Eisenhower’s Reprieve and the Descent Into Fiscal Insanity

Part II: David Stockman’s "The Great Deformation" – an instant classic

by , April 17, 2013

Editorial note: The first part of this review appeared on Monday.

David Stockman’s The Great Deformation is an economic history of the United States as seen through the eyes of a devoted fiscal conservative whose number-crunching abilities have led him to the ineluctable conclusion that the Warfare State is one of the main drivers of that old devil the Welfare State.

The result is that we get an analysis that in no way resembles the cookie-cutter Heritage Foundation/American Enterprise Institute "conservatism" that insists on austerity for the masses and tax cuts for the wealthy, while throwing money at the Pentagon hand over fist.

Instead, we get praise for such an unlikely conservative hero as Harry Truman, who insisted that the Korean war "be financed the old-fashioned way – with taxes." As a libertarian, my instant reaction is horror – but wait. We often hear some peace advocates say that if we had a draft there would be less wars of "choice," but to me this has always seemed an absurd trade-off: legalized slavery in return for the prospect of peace? No thanks. Besides, it didn’t work out that way during the Vietnam war, now did it? However, Stockman’s praise of Truman for financing the Korean war with taxes seems like a more reasonable trade-off: make them finance their wars with new taxes so that the population feels some tangible pain. Now that may very well be a more credible deterrent.

In any case, while Stockman avers that "from a contemporary vantage point, it is not clear what purpose US intervention on the Korean peninsula ultimately served" – a point brought home by the current Korean crisis – once the decision to go to war was made, Truman refused to borrow the money. Federal spending metastasized by almost 80 percent during the Korean conflict, but it wasn’t a budget-buster – and Truman’s pay-as-you-go policy encouraged Republicans to support a swift end to the war: "Owing to Truman’s unwavering insistence on stiff war taxes," Stockman notes, "GOP conservatives had no stomach for open-ended war in the barren hills of Korea if it meant permanently high taxes."

That, however, was the last hurrah of the old fiscal orthodoxy, as Stockman points out:

"After that, America’s imperialistic misadventures in other strategically barren redoubts of the planet faced no such political constraints. Lyndon Johnson set the new tone with his ‘guns and butter’ adventure in Southeast Asia, even when the historical record shows tha the Chinese people were now starving in their villages, not fixing to pour across the border of another purported domino.

"Yet LBJ couldn’t bring himself to ask for war taxes until the very end, a drastic failing that opened the way for equally irresponsible war finance by future GOP administrations. Indeed, four decades later George W. Bush’s equally bootless imperial missions were carried out entirely tax free. Indeed, what poured out of China this time was the money to fund them."

The old fiscal orthodoxy persisted in the generation that was rapidly passing from the scene: a generation exemplified by Fed chairman William McChesney Martin, who managed to put a temporary brake on the growing role of the Federal Reserve as the Prime Mover of the American economy. Between 1954 and 1963, as Stockman points out, real economic growth averaged 3.4 percent while inflation was tamed at 1.4 percent. It was a brief golden age, before the darkness overcame us: "There was no subsequent nine-year period that had a better combined performance of these core variables," writes Stockman. "And none which left the overall economic and financial system so healthy and stable."

And, I might add, there was no subsequent period in American history in which the culture was so healthy and stable: the much-derided Fifties, that era of the "organization man," the "man in the gray flannel suit," conformist and bourgeois to the core. The presidency of Dwight David Eisenhower – Stockman describes him as "a military hero who hated war" – was the last hurrah of the Old America.

Eisenhower’s signal achievement, in Stockman’s view, is that he succeeded in actually shrinking the federal budget in real terms during his eight years in office, and he did it by "taming the warfare state." Contrast this with the fiscal profligacy of his war-making successors: LBJ, Reagan, and Bush II: "In each case," avers Stockman, "the plunge of the nation’s fiscal accounts deep into the red was triggered by a resurgence of the kind of massive warfare state budgets that Ike so resolutely resisted."

