Guns, Butter And the Deficit by Fareed Zakaria

February 16, 2004 U.S. Edition

Guns, Butter And the Deficit
We will see a forced retreat from the world similar to the years after Vietnam—only the cuts this time will be deeper, the chaos greater
By Fareed Zakaria

In the past two years, the United States has rediscovered the world. We've seen large increases in funding for all the instruments of American policy—military, political, economic and cultural. Spending on AIDS/HIV, tuberculosis and malaria initiatives has gone from $840 million in 2001 to a projected $2 billion in 2004. Whether you like or dislike specific aspects of George Bush's foreign policy, there's no denying he has outlined an ambitious role for America in the world. Except that within a few years this policy is likely to collapse.

No, the problem isn't Iraq, or Afghanistan, or the French. The greatest threat to America's primacy in the world comes not from its overseas commitments, explains the historian Niall Ferguson in his smart forthcoming book "Colossus": "It is the result of America's chronically unbalanced domestic finances." The mounting federal budget deficits that now stretch out as far as the eye can see will mean—if history is any guide—sharp cutbacks in American military and foreign-affairs spending. We will see a forced retreat of America's foreign policy similar to the years after the Vietnam War—only the cuts this time are likely to be much, much deeper and the resulting chaos far greater.

An open, globalized world needs a leader. And the United States can easily afford its world role thanks to a $10 trillion national economy. In fact, as a percentage of GDP, America's nonmilitary overseas expenditures are now low. In the late 1940s and early 1950s, foreign aid was almost 2 percent of GDP. Today it is 0.2 percent. Even military spending remains moderate by cold-war standards. Today it is about 4.5 percent of GDP. During the Eisenhower presidency it once veered toward 9 percent.

But America is an empire without an imperial culture. Foreign affairs is seen as the most dispensable part of the budget. President Bush's $87 billion request for Iraq had little support among most Americans. Even military spending, protected because it is a series of jobs programs, has always been easy to pare down. The commitments that make up America's world role are tolerated as long as the economy is growing and the budget is large enough to accommodate everything. But if there were a choice between guns and butter, there's little doubt what Americans would choose.

With intelligent fiscal management, such a choice would not present itself. But intelligent fiscal management is not what we have in Washington these days. Much has been written recently about the out-of-control federal budget. The tax base has been eroded at the very moment that a massive new entitlement program, prescription drugs for the elderly, has been added. Increased funding for security measures is inevitable and yet there is no effort to tighten nonsecurity spending. Congress is always irresponsible, but President Bush has not vetoed a single bill since he took office, the first president to show such laxity. He now beats all presidents but Lyndon Johnson at domestic spending. Journalist Mickey Kaus recently spoke with a senior federal official who said, "I've never seen an administration spend money like this... The money's flying out the door. I can barely keep up with it... They give money away on phone calls. No documents. No budget. It's the worst I've ever seen..."

The real problem is that America cannot afford this orgy as it approaches the retirement of the baby-boom generation. When he was Treasury secretary, Paul O'Neill asked two economists at the Federal Reserve Bank in Cleveland to estimate what changes it would take to actually be able to pay for the government's commitments, including Social Security and Medicare. Their answer: either increase income taxes by 69 percent, increase payroll taxes by 95 percent or cut Social Security and Medicare by 56 percent. No wonder O'Neill was skeptical about tax cuts.

Many things about the future are uncertain. But demographics are not. The baby boomers will age and these bills will come due starting in 2008, four years from now. In fact, it's a puzzle as to why the bond market has not reacted to this deep and certain crisis. Ferguson says the only possible answer is that "the magnitude of the problem is such that most Americans find it quite literally incredible. The main reason why America's crisis remains latent is precisely because people refuse to believe its existence."

At some point denial will stop working, the markets will react, interest rates will rise and the budget will be under severe pressure. Then Congress will begin searching for cuts, and spending on foreign affairs, even military spending, will get the ax. And America's grand new engagement in the world will turn out to be short-lived indeed.