Yves here. Readers responded enthusiastically to a recent post by Michael Perelman on free-trade imperialism and military Keynesianism, so we asked him if he’d let us publish the next section from his book The Matrix, and he graciously consented. Those of you who are in New York City might also want to see Michael Perelman and Michael Hudson speak at noon at the Left Forum this May 31, at 540 W. 59th Street.
By Michael Perelman, a professor of economics at California State University, Chico. Excerpted from his forthcomign book, The Matrix: An Exploration of the Surprising Interactions Between War, the Economy, and Economic Theory
The War in Vietnam was unexceptional in some respects. To begin with, the press, as usual, was a crucial instrument in mobilizing support for the war. Vietnam came to public attention in 1964, when a minor incident in the Gulf of Tonkin, which sailors briefly thought was an attack, gave Lyndon Johnson the excuse to ramp up the conflict, even though the mistaken report was corrected within a few minutes. Like the Battleship Maine, a convenient mistake provided a convenient pretext for war. A dishonest report about this supposed attack on a couple of American ships by the North Vietnamese, repeatedly reported in the press, was effective enough to get sufficient support for the war.
Long before the Tonkin incident, while the French were still trying to suppress the uprising against their colonial power, the United States expressed interest in taking advantage of potential economic and political interests in Vietnam. Here is President Eisenhower speaking to a conference of Governors in 1953, well before the deep involvement in Vietnam:
I could go on enumerating every kind of problem that comes before us daily. Let us take, though, for example, one simple problem in the foreign field. You have seen the war in Indochina described variously as an outgrowth of French colonialism and its French refusal to treat indigenous populations decently. You find it again described as a war between the communists and the other elements in Southeast Asia. But you have a confused idea of where it is located ‑‑ Laos, or Cambodia, or Siam, or any of the other countries that are involved. You don’t know, really, why we are so concerned with the far‑off southeast corner of Asia.
Why is it? Now, first of all, the last great population remaining in Asia that has not become dominated by the Kremlin, of course, is the sub‑continent of India, including the Pakistan government. Here are 350 million people still free. Now let us assume that we lose Indochina. If Indochina goes, several things happen right away. The Malayan peninsula, the last little bit of the end hanging on down there, would be scarcely defensible ‑‑ and tin and tungsten that we so greatly value from that area would cease coming. But all India would be outflanked. Burma would certainly, in its weakened condition, be no defense. Now, India is surrounded on that side by the Communist empire. Iran on its left is in a weakened condition. I believe I read in the paper this morning that Mosaddegh’s move toward getting rid of his parliament has been supported and of course he was in that move supported by the Tudeh, which is the Communist Party of Iran. All of that weakening position around there is very ominous for the United States, because finally if we lost all that, how would the free world hold the rich empire of Indonesia? So you see, somewhere along the line, this must be blocked. It must be blocked now. That is what the French are doing.
So, when the United States votes $400 million to help that war, we are not voting for a giveaway program. We are voting for the cheapest way that we can to prevent the occurrence of something that would be of the most terrible significance for the United States of America ‑‑ our security, our power and ability to get certain things we need from the riches of the Indonesian territory, and from southeast Asia. [Eisenhower 1953]
Six years later, Eisenhower, in an address that emphasized the vital mission of the Cold War, suggested another motive for the war:
Japan is an essential counterweight to Communist strength in Asia. Her industrial power is the heart of any collective effort to defend the Far East against aggression. Her more than 90 million people occupy a country where the arable land is no more than that of California. More than perhaps any other industrial nation, Japan must export to live. Last year she had a trade deficit. At one time she had a thriving trade with Asia, particularly with her nearest neighbors. Much of it is gone. Her problems grow more grave. For Japan there must be more free world outlets for her products. She does not want to be compelled to become dependent as a last resort upon the Communist empire. Should she ever be forced to that extremity, the blow to free world security would be incalculable; at the least it would mean for all other free nations greater sacrifice, greater danger, and lessened economic strength …. For a country as large, as industrious, and as progressive as Japan to exist with the help of grant aid by others, presents no satisfactory solution. Furthermore, for us, the cost would be, over the long term, increasingly heavy. Trade is the key to a durable Japanese economy. One of Japan’s greatest opportunities for increased trade lies in a free and developing Southeast Asia. So we see that the two problems I have been discussing are two parts of a single one‑‑the great need in Japan is for raw materials; in Southern Asia it is for manufactured goods. The two regions complement each other markedly. So, by strengthening Viet‑Nam and helping insure the safety of the South Pacific and Southeast Asia, we gradually develop the great trade potential between this region, rich in natural resources, and highly industrialized Japan to the benefit of both. In this way freedom in the Western Pacific will be greatly strengthened and the interests of the whole free world advanced. But such a basic improvement can come about only gradually. Japan must have additional trade outlets now. [Eisenhower 1959]
Despite Eisenhower’s wishes, Japan did turn out to be a major investor in China. On a happier note for Cold War strategists, Vietnam became a major competitor with China in the production of low‑wage consumer goods for exports, an outcome that would have been likely without the slaughter of a million Vietnamese.
Vietnam, in turn, can be traced back to the imperial ambitions of Teddy Roosevelt and Henry Cabot Lodge at the end of the nineteenth century. In 1965, shortly after the Tonkin Gulf incident, Henry Cabot Lodge’s grandson, also named Henry Cabot Lodge, had become a major player in Vietnam War, including a stint as ambassador to the country. After he left that position, echoing the imperial ambitions of his grandfather, Teddy Roosevelt, and Eisenhower in a speech, declaring:
He who holds or has influence in Vietnam can affect the future of the Philippines and Formosa to the east, Thailand and Burma with their huge rice surpluses to the west, and Malaysia and Indonesia with their rubber, ore, and tin to the south. Vietnam thus does not exist in a geographical vacuum ‑‑ from it large storehouses of wealth and population can be influenced and undermined. [Boston Globe (28 February)]
The U.S. motives for the war may have been U.S. access to tin and tungsten, more general anti‑communism, or just plain stupidity. No matter, the war had enormous consequences.
On a relatively superficial level, the Vietnam War, like the Spanish American War, initiated a brief period of prosperity, even though the economy was already doing fairly well before the conflict. However, like other wars, unexpected factors overwhelmed the short‑run positive economic effects of military spending with much larger long‑term consequences.
This difference between the short‑ and long‑run consequences of war stands as a reminder of the temporal complexity of war or, for that matter, of what goes on in all of the pillars. This point is worth repeating in light of Vietnam’s stark long‑term consequences. The stakes at play can be enormous.
In particular, the speed with which the leading military powers (hegemons) decline suggests a longer‑term indication of the economic toll of war, which requires the diversion of a nation’s energies into non‑productive activities. Immanuel Wallerstein described the fleeting nature of great power:
Hegemony is a rare condition; to date only Holland, Great Britain, and the United States have been hegemonic powers in the capitalist world‑economy, and each held the position for a relatively brief period, Holland least plausibly because it was least of all the military giant of its era. Hegemony … may be defined as a situation wherein the products of a given core state are produced so efficiently that they are by and large competitive even in other core states, and therefore the given core state will be the primary beneficiary of a maximally free world market …. As soon as a state becomes truly hegemonic, it begins to decline; for a state ceases to be hegemonic not because it loses strength (at least not until after a long time has elapsed), but because others gain. To be at the summit is to be certain that the future will not be yours, however much the present is; but it is sweet nonetheless. [Wallerstein 1974, p. 38]
Of course, Wallerstein’s dating is subjective. Even though his claim of a U.S. decline is only relative to the growing powers of other countries, that limited decline is very controversial. Any prediction of a future absolute decline is bound to be even more questionable. However, if the United States is in decline, the Vietnam War might be a reasonable candidate for marking the inflection point at which the decline began to set in.
