Testifying as US forces were about to enter Iraq in March 2003, Treasury Secretary John W. Snow airily claimed, “The cost of the war will be small.” We recall Snow’s words today as a textbook case of fiscal miscalculation.
For all that, though, Washington isn’t stirred. Traditional responses to high-cost wars—social program cuts, bond drives, tax increases—are not even discussed. It’s as if Snow was right. One could say that we are living in a post-9/11 world, but with a pre-9/11 fiscal policy.
Hormats argues that, six years into the Global War on Terror, neither the White House nor Congress has pushed for fiscal changes to ensure sustainable funding of US might. Instead, Washington chose to put the war on its credit card (deficit spending).
In its peak years, World War II consumed nearly 40 percent of America’s gross domestic product. To help pay for it, President Franklin D. Roosevelt took draconian steps that slashed New Deal programs and raised the number of taxpayers from four million to 42 million.
Americans still borrowed heavily, but they paid off debt as fast as possible. It was, says Hormats, “a compulsion.”
Hormats criticizes President Bush’s June 2001 tax cut, which took a huge bite out of a projected $3.1 trillion surplus. He notes that, rather than rethinking the cut in light of post-9/11 needs, the Administration doubled down. In January 2003, Bush proposed, and Congress agreed, to speed up implementation of the 2001 tax cuts.
The result was predictable. In 2000, the US ran a surplus equal to 2.4 percent of GDP; by 2004, it was in deficit to the tune of 3.6 percent of GDP. This was the biggest swing in 50 years.
The war against terrorists resembles the Cold War, in that it will be long, expensive, and punctuated by crises. The financial basis must be strong.
The latter point refers to Social Security and Medicare, whose costs will mushroom when 79 million baby boomers retire and draw benefits. Social Security alone is projected to run a shortfall of $250 billion a year by 2030.
The Bush Administration maintains that, unlike periods in the past, the government can use cheap capital to finance the deficit. Moreover, they point out that the tax cuts have created new wealth (and with it, tax revenue), and that, by such expedients, the US will in time “grow” out of its deficits.
We note, however, that all prior wartime presidents found it wise to cut domestic spending and raise taxes to free up resources for defense, and then pay down war-related debt. Moreover, real cuts in entitlements probably aren’t politically feasible except as part of a grand compromise accepting some form of tax increase, too.
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