The theoretical basis of our post-Eisenhower fiscal madness came in "left" and "right"-wing versions: "Keynesian theories of prosperity management that manifested themselves in both a leftist ‘new economics’ version and rightist ‘supply side" version." Armed with this new doctrine, the political class believed they could engineer unprecedented rates of economic growth, "such as 5 percent annually, or even better." They could have "guns and butter," and wind up ahead of the game – all without raising taxes!

But of course what they got was massive war deficits, and "yet this was a good thing, according to the Keynesian professors," says Stockman, "because such deficits inject demand into the economy, thereby lifting output closer to its full-employment potential." The supply-side Lafferites chimed in with their own version of a free lunch for all: growth would pay for everything, including all the wars anybody felt like starting. The reality, as Stockman points out, is quite different, however:

"In fact, war deficits are the worst fiscal policy imaginable. They add to civilian demand but generate no marketable output of consumer products or capital goods. Accordingly, war deficits tip the economy toward excess demand, inflationary bottlenecks, rising interest rates, and financial instability. They destroy wealth and lower living standards."

Feel poorer after the last decade or so? That’s why.

Eisenhower gave the country an eight-year reprieve from such a fate by quickly ending the Korean war, slashing the Pentagon’s budget, and cutting Truman’s wartime spending by nearly one third. The Democrats responded by accusing the President and the GOP of "allowing their Neanderthal fiscal views to endanger the national security." Yet Eisenhower’s approach was to actually spend military appropriations on the defense of the United States, as opposed to imperial adventurism abroad. This was the theme and purpose of his "New Look" national security strategy, which called for a big reduction in land and naval forces, and shifting spending to our nuclear deterrent. He also made our European allies pay more of the costs of their own defense – a proposal that, these days, would be denounced as "isolationist."

Stockman contrasts Eisenhower’s "New Look" with Truman’s national security strategy as summarized by the infamous NSC-68, which called for maintaining a capacity to fight at least two land wars simultaneously with conventional forces. The interventionist bias of NSC-68 violated not only Eisenhower’s reluctance to be drawn into the "limited" land wars that would consume policymakers in subsequent administrations, but also contradicted his own fiscal conservatism and the traditional Republican green-eyeshades approach to government spending: he feared, as Stockman puts it, "that the massive permanent budgets required by the limited war doctrines of NSC-68 would erode the economic foundation on which true national security depended." The Army, the instrument of what was essentially an offensive strategy pursued by NSC-68, was allocated a mere 22 percent of Eisenhower’s military budget, while the Air Force – a vital component of the new "massive retaliation" orientation – got 47 percent.

This led to a revolt of the generals: Generals Matthew Ridgeway and Maxwell Taylor resigned in protest from the joint chiefs of staff. Stockman trenchantly points out that these two were brought back by none other than Robert McNamara, the "whiz kid" of the Vietnam war era. McNamara also brought back NSC-68, during his stint as Secretary of Defense, and beefed up the Army, in preparation for the Vietnam intervention. The Democrats in power brought military spending back up to Trumanesque levels. The American empire was saved!

No President after Eisenhower succeeded in reining in the Warfare State as he did: indeed, after he left office, the Welfare-Warfare State began to take on the gigantism we have come to know and loathe:

"Indeed, in a few short years after Ike left office, the profound danger of a symbiotic nexus among the warfare state and welfare state became starkly apparent. Reflecting the imprint of the Hubert Humphrey "guns and butter" liberals, both sides of the budget hit simultaneous peaks in fiscal 1968. With constant-dollar defense spending back to the $515 billion Korean War peak, domestic outlays followed suit, reaching an all-time peak of $455 billion" [in 2005 dollars]."

