The Return of Big Spending Republicans?
2017-01-21 · Guest: Ivan Eland (Independent Institute Senior Fellow) · 47:49
National debt as a threat to national security
Bob Zadek and Ivan Eland discuss the burgeoning national debt and budget deficits as the primary non-military threat to U.S. national security. They explore the distinction between actual defense and global power projection, the political incentives of the military-industrial complex, and the potential fiscal trajectory of the incoming Trump administration.
Topics: National Debt, Budget Deficit, Military Spending, Entitlements, Reserve Currency, Trump Administration, Crowding Out, Fiscal Policy
Speakers: Bob Zadek, Ivan Eland, Caller (Evan)
Introduction and the Debt as a Security Threat [00:19]
Bob Zadek: Hello everyone, welcome to the Bob Zadek Show, the only live libertarian talk radio show on the air all weekend. Thanks so much for listening this January 22nd, 2017. January 22nd was an important day—is an important day. It was the day in 1973 that the Supreme Court handed down the—everybody knows about this—the decision of Roe v. Wade. I have to restrain myself; I’d be tempted to go off and discuss Roe v. Wade for an hour. Interesting topic; we’ll defer that to another day.
This morning, I’m delighted to welcome back to the show Ivan Eland. Ivan is the Senior Fellow and Director of the Center of Peace and Liberty at the Independent Institute. That’s a wonderful think tank located here in the Bay Area. Ivan joined us back in June of 2014 discussing Iraq. That was quite a long time ago, it seems. Ivan, welcome back to the show.
This morning, we’re going to be discussing an issue of great importance to every single American and indeed many people around the world. It’s an issue that deals with national security in the most profound way but has nothing to do with armaments. Ivan will help us understand what Ivan considers to be the greatest, albeit non-military, threat to our national security. What is that? It is the spending in Washington, D.C., which creates budget deficits that cannot be repaid. Ivan will help us understand how that deficit—that uncontrollable temptation to spend money we don’t have—represents the greatest threat to our security as a country. Ivan, welcome back to the show this morning.
Ivan Eland: Thanks for having me on again, Bob.
Bob Zadek: Now, Ivan, you have recently written a piece taking the position—the somewhat easy position, I dare say, but you’ll help us understand why—taking the position that spending in Washington, but I shouldn’t just say spending, the deficit, which is the result of the difference between spending and tax revenue (although revenue is a bad word), how the deficits represent a threat to our viability as a country, unless I have overstated the point. Tell us the premise of your recent piece and why you chose to write it at this time.
Ivan Eland: Well, no election was ever won on a budget deficit, unfortunately, because people like government benefits, but they’re okay with not paying for them. They want their taxes cut, but somehow they want the services that the government provides anyway. Now, of course, the other question is, could those services be better provided by the private sector? And of course, that’s probably usually true, such as Amtrak train service, etc.
But we won’t get into that. So we have this budget deficit, which means that the tax revenues are less than the government spending. And that’s sort of been the case in recent times because the politics are—especially when we have Republican administrations—the politics are cutting taxes, people love it, but the Republicans always go soft on the spending reductions because people also like those government programs.
So you have budget deficits accumulate, some of them very large, during the Reagan years, during the George W. Bush years. And of course, each year the budget deficit—that’s the flow—and the stock is the debt. In other words, each time you run a budget deficit, it accumulates into the national debt. Now, the national debt is huge right now; it’s almost $20 trillion.
How does that affect national security? Well, national security—anything you do in life—requires money. And the money you have to have to buy tanks, to buy missiles, to buy Navy ships, to buy Air Force aircraft, etc. And so if you don’t have that money, you don’t have a very good military. Now, we have the best military in the world. We have crushing superiority in a conventional war and in a nuclear war over virtually almost anybody. Now, in a nuclear area, Russia also has a lot of nuclear weapons, but our weapons are more accurate, etc. So we do have dominance in nuclear as well. But we have this military because we pay for it. We spend what the next seven or eight countries do combined each year on defense. So we are crushingly dominant. When politicians tell you that the military has been eroded, that’s nonsense.