Military Keynesianism and Vietnam
Many of the economic problems that the United States is currently experiencing result from wartime policies initiated during the Vietnam War. First, a little background regarding the economic dimensions of the war: according to official reports, peak military spending during wars varies. Lacking data for the Civil War, peak military spending during World War II topped all other conflicts at 37.5%. In comparison to World War II, the level of spending during the Vietnam War at 9.5% was relatively small. However, official Vietnam spending was in the same ballpark as World War I, at 14.1%.
Moreover, the official spending on the Vietnam War is probably more understated than the data for World War I. First of all, because of advances in battlefield medicine, soldiers were more likely to survive their injuries than in earlier wars. The post war treatment of these soldiers weighs on the budget although it does not count in the measurement of direct war costs.
Nonetheless, short‑term benefits of the war were readily apparent. In this sense, the Vietnam War bore a remarkable similarity to the Spanish American War. Recall Veblen’s comment about the beneficial economic effects of the war. In this case, Johnson’s chief economic advisor, Gardner Ackley, sent him a lengthy memo on 30 July 1965 confirming the expected effect of the war as an economic stimulant:
There is still a $15 ‑ $20 billion margin of idle industrial capacity and excessive unemployment,” and “our productive capacity is growing by $25 ‑ $30 billion a year apart from any price increase, making room for both more butter and, if needed, more guns”; but “apart from the defense effort, market demand would not be likely to grow as fast as productive capacity during the course of FY [fiscal year] 1966, and unemployment would probably be creeping up.” “We are certainly not saying that the Vietnam crisis is just what the doctor ordered for the American economy in the next twelve months. But, on a coldly objective analysis, the overall effects are mostly likely to be favorable to our prosperity” [Devereux 1996, p. 18]
In this context, Erik Devereux identified Vietnam as “the Fiscal War,” where his “Fiscal” refers to the effect of government spending on economic activity (Devereux 1996, p. 16). The fiscal effect of the escalation of the Vietnam War seems to have come at an opportune time. By mid‑1964, the administration came to the realization that the Kennedy‑Johnson policies of lower taxes and freer trade failed to give sufficient stimulus to keep the economy on a high‑growth path. With that realization in mind, the United States entered into a period of frenzied military Keynesianism.
Wartime spending has frequently lifted the economy out of recessions or depressions, in part by showering profits on a wide swath of businesses. However, those short‑run benefits might be small relative to the destructive, long‑term consequences of war. For example, Peter Temin, an economist from the Massachusetts Institute of Technology, has made a powerful case that one of the primary causes of the Great Depression was the enormous economic distortions created by the economic adjustments that World War I required. Assuming that Temin is correct about the First World War’s long‑term effect on the economy, the subsequent damage from the Depression certainly outweighed any temporary economic benefits of the war.
Vietnam may not have been any different. While business may have appreciated this short‑term burst of prosperity at the time, the Vietnam War was, at best, a mixed blessing. The increased economic activity associated with the war was welcome, except that it also almost eliminated unemployment, thereby increasing the power of labor. More crucially, among the public as a whole (including some prominent business executives), the revulsion about the human costs of the war created a wave of anger toward those who led the nation into war.
In 1964, the same year as the Gulf of Tonkin incident, Lyndon Johnson was able to take advantage of the brief period of sympathy in the wake of the assassination of President Kennedy to get a number of progressive programs through Congress as part of his Great Society, the most controversial of which was his War on Poverty ‑‑ again, the war designation was expected to signal the seriousness of Johnson’s intentions.
Johnson’s two wars ‑‑ one peaceful and one violent ‑‑ symbolized the conflicting pressures that weighed upon his administration. The general public opposed the violent war. Many people also applauded programs, such as those associated with the Great Society and the War on Poverty. In contrast, business was largely angry about the huge budget deficits, but only a small part of the business community opposed the war, while failing to make the connection between the deficits and the war.
During the Nixon administration, public anger about the continuation of the war pressured the president to accommodate popular demands for new government policies, such as environmental protections and workplace safety.
In retrospect, because of the large number of initiatives passed during his administration, Nixon has come to be seen in some quarters as the last liberal president of the United States, not so much as a reflection of his own preferences, but as a means of deflecting the public anger about continuing war.
The country was very divided, not just about the war and Nixon’s concessions. The antiauthoritarian nature of those who protested the war and made the popular demands offended many people. More important, business was fearful that its influence was waning. In response, business mounted a concerted drive to remake the government into a business‑friendly institution, committed to deregulation, low taxes, and the weakening of unions (see Perelman 2007, chapter 3). In this way, opposition to the Vietnam War ‑‑ a real war ‑‑ derailed a more noble war ‑‑ the War on Poverty ‑‑ a war in which Johnson meekly surrendered.
These simultaneous wars left the Johnson administration on the horns of a dilemma. Businesses leaders were expressing concern that excessive government borrowing to finance the war might disrupt financial markets. By early 1966, the Office of Emergency Planning sent a memorandum to the president, warning that increased demands for military goods was raising inflationary fears [Devereux 1996, pp. 21‑24]
In May 1966, Walter Heller, the highly respected, former head of the Council of Economic Advisors, wrote to Johnson, giving a warning about the investment boom that accompanied the Vietnam War, which anticipated Temin’s later interpretation of the Great Depression:
Apart from inflation as such, I’m worried about the investment boom ‑‑ it’s distorting what has been a beautifully balanced expansion. All that new plant and equipment is great stuff for a Vietnam economy, but it will soon build up excess capacity and invite [a] post‑Vietnam investment slump.” [Devereux 1966, p. 24]
A month later, Heller brought up the other horn of the dilemma, warning about the negative consequences of a rapid draw‑down of the war. He recommended aggressive preparations for maintaining a healthy post‑Vietnam economy because “If there’s a quick end and troop withdrawals, it will be a real economic jolt” (Devereux 1966, p. 25).
