An Economist’s Case for a Non-Interventionist Foreign Policy

The Naval War College, based in Newport, Rhode Island, runs a special 11-month course for foreign Navy officers. On February 3, the Naval War College held a special morning session at the Hoover Institution, where I am a research fellow. I was invited to speak. The best invites, in my experience, are those for which I get to choose the topic. That happened in this case. So the topic I chose was “An Economist’s Case for a Noninterventionist Foreign Policy.”

The four speakers, in order, were Gary Roughead (Admiral-Retired), formerly the Chief of Naval Operations and a Distinguished Visiting Fellow at Hoover, me, Bruce Thornton, a professor of classics and humanities from Fresno State University and a research fellow at Hoover, and George P. Shultz, formerly Secretary of State under Ronald Reagan and a Distinguished Fellow at Hoover.

The audience was, I believe, all Navy officers. There were 47 of them, representing 44 countries. I was warmly received by many of them, especially the officer from Bangladesh, and courteously received by the few U.S. military officers in attendance.

You can listen to the audio here (30 min).

Following is a transcript:

Commander Steve Newlund, US Navy: Our next speaker is Professor David Henderson. He’s a research fellow here at Hoover. His full-time job is as an associate professor at the Naval Postgraduate School in Monterey. He was born and raised in Canada and has been a United States citizen since 1986

I just want to point that out, sir.


He earned his PhD in economics from the UCLA. He is the editor of the Concise Encyclopedia of Economics, which is translated into six different languages. He’s also author and co-author of numerous books, to include The Joy of Freedom: An Economist’s Odyssey. He’s been published in no less than 30 different periodicals and magazines and he has appeared on countless television shows, to include The O’Reilly Factor – just a small plug for that. Aside from his many awards and decorations, he’s also testified numerous times to both the House and the Senate and the Senate Armed Services Committee.

Without further adieu, Professor Henderson.


HENDERSON: Thank you, Steve.

And thank you.

And how is my volume?


HENDERSON: It’s good. OK.

So before I get into my talk, I just want to second a couple of things that Admiral Roughead said. First of all, as Steve mentioned introducing me, I teach at the Naval Postgraduate School and so I teach military officers, including, by the way, military officers from some of your countries. I’ve taught students from Israel, from Pakistan, from Norway; not Nigeria yet, I think; Bangladesh, I think, once; and a number of your countries and so I’ve gotten to know a number of people from your various militaries.

I want to also second something Gary Roughead said about the all-volunteer force. It is expensive but it’s worth it. I used to poll my students – I got to the Naval Postgraduate School in 1984 and I used to poll them about once a year – they’re typically lieutenants or lieutenant commanders, that range – and ask them, who favors the all-volunteer force and who would like to go back to a draft. And when I first started doing that, the ratio that favored it was probably about 6:1. And then it went to 8:1. And then it went to 10:1. And then it went to 20:0, which, by the way, as the mathematicians in this audience can tell you, is undefined.


And so about 10 years ago, I quit polling them. It’s unanimous. And then you ask them why, and it’s almost always the same answer. It isn’t my ideal answer. My ideal answer is like the answer that Milton Friedman would have given, which is, it’s about freedom. People ought to be free to choose their career, especially when the career they don’t get to choose might put them at risk of being killed. But their answer is a much more practical one: It works. They say things like, why would I want to be in charge of a whole lot of people who don’t want to be there. That’s their basic answer.

So as Steve mentioned, I’ve done a number of things in my past. I want to show you one of the pictures I’m proudest off. This is with my big boss, who was a few levels above me and one level above George. Ronald Reagan, in his office in 1991, about three years – sorry – 1993, four years after he finished being president. And I’m not going to give you a big slide show. We’re two-thirds of the way through my slides. And then I’m just going to talk.


I’ve also been pretty active in trying to push for freedom, trying to rein in the federal government because – by the way, let me tell you something this man said that I think is absolutely correct. In 1981, and remember that was pretty much close to the peak of the Cold War, Barbara Walters, a famous ABC reporter, interviewed Ronald Reagan at Thanksgiving. And by the way, I cannot find the transcript. I cannot find it on YouTube. But I wrote it down. It was really striking. Barbara Walters asked Ronald Reagan, what do you think about the Soviet Union and how much of a threat they are to us and to our freedom. And he said, “They’re a threat, but the biggest threat to our freedom is our own governments.” And I agree with him. It’s governments at every level in the United States right now and in most of the world that are assaulting freedom daily.

