Hegemony's economic burden
(Aspenia, June 01, 2003)When Congress discusses the costs of the American empire,
economists on both sides of the fence have new cause for a duel.
The administration’s presentation of the budget on Capitol
Hill was greeted with much criticism from the Democrats, including
– and especially – about the way the war on terrorism
is being fought. The new tax cuts are deemed incompatible
with the rise in military costs stemming from commitments
abroad, from Afghanistan to Iraq to the fight against al Qaeda.
The Republicans replied by reintroducing free trade into the
XXI century: what America needs, empire or not, is to increase
consumption, to put more money in the taxpayers’ pockets.
Milton Friedman and Paul Samuelson interpret and argue
these opposite approaches. The first is the economic mentor of
Republican presidents and the latter of Democratic presidents.
They have been examining, debating and defending production
models and alternative development for almost twenty years.
President George W. Bush’s new budget brought the two Nobel
Prize winners to the barricades: Friedman wrote a long analysis
for the Wall Street Journal, supporting tax cuts and the
deficit, while Samuelson responded by signing the appeal of
forty or so Nobel Prize winners asking Congress to save the national
economy by drastically modifying the White House approach.
Behind the clash over the budget, there is a different
analysis on what type of economic scenario awaits the last superpower,
grappling today with the war against terrorism. For
now, the expenses for the war have led to a reduction of tax cuts
planned for the next ten years. The two-way interview below,
carried out in February 2003, covers these topics.
Maurizio Molinari After September 11, and the war in
Afghanistan, now we have the war in Iraq. What do you predict
for the American economy during the era of the war against terrorism?
Paul Samuelson Bush will be in the White House until 2004
or maybe even 2008. The world has changed radically, but he’s
tough and he’ll press ahead on his own. The economy might
have to live with his approach to the war against terrorism until
2008. So, we’ll be having a series of crises and wars against
groups, organizations or countries considered a threat to the
national security of the United States. The complication of this
Hegemony’s economic burden scenario is that public expenditures will grow constantly, and that card could be played to revive consumption. But this is
dangerous ground: it is based on a rapid succession of political
and military wagers, the next one being to export democracy to
Iraq. It’s not easy. We’ll know more in a couple of years.
Milton Friedman In a period of war, the only possible economic
policy is one that succeeds by producing as much as
possible. By cutting taxes – albeit less than hoped – President
Bush is going in the right direction: families need more money
to spend. The economy’s success is also tied to the success of
political-military initiatives.
What is the cost of having an empire in the XXI century?
Samuelson There are primarily social costs. There is less
money for welfare, for assistance to unmarried mothers, for the
poorest segments of the society. The day will come when people
will say that the war fought these years to save America’s
freedom was fought with the money of the poor. Actually, this
is already happening. We have a conservative government, a
Congress with both Houses controlled by the Republicans and
the excuse of national security in the bargain: the President
can move funds from welfare to defense, bolstered by popular
consensus. But things will change in 2004 if they go badly. And
I am not only speaking about Iraq. The economic dissatisfaction
of many Americans could overturn the makeup of Congress,
independently of the military campaign in the Gulf.
Friedman An empire’s economy depends on its success in the
field. Geopolitical problems have always existed, we have had
them in the past and there is nothing new about them. They
might slow down the economy but not stop it. I don’t think that
managing the empire will force President Bush to change his
economic policy, because he has started out in an excellent direction.
What impact will the war in Iraq have on the economy?
Samuelson The progress of the war will naturally influence the
economy. The conflict’s developments will condition the capital
market and the stock market – they are already doing so. Overall,
we will be seeing an increase of total expenditures and not
a reduction, because the defense budget is destined to grow,
meaning increased use and expanded consumption. But we still
will not be seeing the end of the present recession. A negative
effect on the economy is predictable only should there be bad
news from the front. In the world of finance, there is a great deal
of concern about the possible risks of a sharp drop in the dollar
against the euro, but I don’t think that will happen.
Friedman I don’t know that the war’s definitive impact will be.
It depends on how it ends. If it is long and hard-fought, the result
will be less positive for economic recovery. But there will
be a recovery. We are in a recovery phase right now, not in a recession
as some claim. We are growing, slowly to be sure, but
growing, and the data at the end of the year might be better
than many expect. America is moving forward and continues to
do so. The only question related to the war is whether it will accelerate
the recovery already underway or not.
Do you agree with the war to disarm Iraq?
Samuelson Weapons of mass destruction are a real danger in
world and we have to act. The mistake was made by Bush senior,
who should have finished the Gulf war. But since things are
the way they are today, America affirms that it can handle two
crises at the same time: in North Korea and Iraq.
Friedman Wall Street is afraid of geopolitical instability, but
that has more to do with the stock market than the economy. We
mustn’t lose sight of what this difference means. If recovery is
quick and guarantees positive effects, the stock markets will
benefit as well. The markets follow the economy.
How do you explain Federal Reserve Chairman Alan Greenspan’s
criticism of the Bush administration’s plan for tax cuts?
Samuelson Greenspan is not alone. With a number of other
Nobel Prize winners, I signed a petition against Bush’s new
budget, proposed simply to sell the war to the public. The war
on terrorism and national defense are hiding the recession, the
slowdown in production and the rise in poverty that has been
around for some time.
Friedman Greenspan was not criticizing the tax cuts per se.
He was criticizing the fact that they were not accompanied by
a reduction in costs. That is his objection. Greenspan is suspending
judgment, his objections to the budget are not definitive.
I do not agree with him because the deficit is the only way
we have to spend less, because it is a deterrent for the state; it
demands that closer attention be paid to expenditures. Positive
effects are produced every time taxes are cut. In contrast to the
state, people spend their own money, so they spend more carefully,
better, with greater effectiveness. In essence, giving families
money to spend for education and health is better than
taxing those same families to have the state pay for those services.
That is particularly true if taxes are reduced properly. The
abolition of double taxation of dividends was a step we have
needed for a while.