The Price of Liberty

At its peak, WWII accounted for roughly 45% of GDP, the Korean War was 15%, and the Vietnam War peaked at 10%; today the entire military budget is below 5% of GDP and the cost of the war is about 1%.
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Two years ago I set out to examine the methods used by past wartime presidents and congresses to mobilize the resources needed to pay for the wars of their eras. My objective was to see what could be learned from their experiences that would help current leaders to manage the financing of the wars in which the nation is currently engaged.

The product of this exercise, a book entitled The Price of Liberty: Paying for America's Wars, which will be released on May 1, traces wartime financing from the Revolution, through the Civil War, two World Wars, and the Cold War to the present conflicts in Afghanistan and Iraq, and the War on Terrorism.

The story of how the U.S. has paid for its wars, as described in the book, is only partially about money. A sound financing strategy is clearly essential to enable the nation to mobilize a large military force and produce what President Franklin D. Roosevelt called a "crushing superiority" in weaponry. But equally important is the ability of leaders in the White House, Treasury, and Congress to ensure that wartime financing is conducted in a way that marshals and sustains popular support for the war effort.

From the Revolution onward, the politics of financing a war have been closely tied to the politics of the war itself. As American troops were doing battle with the nation's enemies, American politicians were often doing battle with one another at home over how to raise extraordinary wartime sums through taxes and borrowing in ways that bolstered and sustained the public's commitment to achieving the nation's military objectives. Throughout American history, methods of paying for a war have been the subject of contentious debates, featuring vigorous competition among egos, political parties, social classes, regional interests, and economic philosophies.


At the beginning of every major war in which the U.S. has been involved, with the exception of Vietnam, the administration and Congress reevaluated taxing and spending priorities and shifted resources from less vital pursuits to winning the war. Parochial economic interests generally gave way to the national interest.

During World Wars I and II, patriotic bond drives were launched to enable the millions of Americans not serving in the armed forces to play a meaningful part in the war effort and to feel a personal sense of engagement. Woodrow Wilson's Treasury Secretary William McAdoo called it "capitalizing patriotism." Large numbers of Americans also were asked to share in the sacrifice by bearing a heavier tax burden during these wars. During World War II, Americans were told that paying taxes while their fellow criticizes were fighting abroad was not simply a duty but a privilege.


From the Revolution through the Eisenhower Administration, the nation's leaders also sought to pay down war debt during peacetime to avoid imposing heavy obligations on future generations. George Washington warned against "ungenerously throwing upon posterity the burden which we ourselves ought to bear." They also recognized that faithful payment of debt was a national security priority. A high debt could compromise the government's ability to borrow in the future and limit its financial flexibility to confront new security threats.

America's first Treasury Secretary, Alexander Hamilton, insisted that "the creation of debt should always be accompanied with the means of its extinguishment." In his view, this was not simply good fiscal policy, it was also vital because it affected the government's creditworthiness and thus its ability to borrow funds in the case of a future conflict. He was especially preoccupied with ensuring that potential lenders, especially foreigners, retain confidence in the soundness of American finances because they might be called to lend to the U.S. government -- as during the Revolution -- in the event of another war. For this reason he insisted on scrupulously repaying all Revolutionary War debt -- a debt he referred to as the "price of liberty." Ironically, the U.S. now is even more dependent on foreign capital for wartime financing than during Hamilton's time, when French and Dutch funding proved critical to the success of the Revolution. But unlike Hamilton, today we tend to take it for granted that large sums of foreign financing will be available indefinitely, no matter how well the US manages its fiscal policy or what unexpected events, such as another terrorist attack, occur that might cause a sharp drop in those flows.


Also, in contrast to the past, during the current conflict in Iraq the government has not revised its fiscal strategy to increase taxes or cut civilian spending to cover the war's mounting military bills. Instead it has relied on borrowing and emergency supplemental appropriations.

U.S. leaders have not wanted to call on Americans to make economic sacrifices, even at the outset of the war when it enjoyed considerable popularity. There were good reasons for not raising taxes at the time because the economy was weak; and a strong case was made that lowering taxes was needed to restore growth. But spending increases on non-military programs had no such justification. They could and should have been cut to free up resources for the war effort, but they were not. In fact they have been increased. And earmarking for programs for local constituencies increased considerably. No sacrifice there -- no inconvenience for those on the home front at a time when American men and women were facing the danger of death or horrible injuries at every intersection and on every road in Iraq.

There have been no calls on the vast majority of Americans to accept any sacrifices -- not even a small surcharge after the economy had recovered, or a voluntary tax check off, to ensure that American forces had proper body armor or adequately protected vehicles, or that military families were well taken care of when the bread winner was off in Iraq. At a time when the men and women of our armed forces and their families are making enormous sacrifices, most Americans are enjoying tax cuts and rising domestic spending programs for favored constituencies.

