Big and Brassy Defense Budgets

Monetary inflation is back but threat inflation never went away.

More money, more resources, more support.

This message dates back to the Cold War, when anxieties over nuclear competition with the Soviet Union overrode intelligence estimates about our rival’s most likely courses of action. Improbable doomsday scenarios became the public justification for bigger budgets and more elegant (and expensive) theories of national defense. Consequently, military solutions prevailed over diplomacy. The trend continued through part of the Global War on Terror and accelerates as America positions itself to once again be in conflict with Russia and to compete with China.

Experts have decided our country is facing a security problem, and the solution is a bigger defense budget, one that would return defense expenditures to Cold War levels.

Odds are the experts get their way.

But how might this level of expenditure affect our economy? To take a closer look at the market consequences of bigger defense budgets, I spoke with John Tamny, editor of Real Clear Markets. What follows is a lightly edited transcript of our conversation.  

Is it good to spend 5-6 percent of GDP on defense?

No. Every extra dollar directed through Washington, D.C. is control allocated over precious resources. Who is not getting access to precious market resources because the military is such an enormous buyer? And who is getting access? When the government is the buyer of whatever market good—whether that’s trucks or vehicles to move people, or steel or whatever—business gets distorted and warped.

Let’s use one example that’s non-military. Remember how quickly the iPhone kicked the Blackberry out of the market in 2008-09. But when did the U.S. Senate stop buying the Blackberry? 2015. When the government grows as a customer it means the market will get false signals. Commerce is already getting enough false signals under a $800 billion dollar budget. I argue that more, more, more false market signals means the market becomes more distorted, less efficient, and, ultimately, America becomes weaker in the eyes of the competition.  

You assume that government will not spend money on the best product. Why?

Nobody spends the money of others as wisely as they spend their own. Look at our economy right now. What government spending is doing to the richest country on earth is scary. What you’re seeing is the U.S. economy is becoming less vibrant precisely because it’s getting all the wrong signals.

Let’s take a second look at who is getting access to the market when the government behaves as such an enormous buyer. Years ago, my wife and I went to a party put on by a former four-star general, someone who spent his entire career in government. He would put on these great parties at Café Milano in DC. How does he do that? Well, because the defense budget is so large, if you’re high enough up in the military the money finds you. I remember I talked to his son, who told me he consulted for the military on which businesses to deal with in the Middle East. Whenever a deal needed to be closed, he brought in his dad.

Politicians are paid well but not the most and for good reason. We know that even though people in government are not paid a lot, the money still has a way of finding them. It finds their wife or their friends or their parents or kids, and it happens because politicians are moving a huge budget.

So, might we see a return to budget politics if not austerity politics? I’m thinking about how today’s interest rates (as compared to lower rates a decade ago) might chill the impulse to spend on defense, among other things.

No, no. I think a focus on the deficit is just a massive waste of time and only leads to bigger government. If I give you a choice economically—forget about the military—between a balanced budget of $5 trillion per year or another of $2 trillion per year, of which $1 trillion is borrowed annually, which one will you take? It’s obvious you’ll take the deficit scenario. To focus on deficits is to make a distinction without a difference. Nobody lends to someone they expect not to pay it back.

Also, once you focus on the debt, you give both political sides a trigger: Democrats say the deficit means we need to tax more; while Republicans say the deficit means we are spending too much. America is able to run up huge deficits because investors very much believe in our ability to pay the money back. In other words, both sides get it wrong: we don't have deficits because we're undertaxed (Democrats) or because of excessive spending even though it certainly is excessive. Deficits are large because investors around the world are more than willing to lend to a country populated by the world's most productive people. Consider Russia as the counterexample. Russia’s total debt is something like $190 billion, so relatively small. I take this to mean that markets have no trust in Russia’s economic future. Our problem is too much federal revenue, not too little. Government spending is the cruel, economy-sapping tax, not the deficit. 

Let’s talk about government spending. America has sent nearly $20 billion to Ukraine since the start of the war. Many will use this number as a floor and argue for more spending, more aid, more everything. Is this good for America?

Tell me if I’m wrong but I was terrified looking at the appropriations to Ukraine. $20 billion dollars against Russia’s total debt of $190 billion? I was terrified that as an afterthought we could shoot Ukraine $20 billion such that we’re effectively at war with a nuclear power.

Markets must price possibilities. One of those possibilities is that the war could go nuclear. So, I find myself wondering many ‘what if’ questions. One of them is ‘what if’ we didn’t really have an opinion about a part of Europe that has long been a part of Russia? Would there be fewer Ukrainians killed? Would less of Ukraine be destroyed? Now, I’m talking out of turn here, but I think the size and scope of aid to Ukraine is a direct result of politicians having too much money to spend. They had it, so they spent it. That’s the logic.

How does your logic apply to use of sanctions against Russia and its key leaders?

Again, more government, more control. Why is it that every time another country does something we don’t like we get to grow the government bigger? The Russians lost 27 million in WWII, and they’re not allowed to defend their borders? What would Americans think if Russia established an alliance with Mexico? Why is it that the oligarchs who were kowtowing to Putin (which is necessary in that regime) had to be punished with sanctions?