And so now I want to show you a picture of me with someone else, who I’m not such a big fan of. I tried to probe him a little. He came and he was the graduation speaker at the Naval Postgraduate School in June. And you’ll see that it was a graduation by the hat I’m wearing. And you’ll see someone’s thumb in the way, but, oh, well. That’s me on the right. Who is that on the left? Anyone know? General Keith Alexander, the head of the National Security Agency, which now has admitted essentially to basically collecting information on the calls we make. They aren’t necessarily listening but they know, if they want to know, whom you’re calling and who called you.

OK, that’s the end of my slide show.


So when I was a senior economist with President Reagan’s Council of Economic Advisors, my office was an old, exotic-looking building called the Old Executive Office Building, now the Eisenhower Building, located right next to the White House, which is separated by a narrow driveway. It’s the place most people work when they say they work in the White House. It’s not literally true they do. I’ve started doing that, too. Oh, yeah, I used to work in the White House.


Being a curious type, I looked into the history of the building and found that when it was first built in about 1870, it housed the War Department, the State Department and the Navy Department. That means that that building, combined with the Treasury, which was on the other side of the White House and just a carbon copy, housed virtually all of government except the post office and the fledgling Department of Agriculture. That was the size of the US government.

Now what happened in between that led to such a massive growth of the federal government in a country that was justifiably celebrated as the Land of the Free? And by the way, let me just give you a couple of statistics. The federal government in those days spent roughly between 2% and 3% of GDP. Now, it spends approximately 21%.

So what happened? A large part of what happened was war. A huge amount of the new power that the government took on in the 20th century was power that it acquired during and due to war. When the wars ended, the power diminished but never back close to its prewar level.

Economic historian Robert Higgs, in his book Crisis and Leviathan, was the first to point out this pattern, and he called it a “ratchet effect.” And I will just give you a couple of examples. I go into it more at length for US audiences but I know that you’re not typical US But we generally in America think of Prohibition as starting in 1920, two years after the war. Well, not quite. It started during the war. During the war, the government imposed price controls on wheat. As almost any economist can tell you, if you impose a price control below the free-market price, you get a shortage. And when you get a shortage, the government then puts itself in line to get the resources first, and when everyone else has what’s left, it’s very hard for them to justify making grain into alcohol. So under the Lever Act, they imposed Prohibition. They refused to allow grain to be made into alcohol.

Also, other federal powers grew during World War I. The US government, under Wilson, nationalized the railways. They gave it back into private hands at the end of the war but they controlled them more at the end of the war than they had before. We also had the first draft since the Civil War in the United States as a result.

Also, our tax system. We had started taxing income in 1913. The top tax rate was 7%. And it was on incomes that, translated into today’s dollars, would be over $7 million. By the end of the war, the top tax rate was 77%; 11 times. And although Secretary Mellon, the Treasury Secretary in the ’20s, brought the tax rate down, he never brought the top tax rate below 25%. And the bottom tax rate started at 1% and it went to 6%.

So a big part of the growth of government in the United States, the federal government of the United States, as I said, was due to war.

Now, one person on the left, the left part of the political spectrum, who recognizes that war leads to more government control, and celebrates that fact, is editor of The Nation, a left wing publication, Katrina vanden Heuvel. Two months after 9/11, vanden Heuvel and co-author, Joel Rogers, wrote, “If anything, the war on terrorism creates an opening for Progressives.” “Progressives” is the term leftists use nowadays to refer to themselves. So they don’t want to call themselves leftists. “If anything, the war on terrorism creates an opening for Progressives, not closure. Indeed, it presents the opportunity of a lifetime. It is a truism of modern politics that war generally mobilizes and helps the democratic left. It does so despite the repression of dissent that war time also brings because war raises the stakes in politics and invites consideration of wider goals, including justice. War’s mobilization of the populace against a shared threat also heightens social solidarity while underscoring the need for government and other social institutions that transcend or replace the market." In other words, according to her, government grows in war time, displacing free-market institutions, and she likes that.

Now, my title, as I mentioned, is An Economist’s Case for A Noninterventionist Foreign Policy. This is going to be largely American oriented. And let me get some of the economics into it.