So we get this military through taxes, and of course, the taxes depend on the economy because you don’t have anything to tax if the economy’s not going well. Now, there was a guy named Mike Mullen, who was the Chairman of the Joint Chiefs of Staff, and that’s the top military post. He made a very interesting statement one time. He said he thought that the national debt was the biggest threat to national security. That made a lot of headlines because usually we think of the military as wanting more money all the time. And the current Defense Secretary, who just got confirmed, has talked about the same thing. Unfortunately, they don’t really want to cut the defense budget; they want to cut everything else. And we do need to cut other things as well, like entitlement programs, which are actually a bigger portion of the budget. But if you don’t get this debt down that drags the economy—our growth rates have been slow in the recovery since the 2008-2009 recession—and the reason for that, I think, is this huge debt that drags the economy. And therefore, to do that, you need to cut the budget some way and try to run government surpluses to pay down the debt, which is unfortunate, which means you have to take in more tax revenues than you spend. So we’re in quite a quandary because this debt is huge. If our growth rate slows down even a couple of percent and China’s goes up over time, we could become a second-tier power because the reordering of great powers in the world can matter just on a couple of percentage of growth rates.
Defense vs. Offense [03:30]
Bob Zadek: Ivan, one point you mentioned that I want to focus on—I have mentioned this before on prior shows, but never with you, and I’d like your response if I may. You mentioned we’re spending a lot of money in the military on defense. I focus on the word “defense.” I disagree with the statement in that much of our military budget is spent on offense, not defense. We have never had—well, we rarely have a conversation on the difference between the two and whether or not this, of course, captures nation-building, what we did in Libya by way of example. But so much of our defense budget is spent on the military, but not on defense. And that conversation about what we truly need to do to defend ourselves, as opposed to force our will upon others or protect our allies but not directly ourselves, that conversation doesn’t seem to have been had very much in recent history.
Ivan Eland: Yeah, I don’t disagree with you there. I was just using the term “defense” because it’s called the Defense Department and the defense budget. You’re absolutely right. Most of our military is to project power overseas and to impose our will on other countries or defend other countries, such as South Korea, Europe, or Israel from countries that are actually poorer than they are. I think Trump, in that aspect of Trump’s policies, he’s hit the nail right on the head.
The Military-Industrial-Congressional Complex [05:50]
Bob Zadek: Ivan, before we went to break, we were starting to discuss the very concept of, or distinguishing, military spending which is purely defensive in nature—after all, it is the Department of Defense—versus expenditures that have little or nothing—they are military expenditures, but have little or nothing to do with defense. And I guess you can define defense so broadly that the word loses its meaning, or you can take a more grown-up, a more serious approach to defense and ignore a lot of what’s going on in the world because it does not constitute a direct and immediate threat. Now, how much of this dichotomy is actually discussed in Congress, and how did we get such a—sometimes the phrase is “muscular”—military policy where we seem to be spending money to do things to counter what nobody can really believe to be a serious threat?
Ivan Eland: Yeah, well, I think, you know, Eisenhower mentioned the military-industrial complex. Of course, he also helped to create it. After the Korean War, the defense industry didn’t go away like it usually did; it stayed on in peacetime. We have these defense contractors. And what happens is they have subcontractors and they spread the subcontractors all around the country so these weapons systems, even if they’re obsolete or out of date or we should buy something else, these weapons systems continue to get produced because defense is a political industry rather than, say, the computer industry or the tire industry or the oil industry.
Basically, most of these large defense contractors do most of their work for the government. And the subcontractors they choose on the basis of which states they’re in, rather than—most commercial firms, if they’re contracting out for something, they get the best value for their money. But in this case, they go up to the Hill, Capitol Hill, and say, “Well, we need this F-35 fighter.” And the most important briefing slide is always the last one, having worked in Congress, and that’s where all the subcontractors are. So all the members of Congress look into the briefing and say, “Oh, there’s a subcontractor in my state or near my state or district. Therefore, I’ve got to vote for this program even though I don’t really want to,” right?