Regarding sanctions and the pretense that government can keep banks from lending dollars in Russia, let’s be serious. Go shopping in Venezuela or Pyongyang or time travel back to Soviet Russia and you better have the U.S. dollar to buy anything. Money will always find a productive use; it flows to its highest use. So, if U.S. banks are no longer going to finance Putin, then we should expect other banks will. Markets always express themselves no matter what governments do, and so I consider the sanctions another expansion of government power with minimal effects on the situation.

Let’s pause on Ukraine for a moment. Have you ever been to China?

I have and it’s fascinating.

Experts call Russia the “acute” threat while China is the “pacing” challenge. We can extend the present arguments a bit and see how experts will soon argue that China is both the “acute” and “pacing” threat such that America must grow a bigger defense budget to meet the challenge. What are your thoughts on China?

Everywhere you look in China is a McDonald’s or Microsoft or Nike or whatever. The Chinese are having a passionate love affair with all things American. But if you watch Fox News, you’d think the Chinese are rigidly lining up and being told what to do and to hate America. They’re productive. They love everything American. Bill Clinton, of all people, pointed out years ago that the cross-border investment between China and Taiwan is vast. You take the United States out of the equation in East Asia and my guess is that the Chinese acquisition of Taiwan is bloodless. Go to Shanghai. The city will absolutely astound you with how modern and advanced it has become. Yes—the Chinese people view Taiwan as theirs. You pull America out of the equation and, yes, China might acquire Taiwan. And, yes, Xi might be a bad guy. But it’s our involvement that aggravates the tension and promises more trouble to come. Similar to Russia.

You believe that interlocking economies is a deterrent to war with China?

Well, I think more trade barriers create a greater likelihood of war. I wish we could force every commentator, pundit, and politician to go to China. The Chinese people want to be like us and yet we’re demonizing them. What did JFK’s father say? You don’t get into war because it’s costly and bad for business. GM sells more cars in China than it does in America. The second largest market for McDonald’s is China. Nike’s second largest market is China. You cannot weaken China significantly without collapsing aspects of the American economy. Imagine how rich we get in America if the Chinese get rich, too? The Chinese people are very poor relative to Americans based on GDP per capita. We haven’t come close to what we can get out of our deal with China, but everyone has turned against them.

But what about the points we have in conflict with China. Take, for example, the issue of theft of intellectual property—

I’ll stop you right there. What is good IP? We don’t know. If you’ve got good IP, how do you execute it? Gates and Jobs both acknowledge that they lifted IP out of Xerox PARC but it only became valuable IP once in the hands of Gates and Jobs. Everyone steals ideas. GM tries to hide its new cars because they know that everyone is spying on them. Air France used to bug all the seats in first class to find out what the American executives were saying on their international travel. How many of Belichick’s disciples or Saban’s disciples have won championships? The CCP may steal IP, but it's utterly meaningless if in the wrong hands. Indeed, let's take this back to Gates and Jobs. Gates acknowledged that the vast majority of his business ideas at Microsoft failed. With Jobs we talk about the iPhone, but not the Lisa. Most of his ideas failed too, as have most of Bezos's ideas, yet we're supposed to believe the CCP knows what to steal, and more ridiculous, what to do with what is stolen.

The idea of IP theft is another way for government to empower itself and spend more money.

Saddest is that conservatives have embraced some of this. The Wall Street Journal for the longest time supported China joining the World Trade Organization. Since Trump, the Journal has become more and more anti-China. Look at the positive versus negative articles on its editorial page and do a comparison. You can count on one hand the number of pro-China pieces they’ve published. Not too many years ago you had Holman Jenkins saying that China was just a large version of North Korea. That’s incomprehensible! Go to China. See how large a marketplace it is for goods and services. The Journal supported government cracking down on TikTok for fear that China was stealing people’s data. This is all about protectionism. This is businesses going to the government to keep out foreign competition and using all this stuff about national security as a rationale.

You’re saying that U.S. corporations are afraid to compete with China?

Think about it. Huawei was kicking the ass of U.S. businesses. There’s a reason TikTok was kicking ass, too. The use of “national security” as a rationale is simply an abuse of power. There was some-$250 billion appropriated for the CHIPS Act. Ridiculous! The idea that America needs to be “chips independent” is ridiculous. You can’t predict where the product ultimately ends up. There’s no accounting for the destination of goods. The iPhone is popular in Iran no matter that there’s an embargo. The idea that you can keep things from reaching people just runs counter to common sense. Products are going to find their best buyer and no business would ever give up a market.

Oil is no different. The United States is, has been, and should remain dependent on foreign oil. I’m not anti-drilling but I am for dividing up work with the world in the best way possible. There is simply no pushback in the media against taglines like “energy independence.” Try to get on Fox or in the Journal saying energy independence is a lie. Nobody will have you. The price of oil is up 38 percent per barrel but there’s no mention that oil prices quadrupled under George W. Bush. They’re calling it Biden’s war on oil but tell me what happened in the George W. Bush Administration?

What I’m taking from this conversation is that foreign policy is mostly just an expression of domestic politics and economics. As we wrap up, do you agree with that characterization?

Pretty much, yeah. Look, foreign policy is just another excuse bruited for government intervention. A government that is this large is going to be doing lots of things—I don’t mean to imply that there’s anything sinister or corrupt about the way it operates, but I will say that like any other bureaucracy, government is looking for a purpose. There’s always going to be money flowing to the government. Foreign policy becomes one of the many reasons underlying that flow of money. 

John Waters is a writer in Nebraska.