The war created the prospect of an even less attractive jolt. President Lyndon Johnson was running up a large government debt to pay for an unpopular war. Johnson could have addressed the continuing budget deficits by ending the war or imposing tax increases. Getting Congress to agree to tax increases might seem all but impossible. Johnson took considerable blame for his failure to increase taxes:
Outside of the decision to escalate the war in Vietnam, no decision of Johnson’s presidency has come under more attack than his refusal to push for a tax increase earlier in his administration. Historian Irving Bernstein proclaims that “the Great Inflation … can be pinpointed to President Johnson’s decision to commit American forces to Vietnam in July 1965. It would continue for 17 distressing years.” Critics also have linked this decision with Johnsons “credibility gap,” arguing that he deliberately avoided such a request for a tax hike in the same manner that he deceived Americans about the scale and extent of the Vietnam War.” The economist Lester Thurow also identified the Johnson fiscal and monetary decisions as the cause of “the great inflation of the late twentieth century.” Another recent account concludes that Johnson’s “strong desire for both guns and butter was a trap from which neither he nor the country could escape, a trap for which the president was mostly responsible” [Schwartz 2003, p. 189]
Heller was concerned about the other danger of the trap: if new taxes were collected, they would set off the kind of jolt against which Heller warned would come from the elimination of part of the economic boost from military Keynesianism. To do nothing added to the government debt and contributed to later inflation. Later in 1968, Johnson did raise taxes, enough to throw the economy into a recession, but not enough to curtail inflation.
The combination of debt and inflation gave powerful ammunition to conservative forces that opposed the New Deal as well as Johnson’s Great Society. They were quick to use the growing size of the federal debt to discredit the government and, even more pointedly, to create an excuse for undoing many of the progressive policies enacted during the New Deal and Johnson’s brief Great Society. Those parts that survive are still under fierce attack.
Vietnam: The Class War at Home
Business won major victories in its campaign against the war on poverty ‑‑ the second front of the Vietnam War. Based on inflated fears about government deficits, as well as rising prices, powerful interest groups began a vicious domestic struggle about the role of the government. This well‑organized and well‑funded pro‑business movement embarked on a fear campaign, which intensified after the Vietnam War, expressing horror that continuing government deficits threatened to destroy economic vitality (see Perelman 2007, chapter 3). This stepped‑up pressure for the government to hold nondefense spending in check in order to balance the budget took a serious toll on Johnson’s administration (more on that later).
By the time of the Reagan administration, the business‑oriented victors had succeeded in rolling back many of the previous working class gains that were enacted in the earlier part of the twentieth century. No longer worried about the immediate effect of deficits, Reagan began what became a period of tax cuts that multiplied the federal deficit. Many of the supporters of these policies, which grew the deficit, were delighted that they would be able to use the threat of a greater deficit to reinvigorate the call for cutting government back.
Although spending for past, present and future wars counts for more than half of government outlays, business officials display little appetite for cutting defense spending. Instead, they prefer to target non‑defense programs, such as the improvement of people’s health and education ‑‑ the sort of programs that help make economies strong.
Johnson, a committed New Dealer, reacted to the business‑oriented criticism of the deficits in a way that did incalculable damage by initiating changes in budgetary, accounting, and regulatory policy to obscure the actual costs of the Vietnam War.
In effect, Vietnam, together with Johnson’s effectively surrendering the Great Society, produced a distorted form of military Keynesianism ‑‑ itself a distorted form of Keynesianism. This double distortion could no longer pretend to be a socially responsible means for promoting prosperity. Instead, it reduced social programs in order to transfer government largess to an increasingly powerful phalanx of military contractors. This practice has gained more power over time.
Social Security, the crown jewel of the New Deal and probably the most popular of all government programs, was an early victim of this perverse prioritization. Despite its overwhelming popularity, Social Security had powerful enemies since its inception. The antagonism against Social Security is understandable. To the extent that Social Security funds would move through the private sector, financial interests could reap huge management fees and perhaps even gamble with Social Security’s funds. Fortunately, the popularity of Social Security has protected the program from the appeal of well‑funded calls for wholesale privatization.
Johnson could pretend that his action with regard to Social Security funds was only a matter of bookkeeping. In reality, it represented a major change. Money collected for Social Security was supposed to be held in a separate account, outside of the federal budget. By lumping income for Social Security with normal government revenue, Johnson was able to reduce the reported wartime budget deficit, which is the difference between taxes and revenues. By including Social Security revenue along with taxes, the difference shrank without either cutting spending or increasing taxes.
Johnson put Social Security at risk by shifting funds from the program. Although this transfer had no immediate effect on Social Security, Johnson’s move still made the program politically vulnerable. Social Security had always been self‑supporting in the sense that workers’ Social Security taxes provide for the program’s upkeep. For this reason, Social Security was immune from being treated as a give‑away welfare program. After Johnson’s maneuver Social Security revenues went to the U.S. Treasury, leaving the program holding a government‑issued IOU. This new arrangement created a dangerous opening for the enemies of Social Security, who framed the Treasury’s obligation to make good on its IOU as an unfunded government liability that had to be cut in order to hold down the deficit. Reducing Social Security benefits promised to make the program less popular, making privatization more feasible.
In 2011, President Obama sabotaged Social Security further. Lacking political courage or support to effectively stimulate a wobbling economy through government spending, he opted for a weak stimulus program that would least offend his critics. The key part of this program was to cut Social Security taxes, promising that the Treasury would be expected to make up the shortfall. In doing so, Social Security would no longer be entirely self‑supporting so long as the tax cut was in place, removing one of the strongest reasons to avoid tampering with the program.
Emboldened, contemporary enemies of Social Security demand policies that would degrade the program by limiting the amount that the government could spend on the program. The resulting degradation would be expected to undermine the popularity of Social Security.
Another line of attack was a well‑funded effort to convince young people that they will never be able to see any benefits from the Social Security taxes that they pay. Finally, the enemies attempted to deceptively discredit the program by labeling it as an entitlement ‑‑ a government give‑away, ignoring the fact that workers have been paying for the program all along.
Building on the already‑hysterical claims about the dangers of budget deficits, the current enemies of Social Security can frame the program as threatening to create huge government deficits should the program have to cash in its IOUs, even though the Treasury only serves as a conduit for money already collected for Social Security.
Just as Johnson used a bookkeeping trick to create an illusion of diminished deficits, the enemies of Social Security flipped Johnson’s bookkeeping tactic to diminish the federal deficit. They claimed that Social Security threatened to create enormous federal budget deficits in the form of the Treasury department’s obligation to repay the IOUs at some time in the future. By treating these repayments as government spending rather than a matter of bookkeeping, the opponents of Social Security framed the program as a form of welfare. To make the situation seem more ominous, they based their calculations on the assumption that the economy would grow more slowly over a long period than has ever been the case in the past. The accumulation of unrealistically estimated shortfalls over a number of future years makes any shortfall seem much larger than it will actually be.
To the extent that Social Security faces future shortfalls, those who decry those shortfalls should recognize one of the most important causes: decades of whittling away of New Deal programs and policies succeeded in repressing wages, which result in lower Security taxes.
Once the whittling away of New Deal programs and policies began, the resulting damages multiplied. For example, continued banking regulation from the New Deal prevented a recurrence of the meltdowns that previously plagued American economic life ‑‑ at least until the eventual dismantling of those New Deal regulations, as usual, in the name of efficiency rather than corporate profits.
This general undermining of public agencies played into the hands of a powerful movement launched during the last years of the Vietnam War to undo many of the gains made during the New Deal. The deregulation of banking and finance proved especially harmful with the financial meltdown of 2008.
The government also privatized parts of the federal housing programs, converting them into the private companies, Fannie Mae and Freddie Mac, to further obscure the cost of the war. As profit‑making operations, they had less reason to consider the social consequences of their policies. Instead, they worked hand‑in‑hand with the core of the financial system in preparing the way for an economic meltdown.
