The Unbearable Costs of Empire

Bush's war could help the economy in the short run.
The big harm comes later.

by James. K. Galbraith

The American Prospect magazine, November 2002

Talk in Washington these days is of Rome and its imperial responsibilities. But George W. Bush is no Julius Caesar. France under Napoleon may be the better precedent. Like Bush, Napoleon came to power in a coup. Like Bush, he fought off a foreign threat, then took advantage to convert the republic into an empire. Like Bush, he built up an army. Like Bush, he could not resist the temptation to use it. But unlike Caesar's, Napoleon's imperial pretensions did not last.

Analogy is cheap but the point remains. Empire is not necessarily destined to endure, least of all in the undisturbed, vapid decadence to which our emperors so evidently aspire. True, in recent times the British Empire lasted for a century (or perhaps two, depending on how you count). The Soviet Union held up for seven decades. Napoleon was finished in just 15 years.

There is a reason for the vulnerability of empires. To maintain one against opposition requires war-steady, unrelenting, unending war. And war is ruinous-from a legal, moral and economic point of view. It can ruin the losers, such as Napoleonic France, or Imperial Germany in 1918. And it can ruin the victors, as it did the British and the Soviets in the 20th century. Conversely, Germany and Japan recovered well from World War II, in part because they were spared reparations and did not have to waste national treasure on defense in the aftermath of defeat.

THE UNITED STATES TODAY IS RICH AND PROSPEROUS.

But this does not mean that we have the financial or material capacity to wage continuing war around the world. Even without war, Bush is already pushing the military budget up toward s400 billion per year. That's a bit more than 4 percent of the current gross domestic product. A little combat- on, say, the Iraqi scale-could raise this figure by another $100 billion to s200 billion. A large-scale war such as might break out in a general uprising through the Middle East or South Asia, with the control of nuclear arsenals at stake, would cost much more and could continue for a long time.

One is tempted to analyze these sums, particularly the immediate costs of war in Iraq, in terms of budget deficits and interest rates-in terms, that is, of the conventional arithmetic of fiscal irresponsibility. But this misses the point. The real economic cost of Bush's empire building is twofold: It diverts attention from pressing economic problems at home and it sets the United States on a long-term imperial path that is economically ruinous.

Fiscal irresponsibility is an important issue, mainly because of the Bush tax cut of 2001. If allowed to survive, that long-term program of relief for the rich would, by itself, ruin the federal fisc into the indefinite future. But the problem of toppling Saddam Hussein next year is not fiscal. The United States would have no difficulty selling bonds to pay for it. On the contrary, with our domestic economy in the dumps, with private business disinterested in investment, government bonds would sell easily. And even if they did not, the Federal Reserve itself could buy them. So, too, could the successor government in Iraq, which will have the oil with which to purchase, after the fact, its own assumption of power. Either way, interest rates need not rise, and Bush's Iraq war will be timed to help, not hurt, the short-term performance of American growth and employment.

Nor is Bush's strategy necessarily irrational insofar as it affects oil-in the short run. With a new Iraqi government, the United States will gain a client state that is prepared to help keep the oil price within the band that both U.S. consumers and the remaining U.S. oil producers can tolerate-low enough so as not to fatally drain purchasing power from the former, high enough so as not immediately to ruin the latter. Given the George W. Bush-Dick Cheney commitment to unlimited oil consumption, this will prove useful in putting off a day of reckoning. As total world oil production declines-credible scientific evidence suggests that this may start happening quite soon-the Middle East's share of the remaining reserves will rise. So, too, would the potential for cartel control and price manipulation. A robust U.S. military presence in the oil fields, directly or by proxy, will naturally make higher oil prices less of a danger. This is part of the appeal of war with Iraq.

In other words, the Iraqi war could prove both stimulative and stabilizing in the short run. Unless the campaign goes badly or the neighborhood blows up, it is unlikely, in and of itself, to produce an immediate economic disaster. And so the political

opportunists-we may safely suppose they exist-who favor such a war because it might help rescue Bush in 2004 may not be entirely wrong in their calculations.

