Approaching the Abyss

  • by Pete O'Brien
  • 05-17-2020
In the wake of what will now be the largest single increase in the national debt, many are calling for an across the board reduction in spending for national defense.
Meanwhile, there’s an army of economists opining about the need for this or that additional stimulus package to help the country and possibly get the economy restarted as the nation struggles to come out of the Wuhan Depression.
This is both contradictory and wrongheaded. But, as George Bernard Shaw once reportedly noted that: “if you laid all the economists in the world end to end they still wouldn’t reach a conclusion.”
Never mind that spending on national security necessarily means spending on American companies that build and maintain our ships, airplanes and all the associated weapons and systems, that such spending employs several million workers, or that the world looks to be getting more, not less, dangerous in the wake of the Wuhan Virus - as we enter the world-wide Wuhan Depression.
Consider this:
Measuring deficit spending in current year dollars doesn’t provide context. There’s been so much inflation in the last 75 years that raw numbers taken in isolation don’t mean much. Rather, we should look at the total national “income” and compare that to how much we’re willing to invest. The total “income” might be best represented by the Gross Domestic Product (GDP). 
The US’s GDP for 2019 was about $22 trillion. We’re now looking at deficits in the range of $4 trillion, or 18% of GDP.
In 1940 US GDP was a tad over $100 billion and federal spending was $9.5 billion (a $2.9 billion deficit). In 1941 spending surged in anticipation of our entry in the war that already raged in Europe and Asia, and in the 5 years 1941 - 1945 just over $312 billion was spent by the federal government (the vast majority on the Army and Navy). Importantly for understanding this spending, after WWII started, wage and price controls, and broad rationing, went into effect across the economy. What that means is that, for all intents and purposes, real GDP was frozen in place, so while nominal GDP rose to more than $230 billion by 1945, real GDP was probably in the vicinity of $140 - 150 billion, the rest being a function of the $92 billion in federal spending.
The point is that the level of deficit spending in 1944 and 1945 was on the order of 60 - 65% of GDP — more than three times the current deficit.
This is not to advocate for massive deficits, but to put things in perspective - for a reason: the rest of the world is arguably approaching the abyss…
Oil prices remain depressed - and are likely to do so. The Middle East is going to face an interesting near term future. If we’re lucky, and if we keep the pressure on Iran, the Mullahs will face internal unrest and perhaps even be overthrown. That may actually produce an increase in stability in the long run, but we should be aware that it may well be a bumpy ride, particularly with depressed oil prices affecting a number of countries.
Russia has problems. Russia is heavily dependent on their oil and gas revenue, they face a continuing demographic crisis - they are growing older. And the virus is just taking hold.
China, which to a certainty has covered up the real effects of the virus, likewise is growing older and in particular President - Emperor Xi is facing an economy that faces a world that has, in the face of the Wuhan virus, grown tired (finally) of China’s imperious  and criminal behavior. Xi may well see that the windows of opportunity - that he saw opening up, the possibility of continuing to spread his hegemony to the South, to the East, and to the West, even into Africa and Europe - are closing. Perhaps Xi will feel it’s time to “roll the dice” and see if he can achieve his goals of a greater China "prosperity sphere” of influence that reaches into the Philippines, that includes Taiwan, that bends Korea and Japan in the direction of Beijing rather than Washington.
Meanwhile in Europe the virus has revealed the vision of European Unity to be a  flawed myth. Germany and France are taking care of Germany and France, Italy has been left to her own devices, and as the global economic contraction hits home, deficits will grow and national security budgets will shrink. Once again we are seeing growing concerns about the possible economic collapse of Italy, Greece, Portugal, and Spain; and Germany is unlikely to come to their rescue. 
And NATO defense spending is likely to fall even further below the promised 2%.
Over all of this is the massive uncertainty of the virus and the economic crush faced in every nation and every economic sector. Over the next several years we are going to see more political and social instability around the world. The possibility of new wars is growing.
And yet we talk about cutting our own defense budgets?
The US federal budget this year was scheduled to be about $4.9 trillion - prior to the Wuhan Virus crisis. DOD plus the rest of the national security complex accounts for a bit more than $700 billion - 15%. Meanwhile, with the additional spending now forecast, total US government spending for 2020 could reach nearly $9 trillion. 
And still the answer is to cut defense spending?
There’s an old adage: Penny wise and pound foolish. Reducing the national security budget, even eliminating it all together, would scarcely put a dent in the huge deficit. But reducing defense spending now, in the face of a worried Putin and a worried Xi, both of whom may soon find a need to redirect their people’s attention, while Europe rapidly dis-unites? Is that really the best thing to do?
Perhaps we should spread a tiny bit of this immense largesse into the defense industry, and press ahead with force modernization? Spend a few extra dollars now and work intelligently to deter aggression by Xi. Or do we try to pare back the national security budget, leave the field, and increase the odds that these dictators will drag a depressed world into war - a far more costly problem than anything we can now imagine?