Eisenhower’s Reprieve and the Descent Into Fiscal Insanity
Part II: David Stockman’s "The Great Deformation" – an instant classic
Editorial note: The first part of this review appeared on Monday.
David Stockman’s The Great Deformation is an economic history of the United States as seen through the eyes of a devoted fiscal conservative whose number-crunching abilities have led him to the ineluctable conclusion that the Warfare State is one of the main drivers of that old devil the Welfare State.
The result is that we get an analysis that in no way resembles the cookie-cutter Heritage Foundation/American Enterprise Institute "conservatism" that insists on austerity for the masses and tax cuts for the wealthy, while throwing money at the Pentagon hand over fist.
Instead, we get praise for such an unlikely conservative hero as Harry Truman, who insisted that the Korean war "be financed the old-fashioned way – with taxes." As a libertarian, my instant reaction is horror – but wait. We often hear some peace advocates say that if we had a draft there would be less wars of "choice," but to me this has always seemed an absurd trade-off: legalized slavery in return for the prospect of peace? No thanks. Besides, it didn’t work out that way during the Vietnam war, now did it? However, Stockman’s praise of Truman for financing the Korean war with taxes seems like a more reasonable trade-off: make them finance their wars with new taxes so that the population feels some tangible pain. Now that may very well be a more credible deterrent.
In any case, while Stockman avers that "from a contemporary vantage point, it is not clear what purpose US intervention on the Korean peninsula ultimately served" – a point brought home by the current Korean crisis – once the decision to go to war was made, Truman refused to borrow the money. Federal spending metastasized by almost 80 percent during the Korean conflict, but it wasn’t a budget-buster – and Truman’s pay-as-you-go policy encouraged Republicans to support a swift end to the war: "Owing to Truman’s unwavering insistence on stiff war taxes," Stockman notes, "GOP conservatives had no stomach for open-ended war in the barren hills of Korea if it meant permanently high taxes."
That, however, was the last hurrah of the old fiscal orthodoxy, as Stockman points out:
"After that, America’s imperialistic misadventures in other strategically barren redoubts of the planet faced no such political constraints. Lyndon Johnson set the new tone with his ‘guns and butter’ adventure in Southeast Asia, even when the historical record shows tha the Chinese people were now starving in their villages, not fixing to pour across the border of another purported domino.
"Yet LBJ couldn’t bring himself to ask for war taxes until the very end, a drastic failing that opened the way for equally irresponsible war finance by future GOP administrations. Indeed, four decades later George W. Bush’s equally bootless imperial missions were carried out entirely tax free. Indeed, what poured out of China this time was the money to fund them."
The old fiscal orthodoxy persisted in the generation that was rapidly passing from the scene: a generation exemplified by Fed chairman William McChesney Martin, who managed to put a temporary brake on the growing role of the Federal Reserve as the Prime Mover of the American economy. Between 1954 and 1963, as Stockman points out, real economic growth averaged 3.4 percent while inflation was tamed at 1.4 percent. It was a brief golden age, before the darkness overcame us: "There was no subsequent nine-year period that had a better combined performance of these core variables," writes Stockman. "And none which left the overall economic and financial system so healthy and stable."
And, I might add, there was no subsequent period in American history in which the culture was so healthy and stable: the much-derided Fifties, that era of the "organization man," the "man in the gray flannel suit," conformist and bourgeois to the core. The presidency of Dwight David Eisenhower – Stockman describes him as "a military hero who hated war" – was the last hurrah of the Old America.
Eisenhower’s signal achievement, in Stockman’s view, is that he succeeded in actually shrinking the federal budget in real terms during his eight years in office, and he did it by "taming the warfare state." Contrast this with the fiscal profligacy of his war-making successors: LBJ, Reagan, and Bush II: "In each case," avers Stockman, "the plunge of the nation’s fiscal accounts deep into the red was triggered by a resurgence of the kind of massive warfare state budgets that Ike so resolutely resisted."
The theoretical basis of our post-Eisenhower fiscal madness came in "left" and "right"-wing versions: "Keynesian theories of prosperity management that manifested themselves in both a leftist ‘new economics’ version and rightist ‘supply side" version." Armed with this new doctrine, the political class believed they could engineer unprecedented rates of economic growth, "such as 5 percent annually, or even better." They could have "guns and butter," and wind up ahead of the game – all without raising taxes!
