William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.

HOW POOR IS THE UNITED STATES?

When President George W.  Bush addressed newly elected members of Congress at the White House January 3, he spoke of doing “big things” in his second term.  One of these “big things” was leading the relief efforts in South Asia in the wake of the tsunami that devastated coastal areas from Indonesia to Africa.  Another was reforming the U.S. tax system with an emphasis on lower rates.  What the president failed to realize, both in this instance and in regard to other issues related to America’s continued security and leadership in world affairs, is that the continued mismanagement of the nation’s finances makes the accomplishment of most “big things” impossible.  

President Bush has pledged what he calls “an initial commitment” of $350 million toward the tsunami relief effort in Indonesia, Thailand, Sri Lanka and other affected countries.  The administration is drawing those funds from an emergency account at the Agency for International Development, money that was appropriated in November as part of the omnibus spending package.  The problem is that this initial response will completely drain the AID fund, requiring Congress to vote additional funds, not only for the current disaster but also as a reserve against future contingencies.  According to the Office of Management and Budget, the 2005 budget is already facing an estimated $363.5 billion deficit, so any new funding will be financed in red ink.  
President Bush has enlisted two former presidents, his father and Bill Clinton, to spearhead a private charity drive to raise money for tsunami relief.  The American people were already pouring out their charity, as they always do in a crisis, but this added effort by the Bush Administration looks like an admission of the poor financial condition of the Federal government.

The United States is a large and rich country, which gives it the ability to shape world events in accordance with its interests and values, and, as a result, create better lives with more opportunities for its citizens.  But it must be willing to mobilize its resources behind its objectives or it will be no more effective in international affairs than a small and poor country.  

The tsunami crisis provides Washington with the opportunity to exercise its leadership, demonstrate its global reach and make substantial diplomatic gains.  The U.S. government is setting up a coalition with Japan, Australia, and India to coordinate relief efforts, a coalition that would serve as a good foundation for securing America’s strategic position in Asia.  But is the Bush administration willing to mobilize the resources needed to maintain its role as the lone Superpower? Australia, Japan, and Germany have all pledged more official aid than the United States.  

When Congress considers increased disaster funding, it will probably add the money to the $80 billion supplemental spending bill for military operations in Iraq, Afghanistan, and elsewhere in the war on terror.  The Bush administration’s war funding request is not expected on Capitol Hill until after the president has submitted his fiscal 2006 budget proposal on Feb. 7.  The 2006 budget,  as estimated by the OMB, still shows a $267.6 billion deficit.  According to widely leaked memos, OMB has asked the Pentagon to cut $10 billion from its budget to lower the overall Federal deficit.

The U.S.  military has been in the forefront of tsunami relief, with an aircraft carrier and Marines on the scene in Indonesia, and Air Force transports flying in aid across the region.  The military is already badly stressed by the Iraq and Afghan deployments, even though these are small compared to past conflicts.  There are around 150,000 American military personnel in Iraq and 10,000 in Afghanistan, but the United States deployed roughly 500,000 in the Korean, Vietnam, and Gulf wars.  Maintaining troop levels in the current campaigns should not be a problem, but it is, due to the massive force level cuts of the 1990s.  The Army had 18 regular combat divisions in 1991, but only 10 divisions in 2001.  When Defense Secretary Donald Rumsfeld was asked about the lack of armor for vehicles in Iraq at the now famous session with  National Guardsmen, he said, “The country goes to war with the Army it has at the time, not the Army it might want in the future.”

True enough, but it has been three years since 9/11.  Rumsfeld has done nothing to increase the size of the Army, or any of the other services, inherited from the Clinton Administration.  The Bush administration has not been willing to put resources behind its geostrategic policies, risking the failure of those policies. (Instead, resources have gone to new  domestic programs, such as “No child left behind” and the Medicare prescription drug benefit.)

Bush and Rumsfeld are even planning to cut major weapons programs and take more combat units out of service.  Proposed force level cuts include reducing the Navy’s aircraft carriers by one (from 12 to 11), even though the Navy’s uniformed leadership has said it needs 15; cutting back the F/A-22 fighter program to such a low level of production as to endanger the entire project (despite the reliance of U.S. war planning on air superiority); and delaying new satellite launch vehicles (even though the military depends heavily on space-based assets).  A host of other military projects are also being cut or slowed because they are deemed to be too expensive.  

Yet, America’s military spending is not excessive, even when taking into account the cost of military operations in the Middle East.  It will run about 4.5 percent of GDP in 2005, which is about what it was ten years ago when the country was at peace.  Indeed, total Federal spending is at a relatively modest level, running at about 20 percent of GDP, compared to 21 percent in the 1990s and 22 percent in the 1980s.  The immediate problem is not spending, but the lack of Federal tax revenues.  Beyond that is the menace of America’s huge current account deficit and the falling value of the dollar.  

The Bush administration has cut taxes every year it has been in office.  In 2004, the OMB estimates that tax revenues equaled only 15.7 percent of GDP, the lowest rate since 1950.  The initial tax cut was necessary to fight the recession, but subsequent cuts have been pushed by a mixture of ideology and concern that the economy has still not reached a self-sustaining recovery.  At the recent White House economic conference, it was claimed that the economy was now on a growth track.  So it is libertarian ideology that is pushing for more revenue killing tax cuts under the guise of reform – including a possible shift away from the income tax.  But the libertarian ideology explicitly rejects maintaining America as a great power.  Its fiscal policy is compatible only with isolationism and “imperial” decline.  

It is also from libertarian ideology that the “free trade” policy of both the Clinton and Bush administrations has come.  That policy has allowed the U.S. current account deficit to expand year after year, propelled by a trade deficit that topped $630 billion in 2004.  Every time America acts in the world, deploying forces overseas, providing foreign aid, or conducting diplomacy, it expands the current account deficit.  And as the imbalance increases, the value of the dollar declines in international exchange, making it more costly in real terms for America to pay its way in the world.  

During the first three decades after World War II, the United States was a net international creditor.  It ran a trade surplus than could fund its overseas military operations.   Now, the United States is the world’s largest debtor.  The immense strategic advantage Washington has held because the dollar serves as the reserve currency of the global economy is in jeopardy because national leaders have ignored  the dire consequences of the fundamental shift in America’s financial position.

History is quite clear on this matter.  More great powers have declined because of financial distress than from defeat in war, though economic failure often leads to military failure.  It is common for nations to run up budget and trade deficits in times of emergency (primarily war), but the ability to do so depends on the confidence of lenders that revenues from future taxes and exports will be sufficient to cover the debts.  The danger comes when governments start using emergency measures as normal operating procedures.  This is a sign of weakness and a process that leaves nothing in reserve to meet the next real emergency.    

Polls consistently find that the American public wants the budget deficit reduced more than it wants lower taxes; and it also wants foreign trade brought into balance.  This is not just common sense, it is a manifestation of the people’s survival instinct.  The deteriorating financial situation both at home and abroad is not the result of a “poor” economy, but of poor leadership.

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