And of course, the people who have a lot of defense industries, military bases, etc., they tend to gravitate toward committees where these issues are discussed and the money is appropriated for these things. And so therefore, you have this military-industrial and I would say congressional and even media complex that supports these things. And of course, if you have all these weapons, as Madeleine Albright, Clinton’s Secretary of State, once said to Colin Powell, who about passed out when she said it, she said, “You have this big beautiful military, why don’t we use it?” right? And so if you have all these weapons and power projection capabilities, then people look to you to say, “Well, gee, what are you going to do about this or that problem?” And of course, we don’t really have an overall strategy of what we want to do in the world. We seldom do. After World War II, we just decided to basically—we were squared off against the Soviet Union, but we were kind of using that as a rationale for policing the world. And then after the Soviet Union fell in 1991, of course, it got much worse. We intervened a lot more because there was no counterweight and we overtly policed the world. And we’re still doing that. The problem is we have a huge national debt. We can no longer afford to do this anymore. And we have a lot of wealthy allies who, Donald Trump is absolutely right, need to pay more. We pay 75% of the NATO defense spending, one country, and we have 28 members in the alliance and you have one country paying 75% of the bill.
The Breaking Point [07:40]
Bob Zadek: Ivan, I notice we have our first caller from Alabama. Always like to welcome out-of-state callers who wonders about—and this is a topic I wanted to cover today—when will we hit the breaking point and what will it look like? But first, let’s take our caller from Alabama. Evan from Alabama, welcome to the show this morning.
Caller (Evan): Yeah, hi. Thank you, Bob. And hello to you and Ivan. And yeah, my question is, I’m looking at a chart here based on CBO data and it shows that by 2025, the entire federal budget is going to be consumed by Social Security, Medicare, Medicaid, and interest on the debt. No money left over for other basic functions. My question is, when we reach that point, is that the breaking point of the budget? And if it is, what do we expect to happen when we reach such a breaking point?
Ivan Eland: Well, I think it’s a little hard to say. Perhaps one of the breaking points might be when the U.S. no longer has the reserve currency, which facilitates a lot of this borrowing. That could be one trigger. Of course, as you point out, the entitlements are what are really growing. Now, defense is big, but it’s been a reduced portion of the budget. But the real question in defense is, do we really need to be spending even what we’re spending? But of course, what the best thing that we ever had, I think, was sequestration, where they just said you have to cut across the board. Unfortunately, they didn’t include most of the entitlement programs in that. And therefore, the entitlement programs really have to be wrestled down. And we’re going to get to a point, I think Medicare is in worse shape than Social Security, but they’re both going to run out of money at some point. And that could be a trigger of when we really hit the morass of what we’re going to do. I mean, we could be in a Greek-style debt situation if we didn’t have the reserve currency. So I think that may be one of the factors that will trigger it if China gets enough economic power and people start to say, “Well, you know, we should move to an international basket of currencies for the reserve currency, or let’s just move to the Chinese currency as the reserve currency.” Now, that may be a ways down the road. I’m not saying this crisis is going to occur tomorrow. But the politicians have been ignoring this since Reagan and before. And the entitlement programs basically work on the premise that whoever qualifies gets paid, right? And so if you have a bulge in the population, which we do now retiring—the baby boomers are retiring—then you have a bulge of expenses and you have fewer workers for the amount of people that are getting benefits. And of course, we all know that that’s an untenable system. So the entitlements are a lot of this debt, but there’s also a lot of wars that we’ve racked up $4 to $6 trillion in Afghanistan and Iraq. You know, people who say, “Well, you got to cut the entitlements, not defense,” well, we don’t need all this spending, as Bob pointed out, because it’s not really defense spending; it’s offense spending or defense of other countries, if you will. And I think we can reduce that. And we need to reduce all the way across the board. That’s why sequestration is good, but entitlements need to be included in that sequestration, which they weren’t last time.
The Dollar as Reserve Currency [11:00]
Bob Zadek: Ivan, before the break, you used the phrase “reserve currency.” I’d like you to spend a few minutes explaining what exactly that means and why the dollar is special among the world’s currencies and how that affects the conversation of the deficit. It’s not an ultimate buffer, but it helps. Please explain reserve currency.