But of course what they got was massive war deficits, and "yet this was a good thing, according to the Keynesian professors," says Stockman, "because such deficits inject demand into the economy, thereby lifting output closer to its full-employment potential." The supply-side Lafferites chimed in with their own version of a free lunch for all: growth would pay for everything, including all the wars anybody felt like starting. The reality, as Stockman points out, is quite different, however:
"In fact, war deficits are the worst fiscal policy imaginable. They add to civilian demand but generate no marketable output of consumer products or capital goods. Accordingly, war deficits tip the economy toward excess demand, inflationary bottlenecks, rising interest rates, and financial instability. They destroy wealth and lower living standards."
Feel poorer after the last decade or so? That’s why.
Eisenhower gave the country an eight-year reprieve from such a fate by quickly ending the Korean war, slashing the Pentagon’s budget, and cutting Truman’s wartime spending by nearly one third. The Democrats responded by accusing the President and the GOP of "allowing their Neanderthal fiscal views to endanger the national security." Yet Eisenhower’s approach was to actually spend military appropriations on the defense of the United States, as opposed to imperial adventurism abroad. This was the theme and purpose of his "New Look" national security strategy, which called for a big reduction in land and naval forces, and shifting spending to our nuclear deterrent. He also made our European allies pay more of the costs of their own defense – a proposal that, these days, would be denounced as "isolationist."
Stockman contrasts Eisenhower’s "New Look" with Truman’s national security strategy as summarized by the infamous NSC-68, which called for maintaining a capacity to fight at least two land wars simultaneously with conventional forces. The interventionist bias of NSC-68 violated not only Eisenhower’s reluctance to be drawn into the "limited" land wars that would consume policymakers in subsequent administrations, but also contradicted his own fiscal conservatism and the traditional Republican green-eyeshades approach to government spending: he feared, as Stockman puts it, "that the massive permanent budgets required by the limited war doctrines of NSC-68 would erode the economic foundation on which true national security depended." The Army, the instrument of what was essentially an offensive strategy pursued by NSC-68, was allocated a mere 22 percent of Eisenhower’s military budget, while the Air Force – a vital component of the new "massive retaliation" orientation – got 47 percent.
This led to a revolt of the generals: Generals Matthew Ridgeway and Maxwell Taylor resigned in protest from the joint chiefs of staff. Stockman trenchantly points out that these two were brought back by none other than Robert McNamara, the "whiz kid" of the Vietnam war era. McNamara also brought back NSC-68, during his stint as Secretary of Defense, and beefed up the Army, in preparation for the Vietnam intervention. The Democrats in power brought military spending back up to Trumanesque levels. The American empire was saved!
No President after Eisenhower succeeded in reining in the Warfare State as he did: indeed, after he left office, the Welfare-Warfare State began to take on the gigantism we have come to know and loathe:
"Indeed, in a few short years after Ike left office, the profound danger of a symbiotic nexus among the warfare state and welfare state became starkly apparent. Reflecting the imprint of the Hubert Humphrey "guns and butter" liberals, both sides of the budget hit simultaneous peaks in fiscal 1968. With constant-dollar defense spending back to the $515 billion Korean War peak, domestic outlays followed suit, reaching an all-time peak of $455 billion" [in 2005 dollars]."
After Vietnam, there was no "peace dividend": instead, the log-rolling operation conducted by the military-industrial complex and big spending liberals simply recycled the $200 billion in "savings" into increased domestic spending. Under Nixon, the spending continued, exceeding "even the Kennedy-Johnson record spree." By the time Ronald Reagan took office, domestic spending had doubled. What this meant was that the Reagan military build up had to be financed with borrowed money: and this marked the death of the old Republican fiscal orthodoxy, and the rise of a "right-wing" variant of Keynesianism – dubbed "supply side economics" – to rationalize the abandonment of sound economics.
The end of the cold war gave us no relief, only "a modest rollback," as Stockman characterizes it. Bill Clinton‘s military budget was as large as Eisenhower’s, even though, at that point, there was no major threat to America’s unprecedented military hegemony. As for George W. Bush – well, we all know what he did:
"Then followed George W. Bush’s senseless misadventures in the barren expanse of the Hindu Kush and on the bloody plains of the Tigris-Euphrates. These campaigns generated the third great post-Eisenhower surge in constant-dollar defense spending – an all-time high of nearly $600 billion in constant dollars."
