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The Problem with Deficit Financing a War

November 28th, 2009 . by economistmom

ww2-warbonds-christmas-ad(War bonds ad from the 1940s, from “Found in Mom’s Basement” blog.)

As Bruce Bartlett explains in his Forbes column, when a war is deficit financed, people tend to (way) underestimate its economic cost (like all other things that are deficit financed), and that tends to tilt the subjective cost-benefit analysis done in the heads of Americans in favor of engaging in war–or at least not opposing the war:

[George W.] Bush and his party, which controlled Congress from 2001 to 2006, never asked for sacrifices from anyone except those in our nation’s military and their families. I think that’s because the Republicans understood, implicitly, that the American people’s support for the wars in Iraq and Afghanistan has always been paper thin. Asking them to sacrifice through higher taxes, domestic spending cuts or reinstatement of the draft would surely have led to massive protests akin to those during the Vietnam era or to political defeat in 2004. George W. Bush knew well that when his father raised taxes in 1990 in part to pay for the first Gulf War, it played a major role in his 1992 electoral defeat…

In his 2008 book, What a President Should Know, [former Bush economic adviser Larry] Lindsey said that lowballing the cost of the war was a “tactical blunder” because it allowed Bush’s enemies to claim that he lied us into war. But at the same time, Lindsey acknowledges that the administration never rose to “Churchillian levels in talking about the sacrifices needed.” He also says that asking for sacrifice in the form of spending cuts and tax increases would have served the important purpose of involving the American people in the war effort. As it is, war is largely out of sight and out of mind…

Well, just like my former boss, Charlie Rangel, tried to reinstate the draft as a way of getting the war back in the sight and mind of all Americans (several years ago when the war was a new war that wasn’t even supposed to last very long), now David Obey, the House Appropriations Committee chair, is calling for a tax (on Americans broadly, not just the richest Americans) to pay for the additional costs of the war in Afghanistan for largely the same reasons.  As Bruce explains it (emphasis added):

The White House has given no indication of how it plans to pay for expanding the war in Afghanistan. More than likely, it will follow the Bush precedent and just put it all on the national credit card. But at least some members of Congress believe that the time has come to start paying for war. On Nov. 19, Rep. David Obey, D-Wis., introduced H.R. 4130, the “Share the Sacrifice Act of 2010.” It would establish a 1% surtax on everyone’s federal income tax liability plus an additional percentage on those with a liability over $22,600 (for couples filing jointly), such that revenue from the surtax would pay for the additional cost of fighting the war in Afghanistan.

It’s doubtful that this legislation will be enacted. But that’s not Obey’s purpose. He will probably offer it as an amendment at some point just to have a vote. Republicans in particular will be forced to choose between continuing to fight a war that they started and still strongly support, or raising taxes, which every Republican in Congress would rather drink arsenic than do. If nothing else, it will be interesting to see those who rant daily about Obama’s deficits explain why they oppose fiscal responsibility when it comes to supporting our troops.

What Bruce fails to recognize or at least doesn’t mention is that the Republicans don’t actually “rant daily” about Obama’s deficits, because “Obama’s deficits” aren’t really Obama’s deficits–as the Obama Administration has been quick to repeatedly point out.  The “deficits” under the Obama budget are not from new policies that Obama is proposing (those policies he actually pays for), but from the fiscally irresponsible policies of the George W. Bush administration that the Obama Administration now wants to both blame and extend.  The Republicans are ranting daily about Obama himself and Obama’s policy priorities–not “Obama’s deficits” or Obama’s fiscal irresponsibility.  The Republicans don’t “oppose fiscal irresponsibility” as long as it’s attached to policies they favor–whether it be war or tax cuts or more checks for seniors.

Come to think of it, the Democrats also don’t often “oppose fiscal irresponsibility” as long as it’s attached to policies they favor–whether it be economic stimulus or universal health care…or (come to think of it!) more checks for seniors… ;)

In fact, Bruce points out (I believe correctly) that David Obey’s objection to deficit-financing the war has more to do with the “war” part than the “deficit-financing” part–and that Obey’s worried mainly about spending on war “crowding out” other government spending–no matter what the effect on the budget deficit (emphasis added):

Obey makes no secret of his motives. He knows that deficits need to be reduced at some point and this will put pressure on spending programs he supports. “If we don’t address the cost of this war, we will continue shoving billions of dollars in taxes off on future generations and will devour money that could be used to rebuild our economy,” Obey explained in a press statement.