The U.S. has so far been able to avoid a major revision in fiscal policy because this war represents a relatively small portion of GDP compared to past conflicts. For example, at its peak World War II accounted for roughly 45% of GDP, the Korean War was 15%, and the Vietnam War peaked at 10%; today the entire military budget is below 5% of GDP and the cost of the war is about 1%.


The government also lacks a long-term strategy to meet future elevated military, intelligence and homeland security needs during what is likely to be a multi-decade War on Terrorism. The vast majority of Americans have not been asked to play a meaningful financial part in that war either. It is often said that 9/11 "changed everything," but when it comes to fiscal policy, it changed little. Military and homeland security costs rose -- as was appropriate. But other than that we are living in a post-9/11 world with a pre-9/11 fiscal policy. There was no attempt to assess whether programs that were considered affordable before the country was attacked, and enjoyed a budget surplus as it did before 2001, were affordable after the War on Terrorism was launched and the deficit had disappeared.

Current Iraq War costs are expensive but manageable. However, mobilizing resources for the longer-term. War on Terrorism -- when large sums will be needed for intelligence and enhanced homeland security in addition to money required to replace weapons worn out or destroyed during the Iraq War, purchase sophisticated new weapons systems, and meet the long-term medical needs of thousands of veterans -- will be difficult. This will be especially true because after the Iraq War many Americans are likely to turn sour on national security spending.


The fiscal challenge U.S. leaders will confront in the future is similar to that faced by President Truman at the beginning of the Cold War in the late 1940s. At that time, there was a strong public desire to sharply curb defense spending and virtually eliminate assistance to other countries, even those facing a Communist threat, because after World War II a significant number of Americans neither wanted or expected another war and took the Soviet threat very lightly. After the Vietnam War a large majority of Americans also wanted to sharply cut the defense budget and international programs in general. Similar pressures for spending cuts on national security and other international programs are likely to emerge after the Iraq War. The challenge of maintaining adequate resource levels for such programs will be even greater if there is a prolonged period without another terrorist attack, during which complacency about national security is likely to set in.

Today, defense spending accounts for a far smaller portion of GDP than it did during those earlier periods, but marshalling funds for national security will take place in a more challenging environment, because of the rapidly growing costs of Social Security, Medicare, and Medicaid. Over time, these programs will produce dangerously high budget deficits. Coupled with increases in interest payments on a rising federal debt, they risk crowding out defense funding and in so doing limiting the amount of resources available to the government to rebuild the military after weapons losses in Iraq, respond in the event of another terrorist attack, or deploy forces to meet a crisis that might erupt in the future. Bigger budget deficits in the coming decade also will increase dependence on foreign capital, making the economy more vulnerable if there is a disruption in the supply of such funds; that could occur in the event foreign investors become nervous about placing funds in the U.S. after any future terrorist attack.

If the US is to protect its security interests in coming years, the government will need a long-term financial strategy to meet the needs of the military, strengthen homeland defenses, and enhance intelligence and improve overseas information programs. At the same time it will need to find growing sums of money to pay for rapidly rising non-security requirements, chiefly those related to Social Security, Medicaid and Medicare.

Meeting these needs in a fiscally responsible way will require broad entitlement reform so that outlays and inflows converge over time, more rigorous resource prioritization in national security and all other programs, and fiscal discipline so that tax revenues and spending are closely aligned. All of these will be difficult to accomplish unless the current presidential campaign can be used to educate Americans to the need for bold changes in the direction of fiscal policy and about the various alternatives available. There are no "soft" solutions here, and candidates should be urged to offer hard ones if they are to be elected with mandates to effect meaningful change.


And as in most conflicts of the past, Americans need to be told candidly the cost of wars in which the nation is engaged, and encouraged as well as enabled to make at least a small financial commitment to the war effort or support meaningful reductions in non-vital domestic programs, and runaway earmarking, to free up budgetary funds for military or homeland security needs. "Wars cost money," FDR said in early 1942. "That means taxes and bonds and bonds and taxes. It means cutting luxuries and other 'all-out' war by individual effort and family effort in a united country." It might be too late to create such a spirit of sacrifice and unity in the Iraq War, but in the War on Terrorism, and prospective crises elsewhere in the world, such an approach will be critical to marshal the resources and public support needed for a robust and sustained national response.

For Alexander Hamilton, paying off Revolutionary War debt was the "price of liberty." Today that price involves maintaining a sound fiscal policy that gives the president and Congress flexibility to meet future emergency needs and enables the country to rebound quickly should there be another attack, while giving Americans a more personal role in supporting the continuing high cost of protecting our nation's liberties from enemies who would destroy them.

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