The relationship between military spending and actual threats to our national security was long gone. And Obama, who as a candidate campaigned in favor of ending Bush’s wars, wound up topping Bush’s record military spending. I can’t resist quoting Stockman on Obama’s record in full:
"On exactly the fiftieth budget anniversary of Eisenhower’s farewell warning, evidence of the insuperable power of the military-industrial complex was stunningly evident in Obama’s fiscal 2011 budget. The 2008 election, of course, had been even more unequivocally a ‘peace’ election than 1968 had been, because this time the ‘peace’ candidate actually won. Yet election mandate or no, the third great surge in the post-Eisenhower warfare state gave no ground whatsoever.
"In fact, inflation-adjusted defense spending in fiscal 2011 of $670 billion was a new record, eclipsing even George W. Bush’s final war budget. It was thus abundantly evident that even an out-and-out ‘peace’ president is no match for the modern warfare state and the crony capitalist lobbies which safeguard its budgetary requisites.
"Indeed, Barack Obama pushed the frontiers of the warfare state further than ever before. Beating his mandate for plowshares into an even mightier sword, the peace president pushed defense spending to a level 80 percent greater than General Eisenhower concluded was necessary."
The symbiosis of conservative militarists calling for more guns, and liberals calling for more butter, is today complete: the log-rolling continues apace. The War Party pushes for more intervention, more threat-inflation, and more "defense" spending, while the "progressives" campaign for deficit spending, monetary inflation, and more domestic spending. These two factions happily coexist, egging each other on, and therein lies the road to bankruptcy – and endless war.
There is more – much more – to The Great Deformation, but it is, for the most part, beyond the purview of a column devoted to analyzing the effects of militarism on our society. Libertarians will find much to agree with in this volume – Ludwig von Mises merits a mention as the founder of the Austrian school theory of the business cycle, and goldbugs will glory in Stockman’s defense of the gold standard. But liberals and the abovementioned progressives will find themselves nodding in agreement, too, as Stockman describes the ills effects generated by the Federal Reserve and the resulting financialization of the US economy.
The book is already generating a storm of controversy, and is being attacked by all the right people – the Keynesians, on the "left," and the Reagan-idolators on the "right." Go out and buy it, then settle down in your favorite comfy chair: unlike most texts dealing with economics, it’s a real page-turner, as the author describes what led to the biggest bubble in American economic history – and hints, along the way, at a spectacular climax, a day of economic reckoning this book will hopefully help to prevent.
NOTES IN THE MARGIN
I’m having great fun on Twitter these days, and I urge you to join me on this wonderfully interactive site: you can do so by going here.
I’ve written a couple of books, which you might want to peruse. Here is the link for buying the second edition of my 1993 book, Reclaiming the American Right: The Lost Legacy of the Conservative Movement, with an Introduction by Prof. George W. Carey, a Forward by Patrick J. Buchanan, and critical essays by Scott Richert and David Gordon (ISI Books, 2008).
You can buy my biography of the great libertarian thinker, An Enemy of the State: The Life of Murray N. Rothbard (Prometheus Books, 2000), here.
Read more by Justin Raimondo
- Who’s Behind the Boston Marathon Attack? – April 21st, 2013
- Making Stuff Up – April 18th, 2013
- The Great Deformation – April 14th, 2013
- The Meaning of Hugo Chavez – April 11th, 2013
- The Thatcher Paradox – April 9th, 2013
john g
April 16th, 2013 at 9:48 pm
" the rise of a "right-wing" variant of Keynesianism – dubbed "supply side economics" – to rationalize the abandonment of sound economics."
Hang on, what? Supply side economics is Austrian/neoclassical dogma. Almost the polar opposite of Keynes.
Keynes advocated deficit spending for full employment, not military adventurism.
I agree wholeheartedly with a lot of Stockman's wishes with regard to empire and militarism, but his history and his economics are pure bunkum.
And conflating welfare with military spending is unconscionable. Shrink the pentagon by all means, I'll happily help, but not spending on general welfare for the poor, unemployed and the elderly is an appalling indictment of "libertarianism".
Johnny in Wi.
April 16th, 2013 at 9:50 pm
Eisenhower had the right idea on downsizing the military. But no thank you to 90% marginal tax rates. The Federal government is sucking us dry with taxes waste, war, fraud, and mismanagment. Ever since Wilson got us in WW1 we have been on a downhill roller coaster. Taxes and war are killing this country. You have to starve the beast.