Ivan Eland: Yeah, there are several reserve currencies, but the U.S. is the premier reserve currency. There’s Swiss francs, Japanese yen, German marks, British pounds, etc. But we make up about 60% of the world’s reserve currency. Now, what does that mean? That means that central banks hold our currency as a buffer, as a hedge against uncertainty and that sort of thing. In other words, the dollar has a lot of credibility around the world. And of course, that has eroded a bit over time, but still no other currency has usurped it as the premier reserve currency. And what that does, we have a lot of dollars held overseas. In other words, there’s a high demand for dollars in other countries. In developing countries, sometimes you go and they have an official currency, but no one has confidence in it because of the policies, bad economic policies of whatever government is. You’ll see people trading—if you go there as a tourist or on business or something—you pull out dollars, they’ll go, “Yeah, yeah, we’ll take that,” right? So private people use this currency as well, the dollar around the world. And that increases, of course, the demand for dollars and pushes up the dollar value probably higher than it would be if it wasn’t reserve currency.
It also has the effect of this money overseas of being essentially an interest-free loan for the U.S. government, which is probably a bad thing, which means it can borrow more money. Now, the interest savings are only about $20 billion a year, but that’s $20 billion a year. And it also, of course, it makes us have a trade deficit because the dollar is pushed higher—well, that’s not the only reason we have a trade deficit, but it contributes to the trade deficit. And so of course, but it also contributes to the capital inflows that we have. It’s easier for U.S. businesses to get loans and everything because the dollar is—everyone likes to lend in dollars because you don’t have as much currency risk associated with this. And particularly U.S. businesses don’t have as much currency risk as other businesses because a lot of times they can do their trades in dollars. Not always, but if the other party said, “Well, you know, I’d rather do the deal in dollars because it’s safer, easier, whatever, more liquid,” then of course that’s an advantage.
But the real disadvantage is we tend to borrow more money and we tend to—the trade deficit tends to be higher, etc. Now, of course, if the reserve currency, premier reserve currency status went away—say China’s economic power increased or they went to more an international basket of currencies for some sort of a reserve currency—then of course we might be in a situation that’s with heavy debt like we have, unfortunately, we might be in sort of a Greek-type situation. So as I mentioned, that’s what the caller—one of the triggers could be if they moved away from the dollar currency. Now, some people find it curious that we’d both attack Libya and Iraq, and both of those countries had threatened to move away from dollar pricing in their oil. And some people say, “Well, was that a coincidence or not?” You can reach whatever conclusion you want, but that’s just one example of where the U.S. may be policing its dollar currency as the reserve currency and the currency of transaction, because most oil trading is done in dollars and that sort of thing. And so that can be an advantage, but in finance usually there’s a disadvantage, and one of the disadvantages is we tend to borrow more money, we tend to—the trade deficit tends to be higher, etc.
Presidential Power and the Budget [15:50]
Bob Zadek: Now, we have talked about the Eisenhower administration and how Eisenhower tried to cut back on spending. The Clinton administration was somewhat effective in cutting back. The Republicans, Bush, Reagan, were ineffective, did not try to cut back on spending. But we focus on the President. Now, as most of my listeners know, they’re pretty astute about how Washington works. The President cannot—is not allowed to spend money unless Congress permits it. So isn’t the blame, if that’s the right word, isn’t the blame much more so on Congress—and you have explained the political dynamics earlier—and less so on the President? It’s very important if you want to be active politically to understand where the accountability lies. So when we look at what nobody disputes to be a problem, is the entire system at fault and everybody bears blame equally, or as a matter of political dynamics, who bears the responsibility for this and so then we can start to figure out how to fix it?
Ivan Eland: Well, I think you’re right. Obviously it takes two to tango. The Congress, both houses of Congress, has to pass any spending bill. But the President does can veto it and you have to have two-thirds to override his veto. So the President, if he doesn’t want to spend something, he can veto the bill.