But it would be wrong to conclude that all is therefore quiet on the war-economy front. The disaster will, instead, play out in at least two different ways over time. The immediate problem of the Bush-Cheney war policy lies in the neglect and indifference, which it fosters, of all our other economic problems.

First, private business investment in the United States has now fallen virtually to the capital replacement level. There is no early prospect of revival because the recession in consumer spending still lies ahead. Until that storm comes and passes, businesses will hold off on net new investment. As a result, there will be little further application of new technologies to economic life. Instead, new technologists will be pulled back into the military sector from whence they emerged 30 years ago, and the advanced private sector on which we have, until recently, based our hopes will wither.

Second, the recession in consumer spending cannot be put off forever. American households are still being crushed by debt. After September 1l, their spending was held aloft by falling oil prices, falling interest rates, the tax rebate, rising government spending and the auto companies' willingness to unload their inventories at a loss. Interest rates remain very low, alongside a continuing I bubble in the price of housing, which supports a continued flow of equity loans. But this source of consumer spending is already | nearing its limits. The auto companies may give up their effort soon enough (right after the November election?). After that, the second loop of the "W." recession will soon be on us in force.

Third, state and local government budgets continue to implode. Reasonable estimates now show $50 billion in deficits at the state level, and the losses are surely almost as large at the local level. As rainy-day funds are depleted, these will translate into service cuts and sometimes into tax increases. Either way, household budgets will take the full hit. The war fever in Washington-alongside political cynicism, willful ignorance of the economics, defeatism and inertia-has so far blocked an effective campaign for revenue sharing with the states, the one way in which the federal government might prevent this calamity this year.

Fourth, we have the economic effects of the decline of our financial markets, which have already lost more than s8 trillion in nominal shareholder value since their peak in 2000. To some extent, these losses are due to the corruption of certain major corporations, including several (not least Halliburton) that are closely tied to the military-petroleum complex. Failure to attend to these issues is necessarily endemic in an administration built on corporate fraud and committed to war for oil.

None of these problems will be cured so long as war remains our dominant political theme. But serious though they are, they pale in comparison with the larger problem of the international trade-and-financial order under conditions of permanent war. It is a straightforward fact that if global oil production starts to decline but U.S. consumption does not, everyone else will be required to cut purchases and uses of oil. But how can oil prices be held stable for Americans yet be made to rise for everyone else? Only by a policy of continuing depreciation in everyone else's currency. Such a policy of dollar hegemony amid worldwide financial instability, of crushing debt burdens and deflation throughout the developing world, is perverse. It will make our trading partners' exports cheap, render their imports dear and keep their real wages low. It will price American goods out of world markets and lead to unsustainable dependence on foreign capital. It will be a policy, in short, of beggar-all-of-our-neighbors while we live alone, in increasing idleness and inside the dollar bubble.

This is the policy that Bush and Cheney are actually imposing on the rest of the world. But they cannot make it last. It will make lives miserable elsewhere, generating ever more resistance, terrorism and military engagement. Meanwhile, we will not experience even gradual exposure to the changing energy balance; we will therefore never make the investments required to adjust, even eventually, to a world of scarce and expensive oil. In the end, therefore, that world will arrive much more abruptly than it otherwise would, shaking the fragile edifice of our oil economy to its foundations. And we will someday face a double explosion: of anger against our arrogance and of actual shortage and collapsing living standards, when the confidence of investors in the dollar finally gives way.

Compared with this future, a new commitment to collective security, to a new world financial structure, to a rational energy and transportation policy, and to spending to meet our actual domestic needs would be a bargain. At the end of the Constitutional Convention, Benjamin Franklin was asked what type of government the framers had given our new country. He famously replied, "A republic, if you can keep it." The republicans in those days opposed empire. The author of Poor Richard's Almanack understood the economics very well. ~

JAMES K. GALBRAITH is the Lloyd M. Bentsen Jr. Chair in government-business relations at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin, and a senior scholar of the Levy Economics Institute.

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