He is not alone in his fear that war presents a threat to the Democratic agenda. As Boston University historian Robert Dallek told Obama at a White House meeting earlier this year, “war kills off great reform movements.” He cited the impact of World War I in ending the Progressive Era, World War II in killing the New Deal, the Korean War in terminating Harry Truman’s Fair Deal program and the Vietnam War in crushing Lyndon Johnson’s Great Society.

So the problem with deficit financing a war is that deficits get bigger and the war goes on unscrutinized, just like everything else that’s deficit financed.  (Bruce says the historical evidence shows that deficit-financed wars drag on for longer than tax-financed ones.)  And our kids and grandkids get stuck with a big bill for something they didn’t ask for and maybe even their parents and grandparents didn’t want either but didn’t realize they were supporting by voting for “fiscally responsible” politicians who want to keep taxes low at all cost regardless of what they want to do on the spending side.

And the scariest part is that letting a deficit-financed war go on for too long because it’s deficit financed has much larger costs than letting something like economic stimulus or tax cuts (or even a prescription drug program or a “doc fix”) go on for too long because they’re deficit financed–because the toll isn’t just economic but human.

11 Responses to “The Problem with Deficit Financing a War”

  1. comment number 1 by: Arne

    If I were a Representative I would vote for a war surtax. Heck, in my district it might not even stop me from being re-elected.

  2. comment number 2 by: Brooks

    I favor tax increases in light of our projected long-term fiscal imbalance, but I have to nitpick on a couple of Bruce’s arguments.

    Bruce Bartlett writes:
    the American people’s support for the wars in Iraq and Afghanistan has always been paper thin. Asking them to sacrifice through higher taxes, domestic spending cuts or reinstatement of the draft would surely have led to massive protests akin to those during the Vietnam era or to political defeat in 2004.

    Support for the Afghanistan war was “always paper thin”?? Was Bruce out of the country after 9/11? IF the economic outlook hadn’t been shaky at the time, it’s quite possible that an immediate post 9/11 announcement by a president that we would need a “war tax” would not have “led to massive protests akin to those during the Vietnam era or to political defeat in 2004.”

    George W. Bush knew well that when his father raised taxes in 1990 in part to pay for the first Gulf War, it played a major role in his 1992 electoral defeat.

    Is that why his father raised taxes? Wasn’t most of our cost for the Gulf War reimbursed by other nations? ok, I checked. Below is from the Defense Department’s
    “FINAL REPORT TO CONGRESS
    CONDUCT OF THE PERSIAN GULF WAR
    APRIL 1992″

    Perhaps most remarkable was the amount of support provided by Coalition members to cover US incremental costs for the war…60 US allies provided $54 billion against the estimated $61 billion of incremental costs. Roughly two-thirds of these commitments were from the Gulf states directly threatened by Iraq, with the other one-third largely coming from Japan and Germany.
    http://www.ndu.edu/library/epubs/cpgw.pdf

    ———————————————————-

    Re: Charlie Rangel, tried to reinstate the draft as a way of getting the war back in the sight and mind of all Americans

    Unless it would cause a significant reduction in our military capabilities (at a given budget) to integrate draftees, I think we should have a draft, particularly in times of war. If a war is worth fighting, it’s worth everyone risking death (his/her own or that of a loved one). And if it’s not worth that risk, it’s not worth fighting.

  3. comment number 3 by: SteveinCH

    Diane,

    I really wish you would reconsider this argument.

    “What Bruce fails to recognize or at least doesn’t mention is that the Republicans don’t actually “rant daily” about Obama’s deficits, because “Obama’s deficits” aren’t really Obama’s deficits–as the Obama Administration has been quick to repeatedly point out. The “deficits” under the Obama budget are not from new policies that Obama is proposing (those policies he actually pays for), but from the fiscally irresponsible policies of the George W. Bush administration that the Obama Administration now wants to both blame and extend.”