Bob Zadek: Or not spend it. Or not spend it.
Ivan Eland: Well, after Richard Nixon, you really have to enforce the law. You’re supposed to enforce the law according to the Constitution. Nixon tried impounding and then the Congress passed in 1974 the Budget Control and Impoundment Act, which prevented him from doing some of that because it’s really unconstitutional. The President is supposed to spend the money that the Congress appropriates, even if he doesn’t want to. But I think in history, it’s a little bit more complex than that than the formal duties because the President has become real powerful from what the founders wanted him to be. The President was really—the Congress was supposed to be the dominant branch of government. And the President did have the veto power, but he was also supposed to just enforce the law. And if he thought the law was unconstitutional, he would veto it. But it has grown to where the President is now has the bully pulpit. He’s in charge of creating this agenda and then he puts pressure through the modern means of communication, which they didn’t have back in those days of radio, television, internet. He puts pressure on Congress to pass his initiative. And so that’s more informal power. And then of course, as I mentioned, he’s got the veto power on the other end. So the presidency has become quite powerful. And yes, it does take two to tango with the Congress.
As far as partisanship goes, the parties in Congress have spent about the same. Counterintuitively, actually, Democratic presidents have restrained the growth of government as a portion of GDP more than the Republicans have. And the debt accumulation has been much lower for Democrats than for Republicans. And one of the reasons for that is this idea since Reagan that you cut taxes but you don’t cut spending, and that racks up deficits and debt. And so actually, if you look at it, Democratic presidents have pursued more conservative economic policies than Republicans since World War II. And so that’s an interesting fact that most people wouldn’t get by the campaign rhetoric of the two parties. And in Congress, as I mentioned, both parties are about the same spending-wise.
Crowding Out [18:50]
Bob Zadek: Ivan, we’re going to go to break in a second. When we come back, I’d like you to help us understand, as we watch what goes on in Washington, what should we look for? What will be the hopeful signs? And what can we as voters do about the deficit? But before we do that, there’s another issue that I think is underreported but bears directly on our conversation this morning, and that is the “crowding out.” Crowding out has a specific meaning in this context. It means if the government borrows money—and of course it borrows buckets of money—then money that otherwise would be lent to or invested by businesses to actually grow the economy either isn’t available or becomes more expensive because the government is such a massive borrower. To what extent does crowding out come into play and should it be part of the conversation, and how significant is the effect of crowding out on the economy?
Ivan Eland: Well, I think it is significant. And when we were talking about the $20 trillion figure, that’s just public debt. That doesn’t include private debt. And of course, the bigger the public debt is, the smaller the private debt is. And businessmen do need to borrow money to expand their businesses and that sort of thing. And so you do get that crowding out because there’s only so much money. And it also makes it more expensive to private businesses by raising interest rates higher than they would be normally. Now, we’ve been in a period of low interest rates here recently, but as the interest rate rises, you’re going to see more crowding out because—and of course it also increases the interest expenses that the government has. And of course, at the current rate, we may have interest on the debt as one of the higher categories of the budget, if not the highest one, because we have all these interest payments. It’s best to live within your means, I think, and we’re certainly not doing that right now.
Bob Zadek: And not only does the crowding out have the effect of depriving debt capital and investment capital to business, but also it’s quite clear, isn’t it, Ivan, that a dollar spent by the government has a much less positive effect upon the economy as a whole than the same dollar spent by private business? So there is a profound drain on economic growth just by the mere fact that government is an aggressive competitor for the debt dollars that are available. So our economy has really been a lot—or some of the energy is sucked out of the economy by the mere fact of massive government borrowing, is it not?