One of the major contributions of economists like Ludwig von Mises, Friedrich Hayek and Milton Friedman – by the way, Milton Friedman – who, here now, being at Hoover for a day or so, who has heard of Milton Friedman? OK. Milton Friedman is justly thought of as probably the most important economist of the last half of the 20th century. George was friends with him I think from the ’50s. I was friends with him from the early ’70s. He was, I’d say, the most important person at Hoover. And of the thousands of economists, people like him that have studied specific markets and specific interventions, they find a few systematic things, that when government intervenes, it often causes unintended consequences, and those unintended consequences are often worse than the problem they intervened to solve.

Let me give an example from domestic economic policy and then I want to give an example from foreign policy.

On August 15, 1971, President Nixon imposed price controls on the whole US economy. One of the things economists are most agreed on is that price controls – what we call ceiling prices, maximum prices; the price can’t go above them – will cause shortages. And they will especially cause shortages in areas where there are supply shifts that would otherwise raise the price. Well, guess what happened in 1973? OPEC finally got very powerful and raised the world price of oil in a few months from $3 a barrel to $11 a barrel. But the price of gasoline in the United States under the price controls was not allowed to rise enough to eliminate the shortages. We got shortages; we got line-ups.

Now, when you have that, a government has two choices: End the problem by ending the price controls or go further and intervene more to solve some of the problems the price controls led to. And the US government, under Nixon, Ford and Carter, went further. And one of the things we got out of it was so-called CAFE laws. CAFE – not that stuff you’re drinking – Corporate Average Fuel Economy. They said each auto company has to achieve a certain fuel economy a year. Why? Well, because we’re overusing gasoline. Well, sure, the price has been kept artificially low, so we’re acting as if the price is artificially low. And so CAFE laws came along. What’s the quickest way to get higher fuel economy? Drop the size and weight of a car. And cars became, in the late ’70s, early ’80s, less safe, and we actually got more traffic fatalities. That’s a well-documented fact for those kinds of cars. So that’s an example from the domestic economy. Many economists have written about that.

Let me talk about an example of unintended consequences from US foreign policy. Well, actually, let me just mention one that is both domestic and foreign. I mentioned OPEC. We all heard of OPEC in 1973 when they almost quadrupled the price of oil. But OPEC formed in 1960. Why? Because President Eisenhower had imposed import quotas on oil and given preference to Mexico, Venezuela and Canada. And so some of the – Algeria was one of them – I know there’s someone from Algeria here – and three other countries organized to essentially fight back. And then they gradually acquired members in the ’60s and early ’70s. So OPEC was an unintended consequence of US import quotas.

Well, since I’m talking about import quotas, let’s talk a little about the Middle East. Think about George Bush’s invasion of Iraq in 2003. How did that come about? Well, we have to go back further. The United States was hostile to Iraq because the United States saw Iraq as being somewhat hostile to the United States. But why was there any kind of connection at all? Well, in November of 1979, some Iranians took over the US embassy, thus, leading to a long period of bad relationships between the United States and Iran. So the United States was looking for an ally in that region and they found Iraq. By the way, the CIA had helped Saddam Hussein be part of a coup that overthrew his predecessor many years earlier. So they’re looking for this ally and they find Saddam Hussein to go after Iran. But wait a minute. Did history start in November, 1979? Well, according to President Jimmy Carter, it did, because here’s what he left out. A reporter asked him, well, what about in 1953 when Operation Ajax was run by the US government to help depose a democratically elected prime minister of Iran. And President Carter answered – that was 1953; the question is asked in 1979, 26 years later. President Carter answered, “That’s ancient history.”


Now, let me ask you something. Who here has ever taken a course in ancient history? You don’t remember talking about things 26 years earlier, do you?

Now, it turned out, of course, there was some justification for them overthrowing him because he had nationalized the British oil company. Britain was out of resources after the Second World War and they asked newly installed Eisenhower, newly elected Eisenhower to help them out, and he did. But, you know, I live in a country where sometimes government nationalizes things by eminent domain but I don’t go to war with them. And I don’t want to invite another government in to go to war with them. It’s too bad, but I think war is an extreme solution. And overthrowing a government is an extreme solution.

And so then, Saddam Hussein becomes the US ally and then, of course, he gets a little ambition, takes over Kuwait, and then he becomes a US enemy.

But the point is all of that US involvement really got going in 1953. A former head of the CIA under Clinton, early in the Clinton administration, James – you probably know. What’s the guy’s name? James? The head of the CIA?


HENDERSON: OK. OK. Anyway, it will come. Spoke at the Naval Postgraduate School a few years ago and he talked about how this war with Islam started in 1979 with radical Islam. And I stood up and I said, I think you’re off by 26 years. And now I think you know why.