Justin Raimondo
April 16th, 2013 at 10:43 pm
If you think supply-side economics is Austrian economics then you had better go back to Economics 101. Try reading the Stockman book before criticizing it: you might learn something. Also: Milton Friedman is drawn & quartered.
Guest
April 16th, 2013 at 10:47 pm
Eisenhower was no hero, not in WW2 at least. Look up Operation Keelhaul and the book, "Other Losses" by James Bacque.
john g
April 16th, 2013 at 11:30 pm
I have a degree in Economics that I completed in 1980 before that shill Friedman came into vogue, at least in Australian academia. Even then it was mostly bunkum.
Neoliberalism is a direct progeny of Austrian School faux economics. Von Mises was as much of a charlatan as Friedman.
Anyone who would say witha straight face that supply side economics and Keynes are kindred is illiterate.
Anyone who says supply side economics and Austrian School "economics" aren't intertwined is delusional.
john g
April 16th, 2013 at 11:33 pm
I know enough about Stockman not to waste my time with it. He doesn't understand macroeconomics or sectoral balances in any way. I can add money creation and the banking system to the list of his blind spots.
Articles for Mid-Week » Scott Lazarowitz's Blog
April 17th, 2013 at 3:26 am
[...] Justin Raimondo: Eisenhower’s Reprieve and the Descent into Fiscal Insanity [...]
richard vajs
April 17th, 2013 at 5:20 am
"Making the rich pay for their wars" is a nice thought, but America is now way too corrupt for that. No-one will consent to that anymore. All of the rich have one foot out the door already – make them pay taxes and they will be gone – to Costa Rico, Luxemburg, Tel Aviv, etc. Mega-bitch Leona Helmsley put it best -"taxes are for the little people".
Johnny in Wi.
April 17th, 2013 at 5:57 am
Agree: What Eisenhower did at the end of WW2 can only be called a war crime. However he was not a warmonger President. Justin makes good points.
Sam Lowry
April 17th, 2013 at 7:42 am
This is uninformed. But that's what a degree in economics will do to a person.
The occasional convergence of the economic prescriptions of the supply-siders and the Austrians is entirely superficial.
On the other hand, the Keynesians and the supply-siders may disagree on monetary and fiscal policy prescriptions, but they both presuppose a role for government in the economy and society. Laffer explains, for example, that under certain conditions, lower tax rates result in higher tax revenue. This is not the kind of argument a genuine advocate of free markets would make. Participation in economic activity free of government interference is valued for its own sake, not because freer markets tend to provide the government a bigger source of revenue.
The distinguishing characteristic of the Austrian School is its methodology. It approaches the study of economic phenomena first by recognizing that it is the result of purposeful human action—"the result of human action, but not the execution of any human design” as the Austrians like to say.
This enrages the would-be central planners, who view the economy as a machine to be adjusted and tuned so specific ends. So they get back to arguing about which economic knob to turn and which economic lever to pull.
Don_Bacon
April 17th, 2013 at 8:15 am
Let me clarify it. The U.S. gained–
1. Military airbases one air-hour from Shanghai and Beijing.
2. An endless war with an enemy which can be provoked at any time, especially at budget time, with war-games and B-2 bombers. Another "threat" which requires the U.S. government to Keep Us Safe.
3. A reason to "pivot" military forces to the Asian theater to help cajole Asian countries (except China) into a new trade pact (TPP) wanted by corporations who need protection.
–SecDef Panetta: The second element of our defense strategy is to maintain our force projection where we need it, in the Middle East and in the Asia Pacific region. . . So that's why we're rebalancing to the Asia-Pacific because we confront real threats here from — from North Korea.
4. Leverage to get more bases in the Asian theater. The Philippines defense minister recently suggested that if the scary NorKor threat develops further, Philippines might again allow U.S. bases in that country. also Marines in Australia.
5. Reason to spend more money building worthless warships, as the NorKor threat is used to get back to a 300-ship Navy. (PS: The Navy would still have more admirals than ships.)
6. Increased leverage over the United Nations, since the 1953 Armistice Agreement which the UN is a party to (the U.S. isn't) is still responsible while the U.S. is really in control.
7. Similar with South Korea (ROK). The U.S. still commands ROK military and won't allow ROK to command its own troops. This situation is unique recently in the world — the U.S. hasn't commanded Iraq or Afghan troops –except in Europe (NATO) of course, the other U.S. military puppets. This U.S. control of ROK military allows the U.S. to control ROK foreign policy.