After Vietnam, there was no "peace dividend": instead, the log-rolling operation conducted by the military-industrial complex and big spending liberals simply recycled the $200 billion in "savings" into increased domestic spending. Under Nixon, the spending continued, exceeding "even the Kennedy-Johnson record spree." By the time Ronald Reagan took office, domestic spending had doubled. What this meant was that the Reagan military build up had to be financed with borrowed money: and this marked the death of the old Republican fiscal orthodoxy, and the rise of a "right-wing" variant of Keynesianism – dubbed "supply side economics" – to rationalize the abandonment of sound economics.

The end of the cold war gave us no relief, only "a modest rollback," as Stockman characterizes it. Bill Clinton‘s military budget was as large as Eisenhower’s, even though, at that point, there was no major threat to America’s unprecedented military hegemony. As for George W. Bush – well, we all know what he did:

"Then followed George W. Bush’s senseless misadventures in the barren expanse of the Hindu Kush and on the bloody plains of the Tigris-Euphrates. These campaigns generated the third great post-Eisenhower surge in constant-dollar defense spending – an all-time high of nearly $600 billion in constant dollars."

The relationship between military spending and actual threats to our national security was long gone. And Obama, who as a candidate campaigned in favor of ending Bush’s wars, wound up topping Bush’s record military spending. I can’t resist quoting Stockman on Obama’s record in full:

"On exactly the fiftieth budget anniversary of Eisenhower’s farewell warning, evidence of the insuperable power of the military-industrial complex was stunningly evident in Obama’s fiscal 2011 budget. The 2008 election, of course, had been even more unequivocally a ‘peace’ election than 1968 had been, because this time the ‘peace’ candidate actually won. Yet election mandate or no, the third great surge in the post-Eisenhower warfare state gave no ground whatsoever.

"In fact, inflation-adjusted defense spending in fiscal 2011 of $670 billion was a new record, eclipsing even George W. Bush’s final war budget. It was thus abundantly evident that even an out-and-out ‘peace’ president is no match for the modern warfare state and the crony capitalist lobbies which safeguard its budgetary requisites.

"Indeed, Barack Obama pushed the frontiers of the warfare state further than ever before. Beating his mandate for plowshares into an even mightier sword, the peace president pushed defense spending to a level 80 percent greater than General Eisenhower concluded was necessary."

The symbiosis of conservative militarists calling for more guns, and liberals calling for more butter, is today complete: the log-rolling continues apace. The War Party pushes for more intervention, more threat-inflation, and more "defense" spending, while the "progressives" campaign for deficit spending, monetary inflation, and more domestic spending. These two factions happily coexist, egging each other on, and therein lies the road to bankruptcy – and endless war.

There is more – much more – to The Great Deformation, but it is, for the most part, beyond the purview of a column devoted to analyzing the effects of militarism on our society. Libertarians will find much to agree with in this volume – Ludwig von Mises merits a mention as the founder of the Austrian school theory of the business cycle, and goldbugs will glory in Stockman’s defense of the gold standard. But liberals and the abovementioned progressives will find themselves nodding in agreement, too, as Stockman describes the ills effects generated by the Federal Reserve and the resulting financialization of the US economy.

The book is already generating a storm of controversy, and is being attacked by all the right people – the Keynesians, on the "left," and the Reagan-idolators on the "right." Go out and buy it, then settle down in your favorite comfy chair: unlike most texts dealing with economics, it’s a real page-turner, as the author describes what led to the biggest bubble in American economic history – and hints, along the way, at a spectacular climax, a day of economic reckoning this book will hopefully help to prevent.


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I’ve written a couple of books, which you might want to peruse. Here is the link for buying the second edition of my 1993 book, Reclaiming the American Right: The Lost Legacy of the Conservative Movement, with an Introduction by Prof. George W. Carey, a Forward by Patrick J. Buchanan, and critical essays by Scott Richert and David Gordon (ISI Books, 2008).

You can buy my biography of the great libertarian thinker, An Enemy of the State: The Life of Murray N. Rothbard (Prometheus Books, 2000), here.

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