Ivan Eland: Yeah, and I think people who advocate public works programs like the infrastructure that they’re talking about now—an infrastructure program, building bridges, highways, etc.—I mean, you may need to do some of that, I suppose. The question of who does it is another matter. But a lot of people say, “Well, you know, we just need to have public works jobs, put people to work.” Well, if you ask the average person, you say, “Well, if the government was doing something or if a private business was doing something, who do you think would be more efficient?” And they’ll say, “Well, the private business.” Then you say, “Well, then why do we have all this government spending and we think it’s going to increase the economy because there’s an opportunity cost when you spend those dollars in taxes and goes to the government? It’s not spent as efficiently as it would be in the private sector.” So anytime you have public works projects or whatever, the private sector can provide jobs more efficiently than the government can. And of course, as you mentioned, all the government spending itself drags the economy, I think, because it diverts dollars from the private sector. And also, as we were mentioning, in the lending markets, the interest rates get driven up, etc., and there’s not as many funds available for business loans. So yes, to the extent that the government is less efficient than private sector—and the reason the government is less efficient than the private sector always comes back to one thing, and that is that the government is spending other people’s money and private sector is spending their money. Who do you think’s going to be more careful with that? Even the most careful government bureaucrats, it’s not their money that they’re spending, and that’s the real problem with government, I think.
The Trump Era Outlook [21:30]
Bob Zadek: Now, Ivan, before we went to break, I asked you—I warned you when we come back, I was going to ask for your speculation. Of course, it’s very early, but we’re allowed to do it if we wish. Based upon the little bits of information that we have, what are we likely to expect from a Trump administration in so far as deficit spending is concerned, the growth of government in general—that means the growth of government spending? Are you fearful? Are you optimistic? Is it just too early to tell?
Ivan Eland: Well, I think, you know, based on what we’ve seen from Reagan administrations and George W. Bush administrations, and we still see this dynamic operating within the Republican Party, even though Trump is sort of not a—what you’d call a conventional Republican, we see talk of tax cuts, but we also see no talk of entitlement reform. Now, some of the Republicans would like to do entitlement reform, but—at least they say they do—whether they actually will do it in practice because there’s a lot of mad constituents if you do that. Once you get these programs, it’s difficult to get rid of them, as we’re going to see with the Affordable Care Act too, I’m afraid. But the Trump has said he doesn’t want to cut Medicare, Medicaid, and Social Security, the major entitlement programs. Now, there’s been some noise about the Republicans of doing something, but if the President doesn’t support it, so you’re not going to see spending cut there. There’s also been rumblings about an infrastructure program and increased defense spending. So what you have again, I think, are tax cuts and increased government spending like we had in Reagan and G.W. Bush. So the deficit may go up again. And in fact, the deficit was already starting to inch back up. Obama cut it by about two-thirds, but it already started inching up again because of the retirement of the baby boomers are increasing the entitlements expenditure. So if there’s no reform there, I think you’re going to see a natural, if nothing was done, the deficit would go up because of the entitlement programs. But if you don’t see any cuts from Trump on that and you see additional infrastructure and defense spending, and then you also see tax cuts, you may see the deficit widen. And I think the projections by the Congressional Budget Office that the caller mentioned—that’s a nonpartisan government agency in the Congress that does bill costing and whatever and is usually pretty—their estimates are better than the administration, whatever administration is.
Bob Zadek: Ivan, we’re running out of time. How do our friends out there follow your writing and your work and what’s the next book you’re working on? We have about a minute left.
Ivan Eland: Well, I write books on the presidents, and so I’ve got a book that’s going to come out on the presidents who promised small government—did they deliver or did they not deliver in the last 100 years? My last book, Recarving Rushmore, ranked the presidents as the founders of the country might have ranked them had they come back and seen all these people.
Bob Zadek: What an interesting premise. That’s a wonderful premise.
Ivan Eland: Yeah, and I have an updated version of Recarving Rushmore. And so you get really unexpected ratings because of course we rank historians now—history is always a captive of the present. And of course we admire Roosevelt and Wilson because they got us into wars and, you know, vanquished the foes and whatever. But the real people had the high ratings in my view were presidents who stuck within the constitutional limitations of the presidency and gave us peace, prosperity, and liberty.
Bob Zadek: Ivan, we’ve got to go. Sorry to interrupt, we’re running out of time. Thanks so much to our friend Ivan Eland for an hour of conversation. I’ll be back next Sunday. Enjoy your weekend. This is Bob Zadek saying so long for now.