HENDERSON: No. No, no, no. It’ll come.


HENDERSON: What? Woolsey, Jim Woolsey. That’s it. Thank you.

OK, so economists have looked at unintended consequences. Let me talk about another field they’ve looked at, the information problem. I mentioned an economist named Friedrich Hayek. And Friedrich Hayek wrote some of the most important economics articles of the 20th century. One I highly recommend; I suggest you Google it and read it. And I tell my students you have to read it three times. It’s written in this kind of Germanic style. I hope I didn’t insult any German person here. But anyway –



So he wrote this in 1945. And this was one of the final intellectual nails in the coffin of Socialism, and it was about the information problem. Hayek said that the information that matters most in a society does not exist in a centralized body but rather exists in little bits and pieces in millions of minds. And if we have central planning, we can’t get that information aggregated. And by the way, this was way before big computers. It doesn’t matter. Even with huge, wonderful computers, you’re not going to aggregate in a way where it’s useful. People have to be able to act on their own information. Modern scholars in the Hayek tradition call it "local knowledge." Hayek never used that term but that’s what we call it.

Now, there’s nothing in Hayek’s arguments to suggest that it applies only to central planning of a domestic economy. A government that wishes to intervene in another country’s affairs faces the same problem, possibly even magnified by the fact that the small number of government policymakers at the center have even less information about the foreign country than they have about their own country. The problem then becomes one of knowing which countries they should intervene in and, beyond that, even if they seem to have solid grounds for intervening, how to intervene. You might think it’s completely moral, and I might agree with you, to intervene in certain country’s affairs but that doesn’t mean you’re going to do it well and that doesn’t mean it’s going to work.

One economist who addressed this issue briefly but insightfully is David Friedman, the son of the late Milton Friedman, and himself a well-known economist. By the way, I interviewed this economist – I have a little hobby of interviewing older economists about their lives. I interviewed this guy who had done his dissertation under Milton in the 1950s, and he told me, “I used to think Milton Friedman was the most brilliant man in the world. Then, I met David.”

So David Friedman, writing in 1973, pointed out that when a government such as ours wishes to intervene, it often faces a choice between two or more illiberal dictators. Friedman gives a pithy instance. “In practice, an interventionist policy almost inevitably involves alliances with the Shah of Iran or the present government of China” – this is when he was writing in the ’70s – “or Joseph Stalin or Ferdinand Marcos or, in the case of actual policy over the past 45 years, all of the above.”

He also pointed out – this is more on the information problem – “In order for the policy to work, it is necessary to correctly figure out which countries are going to be your enemies and which your allies 10 years down the road. If you get it wrong, you find yourself unnecessarily blundering into other people’s wars, spending your blood and treasure in their fights instead of theirs in yours. You may, to take an example not entirely at random, get into one war as a result of trying to defend China from Japan” – World War II – “spend the next 30 years trying to defend Japan and Korea and Vietnam from China, and then finally discover that the Chinese are your natural allies against the Soviet Union.”

In his book Endless Enemies, former Wall Street Journal reporter, Jonathan Kwitny recounts how US government officials made major decisions about foreign policy with little knowledge of the countries for which they were making the decision, with often disastrous consequences. In discussing the Congo, for example, Kwitny tells how US government officials in 1960 failed to understand that the Congo was a few hundred mini nations whose people were trying daily to avoid starvation. Instead, those officials interpreted everything with reference to their own Cold War with the Soviet Union. This lack of local knowledge extended even to cultural differences. President Eisenhower’s undersecretary of state, C. Douglas Dillon, judged the Congo’s Patrice Lumumba to be, quote, “an irrational, almost psychotic personality." What was his evidence? Lumumba “would never look you in the eye." What Dillon didn’t know, apparently, was that many Africans are taught that avoiding eye contact is deferential. I’ll ask about that maybe a little later. Because of these officials’ negative assessments of Lumumba, President Eisenhower had him murdered. Clearly, knowledge of Lumumba’s true character and personality was important given the major decision riding on that misinformation.

