Paying for War

INTRODUCTION

The article below is based on Robert Hormats' terrific new book, The Price of Liberty: Paying for America's Wars. Funding the war in Iraq is currently the hottest topic in Washington, and Hormats' book places him at the center of the debate.

Bob Hormats, an investment banker, is Vice Chairman of Goldman Sachs (International) and an expert in trade and finance. He's no slouch at politics and national security matters, either. Bob has served under four U.S. Presidents, including work as a Senior Staff member on the National Security Council Staff for Henry Kissinger, Zbigniew Brzezinski, and General Brent Scowcroft.

The article below is a critique of how the current leaders in Washington are financing the Iraq War and the War on Terrorism. Hormats sees real threats to national security resulting from fiscal shortsightedness.

More information about the book, The Price of Liberty, and author Bob Hormats follows the excerpt. Thank you.

Last week, President Bush and the Democratic Congress had a showdown over Iraq war funding. Unfortunately, it was the wrong one.

Lost amid the week's political struggles was this blunt reality: America's political leaders have been reluctant to confront the public with the need to make financial sacrifices to pay for the conflict and for the ongoing struggle against al-Qaeda. And that could spell disaster later on.

It wasn't always this way. After Pearl Harbor, President Franklin D. Roosevelt minced no words with the American people. "War costs money," he said. "That means taxes and bonds and bonds and taxes. It means cutting luxuries and other non-essentials." If only today's leaders would say something similar.

Instead, Bush and Congress have played down the expense of the U.S. wars in Iraq and Afghanistan. Rather than forthrightly asking the public to shoulder new post-9/11 burdens, the administration has skirted the normal budget process, relying on supplemental appropriations. Not only were no additional taxes imposed to cover extra security costs, but the country was treated to an additional tax cut in 2003.

The Iraq war's supporters may have initially figured that the conflict would be short and cheap, making paying for it relatively painless. Later, they may have calculated that relying on emergency funding would make it easier to sustain the public's support -- an approach that assumes that most Americans are afraid of wartime economic sacrifice.

In fact, leveling with the American people early on would have been far wiser, especially as war costs have skyrocketed. (According to the Congressional Budget Office, the government has allocated about $503 billion for Iraq, Afghanistan and counterterrorism since September 2001.) After 9/11, many Americans would have supported cuts in nonessential domestic programs to make room for additional spending on homeland security or the battle against terrorism. And large numbers of taxpayers probably would have been willing to check off a box on their 2003 tax returns to pay a few extra dollars to ensure proper body armor and well-protected vehicles for our troops in Iraq, high-quality health care for returning veterans and financial support for families back home.

Earlier presidents directly and candidly asked the public to support extraordinary amounts of war funding. That generally meant new taxes, war-bond drives and cuts in spending on civilian programs. But such honesty did more than mobilize money; it also mobilized the home front and made it feel engaged in the cause.

During the Civil War, for instance, Abraham Lincoln urged "every person of small means" to buy war bonds to tie large numbers of citizens to the Union Army's cause. During World War I, President Woodrow Wilson told Congress that Americans "know that the war must be paid for and that it is they who must pay for it." Wilson's Treasury secretary, William G. McAdoo, said: "A man who could not serve in the trenches of France might nonetheless serve in the financial trenches at home." He insisted that "any great war must necessarily be a popular movement."

It's probably too late to use earlier leaders' wisdom to salvage support for the unpopular Iraq war. But these history lessons could still help buttress support for the broader conflict in which the country is now engaged, a global fight against radical Islamic terrorism that will need serious, sustained funding.

For years, Osama bin Laden has been blunt about his plans to kill large numbers of Americans and severely damage the U.S. economy; surely our leaders should be drawing up far-sighted plans to pay for a resolute effort to thwart him and his ilk. The nation must face up to the long-term costs of preventing catastrophic terrorist attacks and responding decisively should they occur. But our leaders haven't fully spelled out these costs to the public, let alone discussed the need to change spending and tax priorities to meet them. What's more, the absence of another domestic attack -- so far -- is lulling many Americans into questioning the need for substantial homeland-security spending, particularly as the graying baby-boom generation confronts us with dramatically higher Social Security and Medicare payments.

We are living in a post-9/11 world with a pre-9/11 fiscal policy. Without a national dialogue on how to pay our future security bill, we have no plan to replace the hardware used up or destroyed in Iraq, finance the next generation of sophisticated weaponry, care for our wounded veterans, equip our firefighters and police to respond to terrorist attacks, or strengthen our ailing intelligence system. Nor have we seen a plan to maintain the sound underlying fiscal conditions essential to our economic and military strength. Instead, we're staring at the virtual certainty of skyrocketing deficits in the next decade -- largely because of growing entitlements.

Entitlement programs have dramatically changed the budget landscape. Today, national security spending accounts for less than 5 percent of the nation's gross domestic product -- compared with nearly 40 percent during World War II, 15 percent during the Korean War and 10 percent during the Vietnam War. That makes it sound like it should be easy to win the needed defense funding. It won't be. The enormous sums committed to mandatory federal programs such as Social Security, Medicare and Medicaid dwarf all other aspects of the budget. Left unchecked for a decade or two, they will consume a larger share of the nation's GDP than all our federal programs today combined. Coupled with increasing interest payments on the government's rising debt, they will either force up taxes or produce dangerous deficits. Unless we get entitlement costs under control, Social Security will inevitably square off against national security.