Moreover, wartime spending created serious dislocation in the financial system, especially in the Savings and Loan system, which lent money for housing for thirty years at low, regulated fixed rates. Wartime spending caused rising prices, which meant that a dollar in the future could not buy as much as a dollar today. To compensate for the eroding buying power, interest rates moved along with the expected rate of inflation. As interest rates rose, people moved their funds into other parts of the financial system that paid higher rates than the Savings and Loans were permitted to pay. Because banks could not attract deposits at their regulated rates, they experienced serious losses in their base of deposits. To rescue the Savings and Loan banks, the government dropped important restrictions on their lending, allowing them to invest in virtually anything. The newly deregulated Savings and Loan system went wild, until it largely collapsed. This incident was only one of a number of failed experiments with financial deregulation.
The disastrous consequences of financial deregulation became apparent during the financial meltdown of 2007 in which the housing sector collapsed bringing the entire financial system to its knees (see Perelman 2007). The association of these perverse policies with the Vietnam War is not meant to make a simplistic claim that the war by itself is responsible for all these policies, but rather that the war was an important influence in initiating these changes.
The fact that the United States would go to war in an effort to create the kind of country in which it had virtually no direct economic interests must have given a great deal of confidence to the United States business community. Given the newfound confidence in military cover to protect its investments, business could be relatively confident in taking advantage of low wage labor in far‑off places around the world contributing to an upsurge of deindustrialization, as well as an increasing entanglement of American economic interests around the world. Ironically, Vietnam has since become a major exporter of products of United States corporations to the United States.
The disastrous consequences of the Vietnam War gave rise to what became known as “the Vietnam syndrome”: the same sort of reluctance to engage in war that the country experienced after the war in the Philippines. The syndrome did not have a long lifespan. Instead, the United States resumed its aggressive projection of military force. In addition, the international spread of U.S. business interests has increased the pressure for future wars to protect or extend U.S. business interests.
The so‑called twin deficits (budget deficits plus balance of payment deficits) created many doomsday scenarios. Both government and business were looking for quick fixes. Even before the Savings and Loan meltdown, the government eliminated something called Regulation Q., which limited the amount of interest that banks could pay. Consequently, banks had to compete for funds. Economists almost instinctually presume that competition is a good thing. Many banks supported the move.
Even before the end of Regulation Q, Walter Wriston, who became head of Citibank, had already circumvented (or better yet, violated) Regulation Q by offering a new kind of financial instrument, the Certificate of Deposit, which pay higher rates than the banks were allowed. Although the authorities could have stopped him or even punished him, they surrendered Regulation Q, which set off the tsunami of financial deregulation.
The brazenness of the wave of financial regulation gave way to a more subtle process in the wake of the financial meltdown, which became known by the quaint term, the Great Recession. This process represented an interesting conjunction of the three pillars. Wartime spending set off imbalances, which set economists working on solutions, which almost inevitably came down on the side of more reliance on market forces. Rather than providing prosperity, financial deregulation led to an escalation of instability and inequality. Nonetheless, economists, business, and the government never seem to have looked back, acknowledging the folly of government’s imperial ventures, business’ short‑term policy prescriptions, or the single‑minded ideological thinking typical of economists.
A Digression on Vietnam and the U.S. Postal Service
The attack on public programs gained momentum with every successive administration. Eventually, Johnson’s primary institutional achievement, Medicare, came under an attack that still continues. The success of the anti‑New Dealers has since snowballed into a powerful movement that has made major inroads into a host of federal programs. How much influence the war had in this regard is left for the reader to decide. Even the postal system came under attack.
The importance of the Postal System in the development of the United States cannot be overestimated. Richard John, leading authority on the history of the Post Office, offered data on the scale of the postal system: By 1828, “the American postal system had almost twice as many offices as the postal system in Great Britain and over five times as many offices as the postal system in France. This translated into 74 post offices for every 100,000 inhabitants in comparison with 17 for Great Britain and 4 for France” (John 1995, pp. 3‑5). By the 1830s and 1840s, the system accounted for more than three‑quarters of U.S. federal civilian employees.
John recalled the evaluation of William Ellery Channing, the most prominent Unitarian preacher of the early nineteenth century, who expressed his enthusiasm about how successfully the system linked together the far‑flung population of the United States:
Many Americans, Channing concluded in 1829, probably considered the role of the postal system in facilitating the transmission of information between the government and the citizenry to be its most important “national service.” But such a conclusion overlooks its “highest benefit.” However important the postal system may be for the government, it does “incomparably more for us as a community.” No other channel of intercourse can so effectively bind the “whole country” in a “chain of sympathies” and in this way transform it from a confederation of separate states into one great neighborhood … [Channing] observed that in the early 19th century, “For the vast majority of Americans the postal system “was the central government.” [John 1995, p. 13]
The Postal Services’ distribution of printed media contributes to the formation of what Benedict Anderson calls an “imagined community,” which enables citizens of the smallest towns to begin to imagine themselves part of a larger collective citizenry that makeup a newly forming nation (Anderson 1991, p. 6).
From a technical standpoint, long before transcontinental railroads or the telegraph system had the capacity to connect far‑flung parts of the country, the Post Office served as a primitive Internet, allowing information to permeate the nation. The colonial Post Office, begun in 1775, with Benjamin Franklin as Postmaster General, was a centerpiece of the nascent American Republic. During the Revolutionary War, the Post Office facilitated secure communication, which permitted strategic coordination. After the Revolution, the postal system also helped the colonies to create a national identity. The Postal Act of 1792 reflected the recognition that a far‑reaching postal service was a necessary network of democratic communication. Toward that end, the act stipulated that government subsidize the press through low postal rates for printed matter.
Linked to his role as Postmaster General, the importance of Benjamin Franklin’s trade ‑‑ a “key to North American communications and community intellectual life” ‑‑ cannot be overlooked. In order to develop a source of income, “Printers starting new presses always included a newspaper in their productions . . . Since the main problem facing the printer‑journalist was reaching readers, there developed an alliance with the post‑master so intimate that often each became the other” (Anderson 2006, p. 61).
The importance of the Postal Service as a means of integrating and empowering a country has a long tradition. Writing in the fifth century BC, the historian Herodotus reported on the ancient Persian postal system of Cyrus the Great (576 BC‑530 BC):
No mortal thing travels faster than these Persian couriers. The whole idea is a Persian invention, and works like this: riders are stationed along the road, equal in number to the number of days the journey takes ‑‑ a man and a horse for each day. Nothing stops these couriers from covering their allotted stage in the quickest possible time ‑‑ neither snow, rain, heat, nor darkness. The first, at the end of his stage, passes the dispatch to the second, the second to the third, and so on along the line, as in the Greek torch‑race which is held in honour of Hephaestus [Herodotus 1971, p. 533]
The US Postal System echoes Herodotus in expressing its contemporary commitment to public service with its motto: “Neither snow nor rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds.”
The Post Office accepted its role of public service rather than as a mere arm of government. Unlike Europe, where official snooping of the mail was common, the postal system also promised to protect the public’s privacy. Opening up of mail in the United States was prohibited, except for pieces that were deemed undeliverable (John 1995, p. 42).