Now I want to talk about another issue that economists talk about all the time but I’m applying to foreign policy and they rarely get into that area. And I call it, and economists call, it the incentive problem. Neither the president nor the Congress necessarily has the incentive to make good decisions. Politicians tend to be very short-run oriented. They’re looking at the next election. And they’re looking at how they will play history to the extent they think long-run, and they, if they get us into a war, bear only their pro-rata share of the taxes to pay that war. And so you get very rarely these politicians who think long-run. One of them, by the way – in some my research, I became a fan of this man, and I never would have expected it – was German Chancellor Otto von Bismarck. He was, by the way, the person who started the German welfare state. But on foreign policy, he was pretty crafty. People were always trying to get him to get colonies and he said – he once compared German colonies to sable coats on the backs of Polish noblemen who had no shirts underneath. In other words, they weren’t worth much. When someone pushed him to acquire colonies for Germany, he retorted, “Your map of Africa is very fine, but my map of Africa is here in Europe. Here is Russia. And here is France. And we’re in the middle. And that is my map of Africa.”

He even put a low priority on the Balkans right next door saying in a speech to the Reichstag, Germany’s parliament, “The whole of the Balkans is not worth the healthy bones of a Pomeranian Musketeer.” Bismarck kept his eye on the prize and the prize was avoiding war, but he was very rare. And, of course, he was succeeded by Kaiser Wilhelm II, who was one of the dumbest politicians in our 20th century.

I want to get to certain things so I’m going to very quickly go through a few things I have more on, if you want to ask me in Q&A. But let me just take a minute to talk about World War I, because I think if you look back at the 20th century, the biggest tragedy because of everything it led to, as well as what happened during World War I, was World War I. Because you can make a strong case, without World War I, we wouldn’t have had World War II. And the big thing had to do with Wilson’s intervention.

When Wilson intervened, when the United States went to war in World War I, April 6, 1917, three years almost into the war, how much German territory was occupied by the Allies?


HENDERSON: Zero. In other words, by the standard measures, they were winning. So what happened next? Well, the United States shifted the balance of power because Woodrow Wilson wanted to “make the world safe for democracy.” That was his famous line. So he intervenes and the balance of power shifts. In early November, 1918, the Germans contact Wilson and say, you’ve got these 14 points and one of them is self determination, another is, if we surrender, we’ll get a say in the proceedings; do you mean it? And Wilson says, yes, I mean it. Well, of course, we got the Versailles Treaty.

And there was a famous economist who was about 40 years old, who was a consultant – not even 40 – a consultant to the exchequer at Versailles, who saw things going terribly wrong, saw all these reparations and how they were going to really upset Germans and really destabilize German society and maybe lead to some pretty upsetting political changes in German society as people tried to throw off the yoke of the Versailles Treaty. Does anyone know who I’m talking about?

John Maynard Keynes. That’s how John Maynard Keynes made his reputation. If you pick up his famous book, The General Theory, good luck. I’ve tried it five times. I haven’t yet figured it out. You can pick up The Economic Consequences of the Peace, the book he wrote in 1919 or 1920, blowing the whistle on all this, and you can get through that book in a few hours; it’s that well written. And basically, he said this is going to be bad, and it was bad. And, of course, then we got Hitler and then we got World War II.

So I have a whole section of this talk and I’ve restricted myself to 35 minutes so we can go to Q&A and I’m now down to eight, so I’ll just make it kind of provocative.

I’m not going to be able to make my whole case the way I’d like to. But almost everyone, if you ask in America and Canada, where I grew up, or in Britain, will say that World War II was the good war. World War II was the war we had to fight. I remember being a little skeptical. I grew up in Canada. I was pro World War II because of everything I heard from people around me. But when I started learning that the US allied with arguably one of the three most bloody dictators in history, Joseph Stalin, it did make me wonder about how good the war was. And then when I learned that their propping him up allowed him to advance across Europe, I started having second thoughts. And since then, I’ve looked into it more, and I think I can make a case. And I can’t make it in five minutes. But here’s what I can do. You’re here at the Hoover Institution. Easy question, I think: Who is the Hoover Institution named after?




Yeah. You got a first name on that?


HENDERSON: Not J. Edgar. And they were no relation. Herbert Hoover, who was the president of the United States before Franklin Roosevelt.

Now Herbert Hoover – I don’t want to put too much as risk here – but Herbert Hoover was not a great president. He was from the left wing of the Republican Party and he did a lot of the things that Franklin Roosevelt did. And this is not well understood. He was not Mr. Laissez-Faire. He was against laissez-faire and he intervened in the domestic economy in ways that helped make the depression a Great Depression. And then when Roosevelt came in, Roosevelt doubled down and made those things even worse. And I can make that case again but not in a couple of minutes.