Since 9/11, we have also tolerated a series of budget deficits that make us financially vulnerable. In 2001, a flush budget surplus gave the United States the resources to recover and retaliate after al-Qaeda's attacks. But now we face a deficit and the prospect of very large ones late in the next decade. Moreover, in 2001, the nation was only half as dependent on foreign money as it is today -- and the more the budget deficit rises, the deeper in hock we find ourselves to countries that may not wish us well. A new act of catastrophic terrorism would weaken the economy, thereby sharply cutting federal tax revenues and increasing the deficit. The high costs of recovery (imagine what it would cost to clean up miles of Manhattan or Washington after a radioactive "dirty bomb" attack) and retaliation would further expand the deficit. That, in turn, would make many foreign investors nervous, which could cause them to sharply reduce investment in the United States -- sending the dollar into a nosedive and interest rates through the roof.

Bipartisan efforts could still avert such calamities. The president and Congress must set clear priorities for defense spending, start serious reforms to make entitlement programs sustainable, and begin funding the war through the usual budget process rather than through supplementals and other gimmickry.

As in earlier wars, Americans deserve credible estimates of the costs of protecting the nation -- a burden they're likely to tolerate if they're given the unvarnished facts. More than 200 years ago, Alexander Hamilton squarely confronted his fellow citizens with the need to pay off the enormous debt the country had incurred during the revolution. Doing so, he wrote, was "the price of liberty." We still need to pay for our freedom today, and all Americans need to share in the cost.

Robert D. Hormats is Vice Chairman of Goldman Sachs (International) and managing director of Goldman, Sachs & Co. Mr. Hormats served as Assistant Secretary of State for Economic and Business Affairs from 1981 to 1982, Ambassador and Deputy U.S. Trade Representative from 1979 to 1981, and as Senior Deputy Assistant Secretary for Economic and Business Affairs at the Department of State from 1977 to 1979. He served as a Senior Staff Member for International Economic Affairs on the National Security Council from 1969 to 1977, during which time he was Senior Economic Advisor to Dr. Henry Kissinger, General Brent Scowcroft and Dr. Zbigniew Brzezinski.

Mr. Hormats was a recipient of the French Legion of Honor in 1982 and Arthur S. Flemming Award in 1978. Mr. Hormats has been a visiting lecturer at Princeton University and is a member of the Board of Visitors of the Fletcher School of Law and Diplomacy. He also is a member of the Council on Foreign Relations.

Mr. Hormats' publications include Abraham Lincoln and the Global Economy; American Albatross: The Foreign Debt Dilemma; and Reforming the International Monetary System. Other publications include articles in Foreign Affairs, Foreign Policy, The New York Times, The Washington Post, The Wall Street Journal, American Banker and The Financial Times.

In a bracing work of history, a leading international finance expert reveals how our national security depends on our financial security.

More than two centuries ago, America's first secretary of the treasury, Alexander Hamilton, identified the Revolutionary War debt as a threat to the nation's creditworthiness and its very existence. In response, he established financial principles for securing the country -- principles that endure to this day. In this provocative history, Robert D. Hormats, one of America's leading experts on international finance, shows how leaders from Madison and Lincoln to FDR and Reagan have followed Hamilton's ideals, from the greenback and a progressive income tax to the Victory Bond and Victory Garden campaigns and cost-sharing with allies.

Drawing on these historical lessons, Hormats argues that the rampant borrowing to pay for the war in Iraq and the short-sighted tax cuts in the face of a long-term war on terrorism run counter to American tradition and place our country's security in peril. To meet the threats facing us, Hormats contends, we must significantly realign our economic policies -- on taxes, Social Security, Medicare, and oil dependency -- to safeguard our liberty and our future.

Robert Hormats mounts a compelling argument that America faces large-scale economic catastrophe due to lack of a long-term, fiscally sound strategy for meeting military and security needs as well as domestic obligations. The Price of Liberty is a fascinating book and its messsage is hard to ignore."
-- Henry Kissinger

The Price of Liberty is both a superb history and an urgent call for appropriate fiscal policy in the current campaign against terrorism. Hormats shows that, time and again, how wars were paid for determined how wars were fought -- and won or lost. An important and timely book.
-- David M. Kennedy, author of Freedom from Fear

Bob Hormats has taken on the impossible: making lively history of the fiscal side of America's wars. Taxes and spending, economics and politics, all mixed up together in times of national crisis, from the Revolution and Alexander Hamilton to Iraq and both George Bushes. There are lessons to be learned and too often forgotten, even for the financing of the new 'War on Terror.'
-- Paul Volcker, former chairman of the Federal Reserve

Hormats links economics with history and politics in a must-read for anyone who would understand the fundamentals of America's national security. Lucid and engrossing, The Price of Liberty provides a new and vital perspective for students of national security.
-- General Wesley K. Clark