Admittedly, at times, the government abused its control over the postal system. Even before President Wilson employed the Post Office to censor ‑‑ and even to destroy ‑‑ voices that did not support war, the Comstock Act of 1873 mandated that the postal service stamp out the mailing of “indecent” material, including information about birth control. During the Cold War, all letters to the USSR and China were opened. A recent revelation has shown that the extent of governments’ reach in high‑tech snooping involves the Post Office’s computers copying the exterior of every piece of mail as part of its Mail Isolation Control and Tracking program, adding even more personal metadata to the government’s trove. In addition, the Post Office opens tens of thousands of pieces of mail each year (Nixon 2013). Whether such activities further diminished the finances of the postal service as well as the few remaining shreds of public privacy is unclear.
Despite such abuses, the public appreciates the invaluable services that the postal system provides. Of course, some of that appreciation might dissipate as abuses of the postal system become widely known.
However, the postal system now has strong enemies. First of all, private carriers, such as FedEx and UPS, have long wished to completely replace the public postal system with a profit‑driven system. In addition, the current animosity toward public unions makes the postal system ‑‑ one of the largest unionized employers in the United States ‑‑ an obvious target for opponents of unions as well as supporters of privatization. Nonetheless, widespread public support for the postal system made outright privatization politically infeasible.
Even so, piecemeal dismantlement was not outside of the realm of possibility. An important opening for the first step in dismantling the postal system came in 1970 when 200,000 postal workers struck. Their wages were so low that in some urban areas, many workers qualified for welfare and food stamps (Hevesi 2013). Wages were only one grievance. Working conditions were also an issue in the Bulk Mail Centers, the scene of a later strike. These operations “were designed as mechanized and automated factories, but the cost of mechanical failures, which are probably more frequent than in factories in the private sector, are borne by the workers in forced overtime and increased stress” (Glaberman and Faber 1998, p. 75).
The initial postal strike was effective enough that President Nixon called the National Guard to New York to sort the mail. Nixon was not satisfied with repressing the strike. He quickly followed up with the Postal Reorganization Act of 1970. Besides limiting the right of postal workers to strike, this legislation required that the postal system find ways to survive without the subsidies that had been its lifeblood since the creation of the Constitution. The neoconservative American Enterprise Institute praised this legislation as “the most extensive reorganization of a federal agency” (Ames 2005, p. 73).
Federal support shrank until 1983 when it ceased altogether. To compensate for diminished federal support, postage costs increased, further fraying public approval. The burden of dealing with diminished subsidies was passed on to the workers. In the words of Mark Ames, whose book Going Postal associated postal workers’ increasing stress with a wave of workplace violence:
The U.S. Postal Service was able to function more profitably through the familiar tactics of pushing its workers to work harder and of creating an increasingly stress‑jammed atmosphere, thereby squeezing more work out of them, or “increasing worker productivity” in the value‑neutral language of economics. Oddly enough, the first year that the federal government stopped subsidizing the USPS, 1983, was also the year of the first post office shooting, in Johnston, South Carolina [Ames 2005, p. 73]
The government was not finished with its demolition project although it came close in 2006, with the Postal Accountability and Enhancement Act. This legislation forced the Postal Service to prefund its future health care benefit payments to retirees for the next 75 years, within a ten‑year time span. What could justify the requirement to pay for the medical care for workers who are not yet born? In effect, the Post Office was really expected to subsidize the rest of the government. This burden of having to pay such enormous sums to Congress saddled a severe deficit on an already weakened operation. According to the unions, the government made a bad situation worse by years of underpaying the postal system because of incorrect accounting of some benefit and sick leave time.
Other business interests appreciate the current attack on the postal system. In order to put aside enough money to prefund its medical care, more and more postal operations are relocating from beautiful New Deal structures located on prime real estate into strip malls and storefronts. The key attraction of these changes is that the government is engaging real estate interests to oversee the unloading of these valuable properties to the private sector at prices well below their market values.
The Postal Service gave commercial real estate giant CB Richard Ellis (CBRE) an exclusive, no‑bid contract to sell the public’s property as well as advising it on which postal facilities it should sell as well as to earn a healthy commission on each sale. Blum Capital Partners, founded by Richard C. Blum, is the largest shareholder in CBRE. Besides his position as current Chairman of the Board of CBRE, Blum is the husband of Diane Feinstein, U.S. Senator from California. Among his many other activities, Mr. Blum is currently a Regent of the University of California, Berkeley and formerly Chairman of its Board of Regents, where he exercises outsized influence. Because of his power on the Board of Regents and his many apparent conflicts of interest from many business interests, he is known as the Alpha Regent (see Parrish and Bond‑Graham 2010). For example, he is presumed to be leading the push to privatize university functions, despite his investments in for‑profit education. The management of the postal system has done nothing significant to fight back. Instead, it does the busy work of the system’s enemies, intent on devouring the carcass of the postal system:
Real estate is a piece of the fiscal puzzle, the agency believes. The Postal Service owned 197 million square feet of space in 8,606 buildings like processing facilities and post offices in 2012‑nearly double the size of the Boston office market‑and it leased an additional 81 million square feet across 24,000 properties. It is looking to cut down on both as it tries to raise cash and save on operating expenses. [Brown 2012]
To add insult to injury, the Postal System is relocating much of its business to Staples stores, which rely on non‑union labor.
Had the leadership of the postal system been willing to go to the mat for the institution of the Post Office, perhaps it could have played the trump card, given that the U.S. Post Office has contingency plans to deliver mail after a nuclear war (Clark 1999, pp. 31‑33). Such concern does not come as a surprise to Michael Perelman, who happened to accidentally walk into a meeting of the Federal Reserve Bank of San Francisco in which government officials were absurdly telling the Federal Reserve about the need for them to be able to continue clearing banking transactions as usual in the event of a nuclear attack. But then again, this silence has a positive side: perhaps some vague connection with military priorities may not be a trump card after all.
Although the initial attack on the Postal Service came at a time when the cost of the Vietnam War was putting pressure on the government to reduce deficits, other factors contributed to the ongoing dismantling of the postal system. While one cannot directly attribute the more recent legislation to the Vietnam War, the increasingly intense budgetary pressures created by wartime spending remain an important source of momentum for the current wave of neoliberalism.
International Economic Reverberations of the Vietnam War
Devereux was correct that the Vietnam War was a fiscal war. Alongside the budget deficit a massive distortion of international finances emerged. The United States freely spent dollars around the world, in part to pay for the war. Many of these dollars ended in other countries’ central banks.
To make matters more complicated, U.S. investors were borrowing money in Europe for the purpose of buying up European businesses. This practice raised the hackles of European countries, especially France, which was led by Gen. de Gaulle, whose prickly nationalism was a major characteristic of his political persona.
The adjustments required by the flood of dollars leaving the United States might seem like an obscure technical problem, without much relevance to the lives of ordinary people. In fact this problem and its response went a long way in remaking the economy and society in the United States and elsewhere. In the process, it may have even gravely wounded the career of the President of the United States.