But this book came out a few years ago. And so even when I argue – I don’t know if you’ve been in our coffee room yet, where you sit around and talk about stuff, but when I’ve argued in the coffee room about why the United States shouldn’t have gotten into World War II, if there are 11 people there and I’m one of them, it’s 10:1. Well, I now have someone on my side. And it’s the guy whom this organization is named after, Herbert Hoover. This book came out a couple of years ago, Freedom Betrayed, Herbert Hoover’s Secret History of the Second World War and Its Aftermath. He was taking notes all the way through the ’30s and ’40s. Herbert Hoover, by the way, broke with tradition and commented negatively on his successor’s policies. That’s not normally done, and I’m glad he did it.

And let me just read to you a couple of things he wrote. This is after the peace, the so-called peace between the alliance, the Von Ribbentrop-Molotov agreement to not go to war with each other. And here’s what Hoover said in 1941, way before Hitler attacked Russia in June ’41, months before. He says, “I observed that it was obvious from many signs that a Hitler attack upon Stalin was coming, that Britain would be safe and that our government should at once stop all warlike action and wait for the great dictators to destroy each other. And I said our officials should cease and that Hitler was going to invade the Western Hemisphere. Mr. Hull – ” He was talking to Cordell Hull, the secretary of state. “Mr. Hull made no comment on this advice. All of this vital information of the coming attack of Hitler and Stalin and its implications were suppressed from the American people during the debate and action upon the Lend-Lease Bill. Had this information, as to the diversion of Hitler’s armies to Russia, been known to Congress, much of the oratorical pressure that Britain or the United States were in danger of an invasion by Hitler would have been demonstrably false.” So I do have one big guy in my corner.

Now, in my brief amount of time, I want to talk about the Cold War and a couple of other things.

Jonathan Kwitny, in his book Endless Enemies, whom I earlier quoted, said, “The excuse for intervention, of course, is the notion that if we don’t fight, Moscow will win by default. Yet, as one travels the globe, from Indo-China to Cuba to Angola, one finds that the third-world countries where the Soviets are alleged to had the strongest influence are precisely those countries where we have fought. Meanwhile, in countries that weren’t militarily threatened by the United States or Soviet influence had a chance to fail on its own merits, it has. In Egypt, in Ghana, in Algeria, in Somalia, in Nigeria, in Indonesia, except in occupied countries along the Soviet’s own border, the Russians have been kicked out.”

Kwitny gives 15 lessons to be drawn, and I want to focus on three of them. First – actually, it’s his lesson number four: “Forceful intervention by a big power in a third-world country, no matter how well intentioned, is almost always dramatically harmful to the people who live in the country being intervened in." Look, for example, at George Bush’s intervention in Iraq, which had the unintended consequence of producing a Shiite regime sympathetic to Iran’s government and the unintended consequence of wiping out a large number of Christians whom Saddam Hussein, for all his evil, had not targeted.

Lesson number five: “Intervention by either major power, regardless of what the other is doing, usually tends to be counterproductive for the intervener.”

And lesson number eight: “Force creates enmity.” Creates enemies. “If it creates respect as well, that is less enduring.”

The late Chalmers Johnson even gave a label to the idea of unintended consequences, a label that, according to Johnson, was coined by the Central Intelligence Agency, and the label is “blowback.” One such example is the US government’s entry into World War I, which, by making German defeat all but certain, drove Germany to surrender, and that led to Versailles, as I mentioned.

OK, now, what about terrorism, the issue that George W. Bush and Barack Obama have used so effectively to take away our freedom? In December, 1996, I spoke to a group of Defense Department officials. My speech was a comment on a paper by my Hoover colleague, Henry Rowen, a former president of the RAND Corporation. I pointed out that in his paper, Rowen had taken terrorism as a given. But once you take a step back and ask why terrorism exists, I said, “What leads the Irish Republican Army to put bombs in Britain? Why don’t they, for example, put bombs in Canada or Bangladesh? To ask the question is to answer it. They place the bomb where they think it will help influence the government that makes decisions most directly in the way of their goals. And the governments in the way of their goals are usually governments that intervene in their affairs.” Then I concluded, “If you want to avoid acts of terrorism carried out against other people in your country, avoid getting involved in the affairs of other countries." In other words, don’t go around stirring up hornets’ nests.

By the way, one person who I think kind of got this, at least at times, was Ronald Reagan. When the 238 or 41 – I always forget – 238 or 241 Marines were killed by a bomb in Lebanon, Reagan could have doubled down, but he just said, let’s get out.