    You make it all the time and I understand why; however, it’s really a very weak argument. Obama doesn’t “pay for” any policies in particular. Inflows are inflows and outflows are outflows. The fact that his policies are “paid for”, if you believe they are (and so far I’d say his record isn’t great — stimulus not paid for, HC only through goofy accounting), means simply that he chooses to continue to not pay for the aggregation of all policies at the same level as his predecessor. Granted, that’s better than not paying for new policies, but it is by no means a great feat.

    Further, Obama inherited the policies of ALL of his predecessors, not just Bush. All spending and tax policies were inherited by him. As you rightly point out, he chooses not to change them and therefore, they are his. I know you hate with all the passion in your being the Bush tax cuts but know that I hate non-means tested SS and Medicare (and farm supports, and, and, and) just as much and they are every bit as bad from a budgetary perspective.

  4. comment number 4 by: economistmom

    SteveinCH: Yes, of course– I agree that the money (or lack of it) is “fungible” and that the bottom line is that Obama is not paying for enough things–regardless of which things he labels as “paid for” and which things he labels as not. And don’t get me wrong: I don’t consider his labeling his own policies as “paid for” and extension of Bush’s old policies as “not” as any “great feat” but rather as a very odd practice.

    And by the way, I also “hate” non-means-tested SS and Medicare and farm supports and inefficient tax expenditures and pandering to seniors just as much as I “hate” the Bush tax cuts. And yes, they are all “bad” from a budgetary perspective because we can’t afford them, and even if we could, would we really want to if we truly recognized the economic costs?

  5. comment number 5 by: B Davis

    As Bruce Bartlett explains in his Forbes column, when a war is deficit financed, people tend to (way) underestimate its economic cost (like all other things that are deficit financed), and that tends to tilt the subjective cost-benefit analysis done in the heads of Americans in favor of engaging in war–or at least not opposing the war:

    I agree. I remember thinking before the most recent Iraqi War that, if people had known that there would be a war tax invoked to pay for it, there likely would have been much less support for the war. Alternatively, if people had been faced with a large war tax for a mostly American effort versus a small tax for a true international coalition, I suspect that many more people would have seen the wisdom of forming a true coalition. I had personally thought that forming such a coalition would have been good for two other reasons. First, if the war was truly a good idea that would benefit other countries, requiring a coalition would have forced them to help in the effort or forgo the benefits. Secondly, requiring a coalition might serve as a check on our own rationale for war as it would require us to convince others of its merit.

    Well, just like my former boss, Charlie Rangel, tried to reinstate the draft as a way of getting the war back in the sight and mind of all Americans (several years ago when the war was a new war that wasn’t even supposed to last very long), now David Obey, the House Appropriations Committee chair, is calling for a tax (on Americans broadly, not just the richest Americans) to pay for the additional costs of the war in Afghanistan for largely the same reasons.

    A draft would no doubt get the war back in the sight and mind of all Americans. Although we supposedly have a “volunteer army”, I suspect that many of those volunteers are there, at least in part, for economic reasons. At the very least, we need to treat our armed forces as though there were a draft that had called upon our own sons and daughters.

    Finally, I think that there is still a residual myth that war can have economics benefits that offset any costs. For example, one often hears the contention that World War II brought us out of the Great Depression. In fact, I posted data at this link that suggests that wars often lead to large increases in debt and inflation. A war may be necessary for self-defense but the idea that large-scale death and destruction can be counted on to provide economic benefit is nonsensical and, many would say, immoral.

  6. comment number 6 by: SteveinCH

    The problem with the argument for a “war tax” is we could have the same argument for every single government program. We either need to go to a system of dedicated taxation or not. At the moment, we are sort of halfway there. We have some dedicated taxes (primarily SS and Medicare) but even these taxes aren’t truly dedicated (anyone remember the “lock box”).

    As to a draft, I must admit I’m conflicted. As a matter or fielding an army, I think it’s a rather inefficient way to go. The administrative costs are high and the turnover in the ranks (another cost) is probably high as well. As a matter or clarifying the costs of war, I have more sympathy for it.

    And Diane, thanks for your reply. I guess I’ve overinterpreted your frequent references to the Bush tax cuts.

  7. comment number 7 by: AMTbuff

    Don’t economists agree that a volunteer army is cheaper (less total economic cost) than a draft? Or did I miss a Nobel Prize-winning analysis proving that a draft improves societal welfare?