8. Political leverage over China — "We need you to control your dangerous ally North Korea — just do it."
john g
April 17th, 2013 at 12:20 pm
Austrians refuse to see macroeconomics and end up with the sort of meaningless mumbo jumbo you've just typed.
Macroeconomics rule #1 spending = income.
Government sector spending (money creation) is private sector income.
RyanSmurfy
April 17th, 2013 at 3:47 pm
Eisenhower achieved peace through soft power and strength and prosperity through tariffs, keeping the rudder close to Lord Keynes wishes at Bretton Woods as possible. At Bretton Woods, Keynes had not only argued for the US dollar to be pegged to gold, he had also proposed enforcement measures to hold the US accountable. Unfortunately, America killed Keynes proposal, enabling LBJ and Nixon's guns and butter spending to undermine Eisenhower's American High.
To summarize and give Libertarians a reality check: Eisenhower's policy, 90% marginal tax rates and all, unlike Austrian theories, worked. What followed — Kennedy's military buildup and move toward Austrian-like free trade and LBJ's guns and butter — failed, but both deviated from Eisenhower's gold-based, tariff-enhanced Keynesianism.
Pushing theoretical Austrian economics, which has never worked, creates a huge obstacle to building a broad-based antiwar coalition in the US. The place for Justin to argue the merits of Austrian economics is LewRockwell.com or, if he can defend it, on the Keiser Report. Just not here, where it will only split the peace movement.
Sam Lowry
April 17th, 2013 at 5:13 pm
So if I create perfect Federal-Reserve bank notes in my basement, and go out and spend them, is that private-sector income?
Mike
April 17th, 2013 at 6:03 pm
"Supply side economics is Austrian/neoclassical dogma"
You are a complete moron if you actually believe what you posted. And having a degree in economics does not impress me one bit.
"Anyone who says supply side economics and Austrian School "economics" aren't intertwined is delusional. "
you are mentally ill or have an IQ of 20 if you are delusional enough to believe that. That's just beyond stupid.
john g
April 17th, 2013 at 6:27 pm
Yeah mate. You're a diamond.
john g
April 17th, 2013 at 6:30 pm
Neoliberalism came out of the Austrian School nonsense being taught at UC.
The Austrians were all bankrolled by banksters and and their cronies.
You are misinformed and entirely mistaken.
If you "libertarians" have such a good argument, why do you always resort to insults?
Sam Lowry
April 17th, 2013 at 7:11 pm
You're avoiding the question. What's the difference?
Sam Lowry
April 17th, 2013 at 7:18 pm
"If you 'libertarians' have such a good argument, why do you always resort to insults?"
Um, I apologize for Mike's ad hominem attack, but you started this whole thing with:
"Anyone who would say with a straight face that supply side economics and Keynes are kindred is illiterate."
"Anyone who says supply side economics and Austrian School 'economics' aren't intertwined is delusional."
And for what it's worth, Austrians and supply-siders really do have nothing to do with each other.
john g
April 17th, 2013 at 9:31 pm
But both are true statements. And I was told to go back to Economics 101 prior to that.
Austrians and supply siders are peas in a pod.
john g
April 17th, 2013 at 10:44 pm
It's a pointless question.
Prinzowhales
April 18th, 2013 at 4:12 am
Any mea culpas for putting it on the line for that contemptible sack of odd-ends…little Chuckie Hagel?
RyanSmurfy
April 18th, 2013 at 1:05 pm
From the beginning, Roosevelt made the decisions, not Eisenhower. Thomas Flemming's "The New Dealers' War: FDR And The War Within World War II" describes the difference between the two leaders' policies, objectives, timing, choice of allies and victory goals. Though I will not excuse Eisenhower's service in Roosevelt's mad pursuit of unconditional surrender and partnership with Stalin, I doubt that Eisenhower's plan would have included the worst aspect's of Roosevelt's. For example, according to Flemming, Roosevelt had nixed Eisenhower's surrender deal with Italy and Ike's negotiations with Rommel and other high German commanders (Rommel paid with his life). Oliver Stone's history shows a clip of Ike objecting to the atomic bomb.
The peace movement will be lucky if the US ever elects a realist like Eisenhower again, though he did carry out Roosevelt's strategy as surely as Ron Paul served the Mad Bomber Truman in Korea.