosted military spending, actions that pushed the deficit back up to about 50% of GDP even as the economy recovered.
It’s true that nowadays China, Japan and other countries hold large piles of Treasury bonds. But why? Only because they run trade surpluses with the whole world and have chosen to stockpile those earnings in dollars. This is a sign of confidence in us. And reducing budget deficits wouldn’t change anything about that, unless those Asian trade surpluses were also reversed. But the folks at Brookings weren’t calling for a trade war with Asia, just about the only step (however unwise for other reasons) that might plausibly cut the surpluses.
Do China’s debt holdings give China leverage over us? Not at all. Realistically, China can do nothing with its Treasuries except roll them over. China is not going to dump U.S. bonds in order to buy those of Spain or Greece. And paying interest on them is not, for us, a burden, since the money is never spent and probably never will be.
Speaking of interest, it’s also obvious that the capital markets don’t take the deficit scare-talk seriously; otherwise, they wouldn’t be lending to Uncle Sam for 30 years at just over 4%. And the dollar wouldn’t be rising, as investors seek safety from the European crisis in Treasury bonds — a sure sign that the world’s wealthy don’t find U.S. deficits all that worrisome.
The National Security Strategy doesn’t mention either Medicare or Social Security by name. But the code words “medium-term deficit reduction” are there, and they are today’s stand-in for cuts in those programs. “Everything must be on the table,” we’re told, as the Simpson-Bowles commission prepares to explain why Social Security and Medicare must be cut.
But why? Social Security and Medicare are not broken. They are successful, popular programs that protect America’s elderly from poverty. Cutting them would be devastating. Today, at a time when people have lost jobs, investments and equity in their homes — the very things that an aging population counts on for economic stability — Social Security and Medicare are more important than ever. They are the most important bulwarks of middle-class life in America. And we can afford them. A rich nation can always afford modest retirement benefits and decent healthcare for its old. Cutting them would be, in fact, totally inconsistent with the spirit of the National Security Strategy, which correctly equates human security with national security around the world.
The real cause of our deficits and rising public debt is our broken banking system. The debts our economic leaders deplore were largely due to the collapse of private credit, and to the vast giveaways the federal government made to banks to prevent their failure when credit collapsed. Yet those rescues have failed to reanimate private credit markets and job creation, as the latest employment reports show. And so long as that failure persists, public deficits and rising public debt must remain facts of life.
Are broken banks a national security threat? Let’s avoid going that far. But the only way to reduce public deficits eventually is to revive private credit, and the only way to do that is build a new financial system to replace the one that has failed. The “national security” case for cutting Social Security and Medicare is bogus. In economic terms, it’s just a smokescreen for those who would like to transfer the cost of all those bank failures onto the elderly and the sick.
James K. Galbraith teaches at the University of Texas at Austin and is chair of Economists for Peace and Security, a professional organization.