  8. comment number 8 by: Brooks

    AMT,

    Interesting point. I assume the explanation for such an argument is the opportunity cost of diverting labor from more economically productive work. And I assume the idea is that this cost exceeds savings from lower average compensation that I assume would be possible/likely if, with a draft, government could fix price without reducing supply of labor for the military. Is that the explanation/argument?

    I suppose also that, person-for-person, our military would be more effective as a volunteer force than if partially/completely staffed with draftees, thus possibly making it more cost-effective.

    And I suppose it’s possible that, even though government could set a price for draftees lower than the market price for volunteers, the political process could result in higher compensation (to provide extra compensation for those who don’t want to be there).

    Of course, net economic impact is not the only — or even the main — rationale for a draft per Rangel’s and my argument. Rather, it’s the desire to avoid/minimize deaths and injuries of fellow Americans for causes that don’t justify imposing that risk and sacrifice on relatively few Americans (and by the way, occasionally I encounter someone implying that the fact that our military consists of volunteers means the standard for risking their lives should be lower, which I find appalling. Quite the contrary; they are willing to risk their lives for our protection, so we should, if anything, have a higher standard for justifying such sacrifice.)

    Lastly, in a truly holistic, comprehensive economic view, we’d have to consider any net savings and economic benefit from foregoing wars and military commitments that would be deemed not worthwhile if we all shared the human risk. This could, of course also result in foregoing wars that would have a net economic benefit, since economic benefit is not the only consideration when deciding on whether or not to go to war or initiate/maintain a military commitment.

  9. comment number 9 by: Brooks

    All,

    FYI,
    National Journal “insiders’” discussion:
    “Obama And The Deficit”
    http://economy.nationaljournal.com/2009/11/obama-and-the-deficit-1.php?comments=expandall#comments

  10. comment number 10 by: B Davis

    Brooks wrote:

    Of course, net economic impact is not the only — or even the main — rationale for a draft per Rangel’s and my argument. Rather, it’s the desire to avoid/minimize deaths and injuries of fellow Americans for causes that don’t justify imposing that risk and sacrifice on relatively few Americans (and by the way, occasionally I encounter someone implying that the fact that our military consists of volunteers means the standard for risking their lives should be lower, which I find appalling.

    Well said. Similarly, I was saying, perhaps clumsily, that we should treat our soldiers as we would treat our own sons and daughters. Just as we would not risk the lives of our children unless it was absolutely necessary, so should we not unnecessarily risk the lives of our soldiers. I think that Rangel’s call for a draft was largely based on the premise that we are falling far short of that ideal.

  11. comment number 11 by: Jim Glass

    Don’t economists agree that a volunteer army is cheaper (less total economic cost) than a draft?

    Of course a volunteer army is HUGELY more cost efficient for the entire economy than a draft army.

    The economics are the same as with manning any other profession or industry. Are you better off staffing it by…

    (1) Using force to draft people out of other jobs that they want to do and are good at — thus disrupting all those industries — to force them into jobs they don’t want to do, aren’t good at, and will quit as soon as they can, while paying them squat?; or

    (2) Using market wages to attract those people who want to do the job, are motivated to do a good job, and will stay in it to develop experience and resulting superior expertise, while leaving other industries undisrupted?

    The answer is pretty obvious, ISTM.

    Now, as to the political effects on “war policy”…

    I. The absolute first thing you want from war policy (probably the second and third too) is to win any war you get into, as efficiently and advantageously as possible.

    Beyond that you want your military capability to be respected by allies and feared by enemies — for purposes of war deterrence, effective international diplomacy with both friends and foes, etc. It has to be as good as it can be.

    So you want he most effective military you can get — and there is no doubt whatsoever that the volunteer army of today is of far, far higher quality than the draft army of the VietNam and immediately following years. Or any prior draft army.

    The very worst things that can happen are to get in a war you can’t avoid, then have your sons and daughters killed needlessly by your own inept, incompetent military … get into a war needlessly because your foes view your military as incompetent and easy to defy … get into a war, incur all the loss of blood and treasure, and lose the war.

    We really want to have the best military force possible. I sure do.