One person in the audience when I said this, noted game theory economist Martin Shubik, sarcastically accused me of advocating that, “We all love one another.” But he missed the point. A good game theorist puts himself in the shoes of the other person whether or not he loves him. Even if you hate your opponent, and especially if he hates you, it’s good to know what motivates him and what pushes his button.

Interestingly, the US Department of Defense’s own Defense Science Board has noted this correlation. In a 1997 report, the board wrote, “Historical data show a strong correlation between US involvement in international situations and an increase in terrorist attacks against the United States.”

If the US government – and I’ll close with this. If the US government got out of other countries’ affairs, the positive US impact on the world would become more, not less. The United States has the strongest, wealthiest economy in the world, and is likely to be in that position for at least the next 20 years. The message is already getting out to the world and many countries are trying to emulate the relatively pro-freedom economic policies that caused this long-term economic boom. But the message has been somewhat garbled by the white noise of the United States’ interventionist foreign policy, which has caused some hatred of the United States around the world. With the US out, the hatred would fall.

Similarly, the US government’s paramilitary war against drug producers in various Latin American countries has destabilized democracies in Peru, Colombia and Mexico. Drug producers in Peru, for example, had hired the Shining Path, a group of terrorist leftists, to defend them and their property when the US financed the Peruvian military. With the US government no longer intervening, those countries would become more stable, and would have a much higher chance of creating a freer political and economic system.

The US government could add to its positive impact in the world by loosening immigration restrictions substantially, allowing a few million more people a year into the United States. The consequent brain drain would further pressure the countries losing highly skilled labor to reduce their taxes and regulations that drive people out.

I could say more, but I know there are a lot of people wanting to ask questions, so I’m going to stop here. Thank you.



HENDERSON: No. OK. I could say more.

Sir, where are you from?

UNIDENTIFIED MALE: My name is – (INAUDIBLE) – and I’m from – (INAUDIBLE).


UNIDENTIFIED MALE: I have two questions, actually.


UNIDENTIFIED MALE: You mentioned that the US economy was – (INAUDIBLE) – was healthy – (INAUDIBLE).

HENDERSON: I didn’t use the word “healthy.”


HENDERSON: And by the way, it’s not the healthiest.

UNIDENTIFIED MALE: (INAUDIBLE) – that you have the political power or the political decision-making power to change the debt in your economy – (INAUDIBLE). And the same in regard to the nonintervention – (INAUDIBLE) – do you think we have seen the direct consequences – (INAUDIBLE) – in Iraq and Afghanistan or do you foresee the consequences in the coming years after you have pulled out of Iraq and Afghanistan?

HENDERSON: OK, so I’m not – prediction is always hard, especially about the future. I look at the headlines every day, and I don’t know if you know this, but dozens of people typically in Iraq are being killed every day by various terrorist attacks. So dozens a day. That’s a large number over a year in a population of under 20 million. Will that get worse? It could. I don’t know. But my point is Saddam Hussein was an evil man, there’s no doubt about it. But it was a fairly stable society where dozens of people weren’t getting killed every day. He killed some of his big political enemies enough to then have stability.

To your first question, the turnaround in what? In our economy or the world or what?

UNIDENTIFIED MALE: Your economy, your debt.

HENDERSON: Yeah. It’s a tough one. Barack Obama is not Bill Clinton. Bill Clinton, if he’d seen the forces arrayed the way they are, would have made deals all over the place to cut budgets and so on, and Barack Obama won’t. Barack Obama is more of an ideologue who really does want a more regulated, a more Socialist – I’m not saying he’s a Socialist, but he wants a more Socialist, a more regulated economy. So it’s very hard to say. It’s very hard. And he has now managed to really regulate a huge part of our economy, namely health care, which already was regulated, but he’s applied so many more regulations to it, and we’re just seeing the start of it.

Sir, where are you from?

UNIDENTIFIED MALE: From the Indian navy.


UNIDENTIFIED MALE: From the Indian navy, sir.

So my question relates to two parts of your talk. One was regarding noninterventionist policy for economic benefit of the country and the second was the central control that governments have and leads to kind of not a good economy for the country.

HENDERSON: Right. Right.

UNIDENTIFIED MALE: China is a model which displays both in opposite direction. That is, it has a fantastic noninterventionist policy. It does not intervene in any country in any part of the world which goes as – (INAUDIBLE). But its central control over the economy is also there.


UNIDENTIFIED MALE: And is going to – (INAUDIBLE). So how do you correlate these two?