Now, a little background will be useful: In July 1944, while World War II was still raging, 730 delegates from the United States and 43 Allies met in Bretton Woods, New Hampshire, to create an international economic system that would prevent a recurrence of the international financial instability that had led up to the Great Depression. The World Bank and the International Monetary Fund emerged from the conference. In addition, the delegates created a system of international agreements designed to keep exchange rates of currencies stable, which seemed to offer some protection against a recurrence of the Great Depression.
To ensure stability, many of the negotiators would have liked to resuscitate the gold standard, but that was impractical since the U.S. had accumulated the bulk of the world’s gold by the end of the war. The alternative was what Jan Toporowski called an “indirect gold standard (Toporowski 2012, p. 12). First of all, the dollar was already based on a domestic gold standard, under which the government was legally required to maintain a stock of gold equal in value to 25 percent of the money in circulation.
The new Bretton Woods agreement obliged the United States to stand ready to buy and sell gold at $35 per ounce in transactions with central banks. Other countries were required to maintain a steady value of their currencies relative to dollars. With gold priced in terms of dollars at $35 per ounce and other countries committed to keeping the value of their currency in line with dollars, stability seemed possible under this indirect gold standard.
This system of fixed exchange rates did work fairly well until the Vietnam War, but the Vietnam‑driven pressures were too much for the system to hold up. Wartime spending, which was straining the budget of the United States government, was flooding the world with an excess of dollars. Under normal conditions, this situation would have had the natural effect of lowering the value of the dollar relative to other currencies, but international agreements prevented that outcome.
This outflow of dollars was creating inflation in countries such as France and England, which complicated their efforts to maintain stable exchange rates relative to the dollar.
Did the U.S. government have sufficient gold holdings to cover central banks’ potential demands for gold and to back its currency with gold (see Hudson 2003, p. 291)? Certainly, other countries worried the United States lacked the capacity to meet its obligations.
Vietnam and International Class Warfare
These European powers had good reason to worry that the massive U.S. trade deficit would eventually force the United States to devalue the dollar relative to gold by increasing the price of gold above $35. Devaluation would mean that each dollar would exchange for a smaller weight of gold. Pressure on the United States was becoming intense.
The United States had already displayed a willingness to avoid obligation to maintain a sufficient gold reserve. Already in 1959, five years before the Tonkin incident:
… when IMF quotas were increased by 25 per cent in 1959, the U.S. Treasury was not above arranging a window‑dressing stratagem that called for the IMF to redeposit some $300 million of its gold in the United States. This IMF gold became double‑counted, appearing as an IMF asset even while it continued to be included in U.S. gold reserves. The rationale was that because all IMF quota increases had to be paid 25 per cent in gold, the less developed debtor countries probably would elect to obtain this gold by cashing in some of their dollar holdings with the U.S. Treasury. The IMF agreed to close this triangular payments circle by redepositing the entire $300 million gold receipt from less developed countries back in the U.S. Treasury. A similar practice was employed when IMF quotas were increased again in 1966 and 1970. [Hudson 2003, pp. 291‑92]
Once the pressures on the U.S. gold stocks were becoming extreme, central banks holding large amounts of dollars had reason to act before the value of their dollar holdings depreciated. Given that the United States had been willing to resort to subterfuge with the deal it made with the IMF in 1959 in order to evade its obligations to deposit more gold prior to the Vietnam War when its economic position was more secure, could other governments trust the United States to fulfill its obligations. The United States, under Kennedy and Johnson, and afterwards, Nixon, had implemented various policies, such as “differential tax treatment of domestic and foreign investments, reductions in the value of the goods American tourists could bring into the country, tied foreign aid, and finally an across‑the‑board import surcharge ‑‑ in an effort to remedy the balance of payments problem and free up monetary and fiscal policies for the pursuit of domestic objectives” (Eichengreen 2000, p. 2). None of these policies demonstrated much of a commitment to stability and none had a substantial effect. In short, nothing seemed likely to get the United States out of its hole, especially while the war continued.
This futility of the situation in which the United States found itself seemed to come to a head on 31 March 1968, the day before April Fool’s day, when President Johnson gave an important address to the nation. Johnson tried to put the heavy costs of Vietnam in the context of the pressure on the dollar:
These projected increases in expenditures for our national security will bring into sharper focus the nation’s need for immediate action: action to protect the prosperity of the American people and to protect the strength and the stability of our American dollar.
Then Johnson turned to the subject of what turned out to be an unsuccessful monetary conference in Stockholm, which was intended to create a paper alternative to gold for international monetary reserves. Johnson implicitly acknowledged Vietnam as a fiscal war: “But to make this system work the United States just must bring its balance of payments to ‑‑ or very close to ‑‑ equilibrium. We must have a responsible fiscal policy in this country.”
After putting the grim economic reality of the war on the table, Johnson rhapsodized about a future Great Society: “Through all time to come, I think America will be a stronger nation, a more just society, and a land of greater opportunity and fulfillment because of what we have all done together in these years of unparalleled achievement. Our reward will come in the life of freedom, peace, and hope that our children will enjoy through ages ahead.”
The speech concluded with Johnson’s dramatic surrender: “Accordingly, I shall not seek, and I will not accept, the nomination of my party for another term as your president.” A few days later, one expert noted: “The European financiers are forcing peace on us. For the first time in American history, our European creditors have forced the resignation of an American president.” (Hudson 2003, p. 327, citing Wall Street Journal (April 4, 1968).
In reality, other forces besides the European creditors were at work. Obviously, the losses imposed by lightly armed Vietnamese insurgents were a factor. Closer to home, a few days earlier, Senator Eugene McCarthy challenged Johnson in the New Hampshire Primary, surprisingly almost matching Johnson’s vote. Soon afterwards, Robert Kennedy jumped into the presidential race.
Instead of these more popular challengers, an uninspiring Vice President Hubert Humphrey won the Democratic nomination. Despite being saddled with Johnson’s Vietnam policies and lacking both charisma and Johnson’s political cleverness, Humphrey still came very close to winning the popular vote. Given that performance, Johnson, in spite of public anger with the war, might well won the election.
The conflict with Europe was far from settled. As a form of economic self‑defense, after Nixon replaced Johnson, some countries (especially France) were demanding that the United States honor its obligation to exchange dollars for gold at $35, before devaluation would diminish the value of dollars that they held:
In August 1971, the French government decided to make a very public statement of its annoyance over US policy: President Georges Pompidou ordered a destroyer to sail to New Jersey to redeem US dollars for gold held at Fort Knox, as was his right under Bretton Woods! A few days later, the British government of Edward Heath issued a similar request (though without employing the Royal Navy), demanding gold equivalent to $3 billion held by the Bank of England. Poor, luckless Pompidou and Heath: they had rushed in where angels fear to tread! President Nixon was absolutely livid. Four days later, on 15 August 1971, he [President Nixon] announced the effective end of Bretton Woods: the dollar would no longer be convertible to gold. Thus, the Global Plan unraveled. [Varoufakis 2011, p. 94]
Domestic interests had long been calling on Johnson’s successor, Richard Nixon, to let international markets determine the price of the dollar. Both Milton Friedman and Leo Melamed, the chairman of the Chicago Mercantile Exchange, strongly advocated abandoning the current regime of fixed exchange rates for international currencies. Both men also had personal interests in that policy change. Friedman wanted a vehicle with which he could speculate that the British pound was going to diminish in value. However, Friedman had long been calling for flexible exchange rates, beginning in 1950 in a paper written for a U.S. government agency (Friedman 1953b). Melamed wanted to profit by expanding the product lines traded on his exchange by allowing speculation on the relative future values of currencies. However, the forces of international political economy, rather than the special pleadings of Melamed and Friedman, were decisive in freeing up the markets in international currency for speculation.
