Budget Deficit Blowback

One of the striking things about about the deficit crisis that seems to loom over the United States is the probability that it will force a massive change in American expectations. In Newsweek this week Niall Ferguson beats the deficit drum. His fear is that US will have to give up its position as superpower:

As interest payments eat into the budget, something has to give—and that something is nearly always defense expenditure. According to the CBO, a significant decline in the relative share of national security in the federal budget is already baked into the cake. On the Pentagon’s present plan, defense spending is set to fall from above 4 percent now to 3.2 percent of GDP in 2015 and to 2.6 percent of GDP by 2028.

Over the longer run, to my own estimated departure date of 2039, spending on health care rises from 16 percent to 33 percent of GDP (some of the money presumably is going to keep me from expiring even sooner). But spending on everything other than health, Social Security, and interest payments drops from 12 percent to 8.4 percent.

This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in the resources available for the Army, Navy, and Air Force. Which is why voters are right to worry about America’s debt crisis.

Ferguson fears the consequences of a withdrawal of American hegemony. But there’s a different threat here too. The US has relied on the military to provide economic benefits for a long time.

The military is our secret Keynesian weapon. William Kristol was the first to say that if we needed to spend stimulus money, it should be most quickly and efficiently spent through the Pentagon. It is often overlooked how much we depend on the military to provide jobs, vocational training and government subsidies to industry.

Many have argued that this is a very inefficient way to achieve those economic goals.

But it is the way we’ve chosen since the Reagan build-up began 30 years ago. Like the massive overhaul in our entitlement programs that will be forced by the deficit spending on financial system bailout, the loss of military Keynesianism will cause great disruption within the American economy.


An Empire at Risk
by Niall Ferguson
Newsweek; November 30, 2009

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