HENDERSON: OK. So China started from a very low level. If you start from a level where Chairman Mao took millions of people who were very talented in urban areas and made them farmers and then you get rid of that, you can have a lot growth because you’re growing out of something really poor. And I think that explains just that amount of deregulation they have, the amount of private property and farming they allowed starting in 1980. Those things explain a lot of the growth. It’s still a very regulated economy, as I think you’re pointing out. It’s more regulated than ours. But again, it’s catching up. And by the way, catching up is always easier than getting there in the first place. I think they’re running out steam, by the way. I saw a talk by Nicholas Eberstadt on Saturday, who’s a demographer/economist at American Enterprise Institute in Washington. And he was looking at some of the data on children and the numbers of boys and the numbers of girls and where they live, and they’ve got a big mess coming, which, by the way, he was totally talking about China. What I see as an implication for US foreign policy is whatever your degree of worry about the Chinese, if you knew this, and you hadn’t, your worry should be less. So one big regulation they have is they have restrictions on moving to cities. So it’s like Russia under the Soviets. The population of Moscow was a little bit under eight million. If you wanted to move to Moscow, you had to get permission, and you typically couldn’t. It’s kind of like rent control in New York or something when you’re getting an apartment. And so people can’t move to the cities so people are doing badly in the rural areas and well in the cities. So if they just allowed what economists call arbitrage, let people move within the country, they’d be doing way better. So I’m getting a little far afield. The bottom line is China has done well to the extent is has deregulated. They’ve got a long way to go.

PRESENTER: Sir, you have time for one more question.



UNIDENTIFIED MALE: Good morning, Sir. Commander – (INAUDIBLE) – from Australia.


UNIDENTIFIED MALE: Good day, sir. I always love hearing a counter view of the world because mine explains human thought but also, as you quite rightly said, looks at second and third effects of decisions and unintended consequences. Taking your perspective, what would your views be on how we should or how the US should engage China, noting market economists, like one of my favorites, Michael Cox, from the London School of Economics, who say Neo-Liberalism isn’t new. (INAUDIBLE) Let them be. Personally, because I think China learns a lot from the – (INAUDIBLE) – like China can actually affect their society, sir, do you think we should stand back or engage them?

HENDERSON: I liked a lot of what Admiral Roughead said. I wrote notes like crazy when he was talking about China. Let me mention his, and let me say one or two or my own thoughts. He said, “To China, you’re containing yourself by your behavior." And so, in other words, they’re already containing themselves by getting people pissed off at them. And then he said, though, “We should cooperate.” And I think that’s right. I think, if you look at China’s trade, they want us – us, meaning I’m talking as an American. They want America, they want all these other countries to do well. More markets for their goods. But also, economists point out, more goods they can import from us. Trade is both ways. And the idea that they’re going to really mess this up I think is highly unlikely.

I gave a talk to all the newly chosen admirals of the US Navy, all 55 of them, back in 2010 in Maryland, and a large part of my talk was on China. And, again, since I’m in favor of noninterventionist foreign policy, here’s a basic point I made that no one can disagree with. We’ve got a huge thing protecting us from China. Us, meaning the United States. It’s called the Pacific Ocean. It’s very, very hard to cook up any realistic scenario where they invade us. And, yes, the US will lose influence in that part of the world by backing off, but notice what also Admiral Roughead said: India is not necessarily going to sit back and let all that stuff happen. And so, yeah, I think the United States could disengage from that.

Real quick follow up or –

UNIDENTIFIED MALE: I’ve got a follow-up question.


HENDERSON: OK, let’s talk about it.

OK, thank you very much.

PRESENTER: Thank you.


Author: David R. Henderson

David R. Henderson is a research fellow with the Hoover Institution and an emeritus professor of economics in the Graduate School of Business and Public Policy at the Naval Postgraduate School. He is author of The Joy of Freedom: An Economist’s Odyssey and co-author, with Charles L. Hooper, of Making Great Decisions in Business and Life(Chicago Park Press). His latest book is The Concise Encyclopedia of Economics (Liberty Fund, 2008). He has appeared on The O’Reilly Factor, the Jim Lehrer Newshour, CNN, MSNBC, RT, Fox Business Channel, and C-SPAN. He has had over 100 articles published in Fortune, the Wall Street Journal, Red Herring, Barron’s, National Review, Reason, the Los Angeles Times, USA Today, The Hill, and the Christian Science Monitor. He has also testified before the House Ways and Means Committee, the Senate Armed Services Committee, and the Senate Committee on Labor and Human Resources. He blogs at