Despite the international forces that pushed the United States into the deregulation of the international currency markets, Melamed and Friedman wrote with personal pride about this new regime, which they regarded as proof of the superiority of markets over regulation. Never shy about his own accomplishments, Melamed frequently published about his important place in the world of finance and speculation, including Leo Melamed on the Markets: Twenty Years of Financial History as Seen by the Man who Revolutionized the Markets (Melamed 1993). Moreover, he asserted, “The International Money Market began on 16 May 1972 in Chicago; i.e., his Chicago Mercantile Exchange (Melamed 1988, p. 417). As mentioned above, the Vietnam War was a more important factor than Leo Melamed.
Even if Melamed had been responsible for the deregulation of international currency markets, he should not have been so proud of his role. True, this revolution in international finance may be the greatest single act of financial deregulation in modern history, but the consequences of this deregulation should not be a source of pride except in circles of speculators who benefit from currency instability now that foreign currencies rapidly move up and down relative to each other, unleashing massive waves of destabilizing speculation.
The scale of these speculations can be mind‑boggling. In a single day in September 1992, George Soros made millions of dollars by speculating that the English pound would fall in value. While successful speculators might appreciate the door that Melamed’s project opened up for speculators, such as Soros, the Wall Street Journal reported that large U.S. multinational companies lost $17.8 billion last year due to unpredictable currency swings (Chasin 2014).
Governments also suffer from currency speculation. For example, Soros’s gamble pressured the Bank of England to abandon any attempt to maintain an orderly exchange market, while staying within the European monetary system. Although Soros did not cause the British government to fail, this incident suggests the potential impact of currency speculation. If a single incident of currency speculation could destabilize the government of an economy the size of Britain, so much that the government had to buckle under to speculative pressure to deregulate its currency, just imagine how extreme the effect could be on smaller, more vulnerable economies.
Just as England had to adopt policies brought on by foreign‑exchange speculation, so too did many smaller countries. However, such countries had far less power to resist the demands of financial markets than England. For example, in 1997, currency speculation created widespread havoc among Asian economies in what was known as the Asian Crisis.
John Maynard Keynes, who inspired the creation of the World Bank and the International Monetary Fund, warned about the inevitable dangers that await situations when deregulated finance trumps good economic policy: “the whole management of the domestic economy depends upon being free to have the appropriate interest rate without reference to the rates prevailing in the rest of the world. Capital controls is (sic) a corollary to this” (Keynes 1942, p. 149).
Instead, the International Monetary Fund, which Keynes intended to provide the institutional framework for capital controls, became the policeman to enforce austerity as a means of coping with speculative waves. However, this policeman does not enforce the law of markets uniformly. The year after the crisis, Rudiger Dornbusch, a prominent MIT economist went so far as to say, “The IMF is a tool of the United States to pursue its economic policy offshore” (Henwood 2000).
Dornbusch attributed some of the treasury influence over the IMF to its physical proximity. He concluded, “When it counts, the IMF can be relied on to be disappointing” (Dornbusch 1993, p. 103).
An important part of the IMF’s typical policy demands is massive privatization to repay debts. The reliance on practice caused Dornbusch to take issue with this abuse:
If the price is the present value of future profits, then selling off the firms involves trading cash on the barrel for giving up future receipts. Having a fire sale of public sector enterprises to pay off foreign debts is in all likelihood a poor proposition. [Dornbusch 1988, p. 46]
Comparison of the harsh demands the IMF imposes on other countries with its willingness to cook the books to help the U.S. hide the depletion of the U.S. gold stocks (described above) goes a long way toward confirming Dornbusch’s characterization of the role of IMF as a tool of the United States.
Almost inevitably, the ultimate burden of this financial turmoil fell on common people ‑‑ those who are least prepared to bear additional hardship. For others with money to spare, there are great profits to be made.
Vietnam and Domestic Class Warfare
The economic stagnation that followed the war ‑‑ the jolt predicted by Heller ‑‑ put an end to the elevated profits of the Golden Age while setting off a period of serious inflation. Some people argue that the delinking of gold and world currencies in response to pressures unleashed by the war was responsible for the inflation (Lapavitsas 2003, p. 194).
In part, because the Keynesians had presented their work as a technical means of ensuring good economic performance, the lackluster economy discredited Keynesianism. The newly popular monetarist school suddenly became the received wisdom of economics. Monetarism simplistically insisted that mismanagement by the Federal Reserve in letting the money supply expand too much was the cause of the economic problems plaguing the United States.
The eventual policy response to the inflation, guided by monetarist principles, was a vicious attack on labor in 1979 by the newly installed head of the Federal Reserve, Paul Volcker. What did labor have to do with inflation? By that time, cutting wages seemed to be the easiest remedy for sagging profits. Volker and his supporters used imagery, such as “blood in the streets,” to dramatize their need to defeat labor in the name of price stability (see Perelman (2011, chapter 2). Their public face, in contrast, was one of capable people making hard choices out of technocratic necessity; they were in no sense taking sides in class warfare.
The economic effect was disastrous, raising fears of an international meltdown. The war was quickly called off, but labor never recovered from the attack. While the United States military proved unable to conquer the lightly‑armed Vietnamese, the Federal reserve succeeded in its war against the working class. The victorious Volcker was hailed as an economic savior. Although inflation receded, so did the economy, except for a brief period during the dot.com bubble, which ended in 2000.
Vietnam and Economic Theory
Vietnam seems to have linked together all three pillars: war, the economy, and economic thinking. Following the Vietnam War, destructive economic forces wounded the United States economy leading to a combination of inflation and low economic growth. In part, the slow growth reflected the jolt that Heller warned against. Vietnam played a role in this poor performance of the post‑war economy, but other factors were probably more important in ending an exceptional period that was known as the Golden Age, which began with the end of World War II, and ironically ended with the collapse of the gold‑based system of currency controls.
The name of the Golden Age reflected extraordinary economic performance of these two decades, due in large part to the previous effect of the Great Depression in creating severe economic pressures that forced business to increase productivity. In addition, besides prosperity resulting from the military Keynesian effect of wartime spending, the government had taken measures to convert many consumer goods industries to the production of military goods. Consumers’ inability to purchase cars and other consumer goods during the war unleashed powerful pent‑up demand once hostilities ceased. This new wave of consumption provided an enormous boost to the economy. In addition, the war had destroyed the production capacity of major international competitors, temporarily leaving a clear field for American business. The lack of competition allowed business to get lazy, illustrated by commonly letting capital goods age rather than replace them with more efficient plant and equipment. After two decades of complacency after World War II, the United States economy lacked the vigor required for rapid growth. Instead, the Vietnam‑induced inflation along with slow growth created a new word to describe the sad condition of the American economy: stagflation (see Perelman 2002, esp. pp. 13‑15).