    II. Not unrelated to #1, let’s not forget the human rights element of the draft.

    You are taking people *by force* and making them go out and get killed and maimed, their own desires not considered, paying them nothing — “it’s their duty to sacrifice” — for a war they didn’t choose, but which was selected for them by “the political powers that be”.

    Remember, you aren’t drafting a random cross section of America, 30- and 40- and 50-year olds, to make the general population share the human cost of the war.

    It’s the rest of all of America dropping all the human cost of war — for their convenience and satisfaction — by force on teenage kids, the least politically influential, politically weakest group of all.

    If you want to talk about slavery in the US after 1865, this is the closest thing to it. Not rhetorically — as the real deal.

    Milton Friedman made this point directly and out loud when he went head-to-head against General Westmoreland (of VietNam fame and infamy) in the hearings Nixon’s people held that led to the end of the draft.

    Friedman said, “As an American, I don’t want an army of slaves.” Westmoreland replied “America must not have an army of mercenaries”.

    Friedman then hit him with “You are a high-paid mercenary general, the Defense Department is staffed entirely with mercenary civilians, I’m a mercenary professor, we’re all served by mercenary lawyers and doctors, that’s a mercenary press corps watching us now — everyone gets paid by free choice except your drafted soldiers whom you want *cheap*”.

    Milton carried that day, and the draft was eliminated. I’ve seen video of that … hmm … here’s some at youtube.

    III. As to the draft politically preventing wars, I don’t believe that for a minute.

    Remember the draft makes the army that fights the war *cheap* — far below any kind of true cost to society. How does that prevent war?

    How does the combination of a *cheap*, far below real-cost army, and one that is raised by *compulsion* from the weakest political class, regardless of whether they support the war or not, act to prevent war??? Instead of subsidize it?

    Isn’t slavery a subsidy for those who control its labor?

    And don’t anybody say “VietNam” — Americans were fighting in VietNam from 1961 to 1975, 15 long years. That’s mightily delayed “prevention”.

    To the contrary, with a volunteer army service is, yes, volunatry — so if a war is generally seen as unpopular and unjust, people won’t volunteer. And those who have already volunteered won’t re-up.

    When I read my American history I can’t find a single war that even arguably was ended any sooner — well, in under 14 years — due to unpopularity of the draft.

    But I can find case after case after case, starting from the Revolution tself, where the army ran short of people because its volunteers stopped volunteering.

    What did the US government do in near every case? End the war?? Never! It instituted a draft. And then drafted as many as it needed.

    That’s all I need to know about the relative merits of a volunteer army and a draft as a preventative to war adventures.

    IV. Now, as to not paying for the a war financially, that’s another story.

    A general tax to pay for a war does land on the society generally — and on “the powers that be” particularly. (Pretty much missing the 18-year olds). Doubtless that’s why it is unpopular.

    I differ greatly with most of my Manhattan liberal friends about what was wrong with Bush II’s war. “Bush lied” ISTM is pretty much domestic political propaganda — everybody thought Saddam had WMDs, all the other Arabs, the French, Germans, British, the Clintons, Saddam’s own generals. After the war Saddam said he intentionally tried to fool everyone into thinking he had them to maintain his credibility in the region, especially against Iran, and deter an American attack. Well, he fooled everybody! (What a genius.)

    But Bush II fighting that war on the cheap was nauseating to me. Sacking Lindsey for projecting (accurately) the cost of the war … sacking the generals with experience in former Yugoslavia who told (accurately) of the big peacekeeping and nation-building military and financial costs that would follow … violating all the military lessons learned in the last 30 years to use the absolute minimum force, when all the “law and order” issues broke out there was no force to deal with them … having no coherent plans to deal with affairs after the Iraqi military was defeated — even publicly dissmissing the need for such — when it was obvious to everybody that’s when the real, lasting problems would arise … that was all horrible.

    Maybe the worst single thing a national leader can do is commit to fight a war “on the cheap” — it invites military disaster, and shows a williness to end countless lives in a war the leader himself thinks “isn’t worth it”, or at least believes he can’t show is worth it. That’s pretty damn bad. If even his own party won’t vote to pay for the war … there’s an issue there.

    So a tax to pay for the war being put to Congress is something I’d support, certrainly (with that tax supporting a volunteer military).