Robert Lucas, a prominent University of Chicago professor, who won a so‑called Nobel Prize for economics, celebrated the victory of monetarism over Keynesianism, announcing to the Annual Management Conference in 1979: “Keynesian economics is dead … Keynesianism mattered; it filled a very central ideological function. Now that it is gone, something is going to have to take its place (Lucas 1979). Indeed, it did, but with an undesirable outcome.
According to this post‑Keynesian perspective, the only hope for recovery would be a complete reliance on market forces, while disregarding how well market forces performed in the lead up to the Great Depression. Guided by this ideology, the United States embarked on a neoliberal path that became more extreme with each new president, with an exception perhaps of the transition between Ronald Reagan and George H. W. Bush.
The most popular school of economics in the period following Lucas’s declaration was called monetarism. The monetarists followed Milton Friedman, the guru of monetarism, who held that a modest, but steady growth of the money supply was the most effective way to keep the economy running at maximum efficiency. The chief attraction of monetary policy, however, was that it minimized the role of government intervention in the economy, while appearing technocratic or even scientific. For the monetarists, all that was needed for a strong economy was to give the Federal Reserve the right to manipulate the economy in the way that the monetarists advised and keep the government out of the way.
When the economy melted down in 2007, most economists, as staunch defenders of the neoliberal turn of the economy, implausibly blamed obscured government policies for the problems. Ironically, once the economy began to unravel in 2007, largely because of the laissez‑fair policies enacted after the Golden Age, Lucas seemed to have recanted his dismissal of Keynes, admitting to a reporter, “I guess everyone is a Keynesian in a foxhole” (Fox 2008). Lucas, however, was underestimating the ideological rigidity of his colleagues.
As a result, the remaining legacy of John Maynard Keynes seems to be military Keynesianism, which is ironic because Keynes seems to have had pacifist leanings.
Looking for New Vietnams
The long‑standing call for increased military spending need not have anything to do with military needs. For a short period of time after the Vietnam War, authorities openly worried about a “Vietnam syndrome,” meaning that the public’s appetite for more military adventures seemed to have disappeared. The Vietnam syndrome is reminiscent of the strong anti‑war sentiment after the war in the Philippines. Acknowledging this mood, President George H. W. Bush promised a peace dividend, which would allow the government to reduce taxes and to redirect spending in productive ways. The peace dividend never really materialized. Why should a president let money be diverted to programs, such as education and infrastructure, when it could be used for the intoxicating experience of enjoying the exercise of power on a world stage. Accordingly, the peace dividend morphed into a “war dividend,” which is not surprising, given Robert Gates’ comment.
The government succeeded in exorcizing the dreaded Vietnam syndrome, thanks to Saddam Hussein’s invasion of Kuwait, which opened the door to future conflicts, much like Woodrow Wilson was able to do in taking the country to war a short time after the United States’ misadventure in the Philippines. Even strong protests proved ineffectual in the face of the media solidly trumpeting the necessity for war. In the resulting political environment, the United States was able to initiate two expensive wars in Iraq and Afghanistan. Along with a series of massive tax cuts that accompanied the antigovernment movement, the wars added to the soaring federal budget. At the same time, strong government programs in other parts of the world strengthened their economies, while the unproductive financial sector has become the centerpiece of the U.S. economy.
The Vietnam War seemed unique in one sense: the United States had virtually no economic investments in Vietnam. Vietnam did offer potential access to resources, but the U.S. had other options. The most common justification for the war was the Cold War objective of containing the spread of communism, or better yet, rolling it back. In retrospect, the likelihood that such an invasion would succeed was limited. A more probable outcome would have been to inflame anti‑American sentiments, reducing the international influence of the United States. Such seems to have been the case.
Adam Smith’s remark about the futility of imperial conquest is relevant in regard to the Vietnam experience:
Great nations are never impoverished by private, though they sometimes are by publick prodigality and misconduct. The whole, or almost the whole publick revenue, is in most countries employed in maintaining unproductive hands. Such are the people who compose a numerous and splendid court, a great ecclesiastical establishment, great fleets and armies, who in time of peace produce nothing, and in time of war acquire nothing which can compensate the expence of maintaining them, even while the war lasts. Such people, as they themselves produce nothing, are all maintained by the produce of other men’s labour. [Smith 1789, i, II.iii. 30, p. 342]
Earlier in this book Smith had described how the state’s ability to borrow money to cover the costs of war leaves the public unaware of the economic damage that war is causing. Instead, the public revels in the glory of war:
The ordinary expence of the greater part of modern governments in time of peace being equal or nearly equal to their ordinary revenue, when war comes they are both unwilling and unable to increase their revenue in proportion to the increase of their expence. They are unwilling, for fear of offending the people, who, by so great and so sudden an increase of taxes, would soon be disgusted with the war; and they are unable, from not well knowing what taxes would be sufficient to produce the revenue wanted. The facility of borrowing delivers them from the embarrassment which this fear and inability would otherwise occasion. By means of borrowing they are enabled, with a very moderate increase of taxes, to raise, from year to year, money sufficient for carrying on the war, and by the practice of perpetual funding they are enabled, with the smallest possible increase of taxes, to raise annually the largest possible sum of money. In great empires the people who live in the capital, and in the provinces remote from the scene of action, feel, many of them scarce any inconveniency from the war; but enjoy, at their ease, the amusement of reading in the newspapers the exploits of their own fleets and armies. To them this amusement compensates the small difference between the taxes which they pay on account of the war, and those which they had been accustomed to pay in time of peace. They are commonly dissatisfied with the return of peace, which puts an end to their amusement, and to a thousand visionary hopes of conquest and national glory, from a longer continuance of the war [Smith 1789, pp. 919‑20]
On a broader level, this brief discussion about how business might benefit from war is meant to introduce the complexity of the subject. Wartime spending is generally associated with a burst of prosperity, as long as the war is fought elsewhere. However, war also creates stresses in the economy, which eventually leads to problems large enough to threaten the economy, swamping, or even nullifying, any short‑term wartime gains. In short, while war may very well create profitable, short‑run business conditions, in the long run, wars are a drain on the economy, which hurts profitability. In this sense, economists are correct in making the case that business has nothing to gain from war. However, most people (even economists) tend to respond to short‑term stimuli, without much thought of long‑term consequences.
In the case of Vietnam, courageous reporters were informing the public about the horrors of the war and the Republicans brought the wartime debt to the public attention. Otherwise, Smith’s analysis remains accurate.
Economists refer to the reluctance to cut existing programs as the flypaper effect. Once established, programs find ways to stick around long after their justification has disappeared. For example, after the end of Prohibition, the government began the Reefer Madness campaign to create the new priority of the eradication of marijuana. The military is particularly adept in finding justifications for bloated budgets. After the number one enemy is swept aside, the hunt begins for the next great threat, which will justify the continuation of militarization. One of the clearest examples of this phenomenon came after the Gulf War, when then‑Chairman of the Joint Chiefs, Colin Powell, famously lamented, “I’m running out of demons. I’m down to Castro and Kim Il Sung.” Sadly, Powell seemed to have been serious.